Estate planning a plain english guide to wills and trusts

A revocable living trust is a fundamental tool in the estate planning toolkit, and I want to inform as many people as possible about the benefit of having one.. After you finish reading

Copyright © 2013 Clint W Smith J.D.

All rights reserved The text of this publication, or any part thereof, may not be reproduced in any manner whatsoever without written permission from the publisher.

ISBN: 1481884859

ISBN 13: 9781481884853

eBook ISBN: 978-1-879033-96-2

Library of Congress Control Number: 2013900182

CreateSpace Independent Publishing Platform

North Charleston, South Carolina

Gerald, you know what they say…

“You Can’t Take it With You”

How can you know for sure if you don’t even try?

TABLE OF CONTENTS

Prologue: Why Read this Book?

Introduction: Plan Your Estate Now

Chapter One: The Basics of Wills

Chapter Two: The Probate Factor

Chapter Three: Trusts versus Wills

Chapter Four: “Trust Me ”

Chapter Five: Twelve Costly Misconceptions about Wills

Chapter Six: Questions about Trusts

Chapter Seven: It’s Time to “Just Do It!”

Chapter Eight: Keeping Your Assets Safe

Chapter Nine: What If You’re Not Rich but Still Want Protection?

Chapter Ten: “If I Own a Business, How Can I Protect My Assets from Creditors, Predators, and

Probate?”

Chapter Eleven: How to Link Your Business Entities to Your Estate Plan

Chapter Twelve: Something for Doctors to Think About

Chapter Thirteen: Your Estate Planning Action List

WHY READ THIS BOOK?

It is tragic that the average person takes more time to plan the family vacation than toplan the family’s future In the event of your death, dealing with your estate is mucheasier (and cheaper) for your family if you have a fully completed living trust Lack ofestate planning is a disaster waiting to happen Sadly, that disaster can happen to thepeople you care about most Even those who have prepared a traditional will can, upontheir death, thrust their loved ones into a huge mess

All too often there are unresolved questions such as:

What will happen to your business?

Who will have access to your bank accounts?

Who inherits your personal property?

What happens to your home and other real estate?

How will you ensure the care of your minor children? Or your pets?

In this book, you will find answers to these questions and many others I won’t try totell you everything a person should know and prepare for But I can promise that, in theevent of your death, dealing with your estate is infinitely better for your family if youhave a living trust and the related documents Within these eye-opening pages, you willfind the simple answer to what you can do to prevent a costly ordeal for those you mightwant to help the most These easy-to-use tips, definitions and advice can help you planyour estate now so that later it will be a blessing to those you love instead of a burden.Read on to see why You might be surprised by what you learn, and it can change yourlife

PLAN YOUR ESTATE NOW

For more than 27 years, while practicing and teaching about the law, I have accumulatedimportant information about estate planning with this goal: help my clients take care ofbusiness so they can sleep at night Too many people put off their estate planning until it

is too late, causing anguish among family members and friends I’ve learned that mostpeople don’t look forward to this part of their planning for the future So they put it off Itpointed out a dramatic need for this book: an easy-to-understand guide to motivate andhelp you plan your estate now and save money, time, hassle, and even relationships inthe future

The concept of this book was sparked by some of the surprisingly incorrect views outthere about trusts—even among lawyers who should know better! A revocable living trust

is a fundamental tool in the estate planning toolkit, and I want to inform as many people

as possible about the benefit of having one

My practice has always been about people I love meeting with regular people andhelping them plan for the future I sincerely want to help you enjoy your property duringyour lifetime—after all, it’s yours! And I want you to be able to pass the unused portion ofyour estate—with the least possible loss in value—to your loved ones But sadly, thatseldom happens

A recent survey found that over 50% of American adults do not have even a will.1That means over half of us have made no plans whatsoever! As we will discuss, that isgood news for government treasurers and probate attorneys, but very problematic forthose left behind when unprepared people pass away The statistic is especiallynoticeable when we look at age brackets: over 75% over age 65 have a will, but only

8% of us under 35 do.

Why? Because when we are young we believe we are invincible We think nothingterrible can happen to us We are also busy building wealth and raising families That isprecisely why people in that age range need to plan!

It’s an overwhelming prospect for some But armed with the easy-to-understand tips,definitions, and advice in this book, I promise that you won’t feel overwhelmed You canplan your estate and have peace of mind!

What is Estate Planning?

The best description of estate planning I’ve seen comes from the National Network ofEstate Planning Attorneys:

“I want to control my property while alive, take care of my loved ones and myself if Ibecome disabled, and, upon my death, give what I have to whom I want, the way I want,

and when I want And if I can, I want to save every last tax dollar, professional fee, andcourt cost possible.”

CHAPTER ONE:

THE BASICS OF WILLS

Some people hear the word “estate” and immediately think of mansions and summerhomes in the Hamptons The fact is you don’t have to be a Rockefeller or Bill Gates tohave an estate Everyone has an estate Merriam-Webster’s Dictionary defines an estate

as “a person’s assets, whether they be negative or positive in value.” Since all of us fallinto that broad definition, it is prudent to think about doing some kind of planning

Let’s begin with the most basic estate planning tool: the will Most people knowabout wills and fully intend to have one some day A will allows you to design yourplan to distribute your real property and other assets It also allows you to design a plan

to distribute your assets upon your death It can also dictate who will care for your minorchildren

Many different kinds of wills exist I like one that reads: “Being of sound mind Ispent every cent I had!” However, few of us are able to gauge the exact length of ourlifetimes It’s nearly impossible to “spend every cent” because we must keep somemoney for tomorrow’s living expenses No one wants to be a financial burden on familyand friends We all want to pay for our funeral expenses, and avoid leaving tax and otherburdens Therefore, we need to do at least minimal planning to provide for our propertyafter our demise and pass along whatever remains of our estate

Intestate Wills

Here is a little understood fact: people who don’t have anything in writing at the time

of their death will actually have chosen a will by default It is written by the statelegislature and is in state laws that most people have never read It applies to everyonewho dies in that situation It means that those who don’t have wills have decided to lettheir state government choose the manner in which their estates are disbursed This iscalled dying “intestate.” Whether or not you like the terms and conditions, these intestatelaws dictate how an estate passes, and generally provide that it all goes to the nearestrelative This may be exactly what you would want to have happen But too often, it isn’t.That’s the first reason to have your own will prepared: to ensure your laws are carried out

—not the desires of the legislature or court system

Here’s a real-life example: Catherine Marshall was the wife of the noted U.S SenateChaplain Peter Marshall Catherine did not want to discuss with her husband or thinkabout his death while they were both alive When he insisted that she must write downsome things she needed to know just in case something happened to him, she said shewas almost defiant She told him, “I’ll put this stuff down to humor you; but I can’t stand

to hear you talk that way Nothing is going to happen to you Don’t be foolish.”(Catherine Marshall, To Live Again [New York: McGraw-Hill Book Company, 1957], p 24).Catherine was suddenly thrown into unfamiliar circumstances by the untimely death

of her husband Peter Because they never got around to planning, Peter had left no will

In order to inherit and deal with Peter’s estate, Catherine needed to appear in probatecourt The law required her to post an expensive bond so that she could act as the

“Executrix and Administratrix” of Peter’s affairs Everything—all household expenses andincome—became subject to the jurisdiction of the court, on the public records Shecouldn’t pay any bills until the court approved of the expenditures—not funeral expenses,doctor or hospital bills, or even ordinary household expenses To add insult to injury,Catherine had to appear before the probate judge to be appointed the guardian of theirson, Peter John From then on, the court required her to present detailed financialaccounting of her guardianship to the court each year This continued until her sonbecame of age Each year she had to pay someone to verify the accounting with a swornstatement Plus, each year she had to pay a fee to the Office of Register of Wills for theofficial filing of the accounting She was agitated that her husband had never “gottenaround to” planning his estate, and with herself for her own role in that procrastination.The laws thrust her into a situation that was time-consuming, costly, inconvenient, andeven humiliating

Here is another real-life example: Alfred Jackson abhorred attorneys He wasn’tabout to pay one to prepare a will He had accumulated a significant amount of savingsand thought about leaving it all to his alma mater He didn’t get along well with his sonand wanted to leave him nothing But Mr Jackson died unexpectedly in an automobileaccident There was no will Although the college knew of his intentions, it receivednothing from the estate because the law of the state dictated that Mr Jackson’s sonwould inherit everything

Perhaps the most common example today is that of a late second marriage Let’s sayJohn, age 70, decides to marry Susan, age 50 John has a significant estate, consisting ofinvestments, cars, artwork and the like Susan has some assets, but limited income Johnfully intends to ensure that Susan has enough to live on after he passes, but wants histhree children to get most of his assets

The only problem is he never puts his wishes in writing When John dies, he iswithout a will, intestate Here is what the laws of the State of Arizona say about whatSusan receives:

If there are surviving issue one or more of whom are not issue of the surviving spouse,one-half of the intestate separate property and no interest in the one-half of thecommunity property that belonged to the decedent (A.R.S 14-2102)

What does that mean? It means that John’s children receive 1/2 of their father’s totalestate, and Susan receives the other half It doesn’t matter that John intended for hischildren to receive most of his estate; the law says Susan gets half In short, it is not wise

to let the State decide how your estate will pass Almost everyone needs at least asimple will

Holographic Wills

A holographic will is written entirely in a person’s own handwriting All you need is apen and a piece of stationery or even the back of an old envelope As long as thedocument is in a person’s own handwriting, dated and signed by that person, most stateswill consider this a valid and legal instrument A holographic will doesn’t require any otherformality, such as witnesses or a notary People do this because they don’t want to hire alawyer, and most states recognize them as valid

If you’re relying on a holographic will, make sure that it’s accepted by the laws of thestate in which you reside (Arizona does) When you write a will, it’s obvious that you wishpeople to be able to read it If your handwriting isn’t legible, you might be tempted totype your will or have someone else prepare it for you However, if your will isn’t in yourown handwriting, it is not holographic and the statutory rules kick in: most states requirethat you have at least two witnesses and some states require three witnesses Thesewitnesses must be in your presence as you declare the document to be your last will andtestament They must see you sign the document And they must be able to verify thatyou aren’t acting under duress, you’re of sound mind, and are of the age of majority (over

18 or in some states, 21)

Form Wills

The next level of wills is those you can buy at an office supply store or online Formwills may suffice for many people They allow for some flexibility, and they areinexpensive or even free There are, of course, risks in relying on generic legaldocuments, but there is certainly a place in the world for simple wills where the estate issmall For example, if a person has only a retirement account, personal effects and a car,

it may be adequate to address the passing of these items by using a form will But readon; there are reasons why even a will is not enough for most people

Attorney-Prepared Wills

You may want to go a step further and have a professional prepare your will for you.Good reasons exist for pursuing such a course of action For example, even though youknow exactly how you want your property to be distributed, you may find it difficult tocommunicate your desires accurately in writing

To illustrate the help an attorney can provide, consider the case of a wealthy woman

in San Diego She decided to write her own will in spite of owning a large estate Uponher death, it was discovered that in her will, she had left one-fourth of her estate to the

“Archbishop of San Diego.” A truly magnanimous gesture! But her innocent generositycreated a surprising problem At the time, there was no archbishop of San Diego! TheCatholic Church in Los Angeles had an archbishop but his area didn’t include San Diego.The Episcopal Church in San Diego had a bishop but he was not an archbishop Those two

religious organizations fought over that woman’s estate Finally, the courts decided whichchurch would inherit her property What a tragedy that this woman had not made itperfectly clear who she intended to receive her bequest I’m sure it was clear in her mindwhich church she had chosen to inherit her property and benefit from her inheritance Yet

a lengthy and costly court battle ensued because of the nebulous way she wrote her will

A good attorney could have helped avoid this problem completely

A will enables you to designate your beneficiaries (who gets what), it is also theplace for you to name your personal representative The legal community used to call thisperson the executor of the estate Some states still do This is the person you designate

to manage your affairs The courts require that your personal representative post a bond

to ensure that he will faithfully perform the duties This can be a sensitive matter Noteveryone has families and beneficiaries who get along well So a bond is simply aninsurance policy to guarantee that the personal representative will properly fulfill all thelegal obligations With a bond, the insurance company agrees it will pay the loss in casethe personal representative misuses the representative’s authority or even absconds withthe money It is a security for the beneficiaries Obtaining a bond is a cost to the estate.However, when writing your will, you can allow your personal representative to actwithout having to post a bond To do this, you must state in your will that the bond iswaived

You and your attorney can do many other things in a written, attorney-prepared will.For example, you may wish to leave certain assets of your estate in a testamentary trust.This part of your will bequeaths assets to individuals who won’t receive those assetsimmediately upon your death Such individuals could be minors who are ineligible toreceive an inheritance until they reach the age of majority or family members you preferreceive their share of your estate after a certain event occurs or when they reach acertain age If you select a testamentary trust in which you leave property to those whodon’t receive a share outright, then have an attorney assist you These types ofprovisions can complicate a normal will

Value of a Well-Written Will

This story dramatically illustrates the value of a well-written will After the death of hisclient, an attorney gathered the client’s family together to read the will to them Readingthe will began by specifying several large bequests that the client had made to familymembers Family members bowed their heads in modest gratitude as appropriate anduttered appreciative remarks Then the attorney mentioned the name of a disfavorednephew Everyone was suddenly silent Furtive glances raced around the room Theattorney cleared his throat Without a trace of the chuckle he felt inside appearing on hisface, the attorney solemnly continued to read the will: “To my nephew, whom I promised

to remember, ‘Hello, Charlie.’”

While this story brings a laugh, it also makes a good point If this man had failed to writehis will, nephew Charlie might have inherited everything the deceased man had owned IfCharlie had been the closest living relative, he might have walked away having utteredthe appreciative remarks, eyes gleaming with anticipation of the good life ahead.

When estates are involved, remember this rule: If you don’t write a will, the state will do

it for you Your will, hopefully, would meet your specific needs and wishes; the state’smay not

The Self-Proving Clause

If an attorney helps you write your will, he will likely suggest inserting details thatyou wouldn’t have thought about such as the self-proving clause

In the past, when a person died and left a will, the courts called back at leastsomeone who witnessed signing the will to verify that it had been signed using properprocedures In fact, sometimes the court called all the witnesses Witnesses verified thatthe person who signed the will had not acted under duress or undue influence and that hehad been of sound mind and of legal age As you might imagine, often it was difficult tofind all the witnesses to a will They might have been former staff members in the lawoffice where the client had signed the will They might have been neighbors who hadmoved away Sometimes the witnesses were deceased But the courts required that agood faith effort be made to locate the witnesses who could verify the signing of the will

Today, the law in many states allows you to leave language in your will (the proving clause) confirming that the witnesses were in your presence as you declared adocument to be your last will and testament, that they saw you sign your will, theyacknowledge you weren’t acting under duress or undue influence of any person, and theydeclare that you were of proper age and of sound mind The will includes a statementverifying these affirmations and the witnesses add their signatures, which are thennotarized This is called a self-proving will The courts conclusively presume that self-proving wills have been properly executed Today, the witnesses won’t have to be calledback into court to verify that they signed the document

self-Personal Property List

An attorney might also recommend that you make a reference in your will to aseparate list of tangible personal property to be distributed upon your death This allowsyou to update the list from time to time without having to change your will The list can’tinclude real estate, stocks, bonds, cash, or business property, but it can include items ofpersonal property such as antiques, collectibles, works of art, furniture, jewelry, andheirlooms

This tangible personal property list can save you time and money revisiting yourattorney if you change your mind about how you want to distribute a particular item And

there are countless reasons to change your mind Let’s say you have a daughter whomarries John Although you aren’t thrilled with the match, you make an effort to includehim in the family by leaving him something special On your personal property list, youwrite: “Our grandfather clock shall be distributed to our son-in-law, John.” But what ifJohn divorces that beautiful daughter of yours? You no longer want him to receive yourfamily’s prized heirloom You simply pull out your personal property list and removeJohn’s name Insert the name of the family member or friend you now want to receivethe clock, or leave it off the list and the personal representative will divide it up with therest of your estate, according to your will It is usually best to create a new list, sign anddate it, and destroy the outdated list You can do this without having to change your will.Voila! It’s easy and free—you don’t need an attorney to make the change.

Prescription - Chapter 1-The Basics of Wills

Do you have a will? Is it up to date? Take a moment to complete the following action items and keep reading for more tips and information on estate planning After you finish reading this book, I encourage you to find an attorney who specializes in estate planning and has experience drafting revocable living wills to create your estate plan.

Action 1: Create or update your will.

If you don’t have a will and your estate is small and uncomplicated, sit down right now and write a holographic will Remember, holographic means this will is entirely in your own handwriting Sign the will (no witnesses are required) If you type your will, or get a form, then sign it with at least two witnesses present and have them sign it, too If you don’t have a will and you have a larger, more complicated estate (for example, if you own real estate), you may need

an attorney-prepared will or trust If you already have a will, you may need to update it soon or create a trust Keep reading, then make an appointment with a lawyer right away—don’t put it off Don’t risk putting your family through the costs and heartaches of working with the court system.

Action 2: Create or update your personal property list.

Remember to include personal items such as antiques, collectibles, works of art, furniture, jewelry, and heirlooms To distribute items such as real estate, stocks, bonds, cash, or business property, you need to work with an attorney and address those items in your will.

Go to www.EstatePlanningDr.com/action to get:

1 What to include in a holographic will.

2 Personal Property List Form, Tips and information

CHAPTER TWO:

THE PROBATE FACTOR

Do you own your own home? Do you own other real estate? Do you hold stocks, bonds, a401(k), or other investments? Do you have dependents such as children, stepchildren, or

an elderly parent? If so, your estate planning should probably include more than a simplewill In this chapter, you will learn about some of the misconceptions and problems thatarise where a simple will is the only estate planning you do

Although only a small percentage of the people who need a will actually have one,it’s still the most common of all legal documents American Law Reports (a legalencyclopedia) states that the will is the most likely legal document to be subject tolitigation For most of American history, more lawsuits have been filed over wills than anyother legal instrument

To be effective, wills must usually go through a legal process called probate Probate

is defined as “the act or process of proving a will by a court to have competent (proper)jurisdiction.”

In a few exceptional situations, wills don’t need to go through the probate process.One exception is when the deceased person has held no property, either real estate orpersonal property, at the time of death Another exception is when the value of an estate

is less than the state’s defined minimum, or statutory, amount that would requireprobate In most states, this minimum amount is between $10,000 and $50,000; inArizona, it is $50,000 When the estate is less than the minimum amount, the assets inthat estate may be transferred to a beneficiary through an affidavit, a simple procedurethat doesn’t require the full probate process

Probate: A procedure designed by lawyers for the

benefit of lawyers.

Last night my dream turned into a nighmare.

It seemed that everything was settled out of court.

Other than these two exceptions, the law says wills must be probated to distributethe assets

The Probate Process

To more fully understand probate, let’s walk through an example of how a stateconducts the process For these purposes, we use the Arizona statutory requirements, butthey are similar to those of most states

We’ll assume that John Doe, a widower, has died, leaving a will behind The process

is similar whether John prepared a holographic will, filled out a form, worked with anattorney to prepare his will, or dies intestate (meaning he has a de facto “will” prepared

by his state legislature) In John’s will, he named his daughter, Jane, as the personalrepresentative of the estate

What does Jane need to do after the death of her father? First, she takes care of allthe necessary funeral arrangements Then she needs to find and review John’s will Hemay have a copy in his files, in a safe-deposit box, or filed at his attorney’s office.

What Not to Include in Your Will

Wills are often reviewed after the deceased’s funeral Therefore, your will isn’t the bestplace to state your preferences for funeral arrangements or organ donation instructions Ifyou have specific wishes regarding these, be sure to make your wishes known to yourfamily members

Take a moment to complete the following action items and keep reading for moreinformation on estate planning

From the instructions in John’s will, Jane prepares a Petition for Admission toProbate Jane asks John’s attorney to help prepare this petition This legal document setsforth certain details, such as the date John died, the county in which he resided, and thewill he left behind naming his daughter, Jane, to be the personal representative of hisestate In his will, John requested that Jane wouldn’t be required to post a bond toensure her performance (As discussed previously, if John hadn’t included a bond waiver

in his will, the court would require Jane to be bonded.) This Petition for Admission toProbate lists the names, addresses, and ages of the beneficiaries of John’s estate Janealso includes an estimate of the value of all the assets John owned at the time of hisdeath The attorney files the petition with the clerk of the court, together with John’s will(the original will, not a photocopy) This information is all public record Anyone can look

at those records!

Jane then takes John’s original will and the Petition for Admission to Probate to theprobate judge or his staff The judge reviews the will to make sure it meets all the legalrequirements If it does, the judge appoints Jane to act as the personal representative ofJohn’s estate The judge issues an order allowing Jane to carry out her duties as thepersonal representative This authorization is usually referred to as granting LettersTestamentary

After her appointment as the personal representative, Jane communicates in writingwith all the heirs and beneficiaries of John’s estate, letting them know that the probateprocess has officially started She must give this notice in writing—a phone call isn’tacceptable Jane’s notice informs the heirs that she is the personal representative andprovides her contact information Her notice to the heirs tells them they have a right toknow all the information about the estate The attorney prepares an Affidavit of theNotice to the Heirs and Beneficiaries and files this with the probate court

Next, Jane sends a written notice to all the creditors of the estate Even if there are

no known creditors, the law requires that the personal representative (or an attorney

representing this person) publish a notice to any creditors in a newspaper of generalcirculation in the county in which John resided at the time of his death (An obituarynotice doesn’t fulfill this requirement.) It usually takes about a month from the time aprobate petition is prepared and filed to the time the newspaper schedules the notice ofpublication Next, the attorney prepares an Affidavit of the Notice to Creditors and filesthis with the probate court.

From the publication date, creditors have a certain period of time to file their claimsagainst the estate The length of time differs from state to state In Arizona, for example,creditors are allowed four months The court waives any claims that aren’t presentedduring the specified period of time

During this period of time, Jane can’t distribute any assets from John’s estate; shecan’t give money from John’s estate to the beneficiaries or pay any creditors’ bills If Janewere to distribute any assets before all creditors’ claims were filed and there wasn’tenough money left in the estate to pay the valid claims, Jane would be personally liablefor those claims because she’s the personal representative of the estate That’s why Janeshouldn’t make any distributions from John’s estate until after the period of time allowedfor the creditors to file their claims and after a final plan for distribution is approved,either by the court or by all the beneficiaries of the estate As a rule, it’s unwise to payany claims unless it is certain that sufficient funds will be available to pay expenses andall creditors Note that expenses for administration of the probate, including attorney’sfees, usually take precedence over all other claims

Once the period of time allowed for the creditors to file their claims has passed, Janeprepares an Inventory and Appraisement of the estate—a list of the assets, and theirvalue, that John owned at the time of his death If Jane doesn’t know their value, shemay have to hire an appraiser to obtain a valuation of John’s estate

Jane must accumulate, inventory, and appraise all of John’s assets Plus, she mustresolve any disputed claims or contesting of the will before she can prepare the plan todistribute the estate This process of resolving claims is generally where litigation canbegin, with all of the associated expenses and stress When Jane creates the plan, shetakes into account John’s wishes (as stated in his will) to provide for his beneficiaries, thevalid claims filed by John’s creditors, and the probate legal and administration costs Janefiles the plan with the court and provides a copy to the beneficiaries If the heirs agree onthe distribution, Jane then distributes the property according to the plan The probateprocess is now complete In short, a “Closing Statement” is filed and the probate isterminated

Critical to Follow the Steps

It is critical to understand that you must carefully follow the steps in the probate process.Here’s a real-life case study of a probate that went awry Edward (not his real name) diedand the family gathered together to divide his belongings Family members discovered

one of the major items in his estate: a box full of gold coins of great value The familydistributed the coins among Edward’s daughters, who quickly sold them and spent themoney.

However, as required, the personal representative of the estate had listed the gold coins

as an asset of the estate on the probate records To make matters worse, with the goldcoins gone, the estate didn’t have enough money left to pay the valid claims Julie, thedaughter who had been named the personal representative, became personally liable topay those claims herself! Luckily, Julie was able to convince her sisters to repay theestate, which left sufficient monies to pay the claims But for awhile, when Julie wasalone and legally liable for the creditors’ claims, it was an uncomfortable, stressfulsituation for her

A probate in Arizona averages between ten months and two years Some probateestates can be completed more quickly Unfortunately, some will take much longer Oneestate was held up in probate for 59 years! Three generations of attorneys lived off thatestate and not much was left when they finally finished In a much worse scenario, aPhiladelphia lawyer said he had been involved in an estate in Pennsylvania that had beenopen for 75 years!

Fortunately, these are extreme examples Even Howard Hughes’ estate took only 11years to settle, a short period of time when you consider that 32 wills were presented tothe Texas and Nevada courts after his death Not one was found to be valid The Nevadaattorney fees alone amounted to $8.5 million

In addition to the fact that probate can be a lengthy process, probate records are notprivate and confidential Anyone can enter the courthouse and ask to see the probate filefor any deceased person You may review the probate file whether you’re a noseyneighbor, a disgruntled heir, or a newspaper reporter For example, after the death ofactress Natalie Wood, The Wall Street Journal sent a reporter to review her probate file

It published an article that Natalie’s estate was worth $6,000,000 and included, amongother things, 29 fur coats This juicy tidbit was available for anyone to discover becauseher estate was settled through probate More recently, Princess Diana’s will was madepublic and can still be found on the Internet We therefore know that she wanted herbrother to be the guardian of her boys (NOT her ex-husband, Prince Charles), and thatshe included her butler as a beneficiary The moral of the stories is: When you let yourestate go through probate, don’t expect privacy

The High Costs of Probate

Legal costs pose another major problem in the probate process Costs include filingfees with the court and publication costs as well as potential appraisal fees, bond fees,administrative costs, and other miscellaneous expenses I hate to even bring up the mostobvious cost: attorneys’ fees Nationwide, the average probate costs between five and

ten percent of the estate, most of which is attorney’s fees

Several states have acted to limit the expenses involved in probate In California, forinstance, the limit for legal fees in a routine case is four percent (4%) That doesn’tsound too bad until you realize that a case with a home equity of $100,000 results in a

$4,000 legal bill And that doesn’t count compensation to the personal representative, orfor appraisers, accountants and other professionals

The Cost of Going through Probate

A survey was conducted among estate planning attorneys nationwide It includedquestions about average legal fees to settle an estate as well as the delays and costsinvolved

Fifty-eight percent of the responding attorneys said they based their fees on apercentage of the estate

An attorney from Missouri said that the time delays varied according to the problemsencountered in the estate “Number-one problem: litigation Number two: the taxliabilities of the estate Third: court backlog (which is becoming more and moreprevalent) Fourth: lawyer backlog!” His minimum fee to settle an estate is $2,500and increases with the size of the estate

A Maryland attorney also had a base fee of $2,500, but the fee could escalate to over

$50,000, depending on the size of the estate On average, he charged 15 percent ofthe value of the estate He estimated that it takes, on average, 12 to 36 months tosettle an estate

A response from Texas indicated a base fee was only $1,500, but depending on theassets, the fee increases to $25,000 or more

A Georgia lawyer listed $7,500 as a minimum fee

The responses to this survey clearly show that having a will does not exempt yourheirs from having to deal with the expensive and time consuming process of goingthrough probate In the next chapter you will learn about a simple tool that will helpyou avoid all these problems

Prescription - Chapter 2- The Probate Factor

Take a moment to complete the following action items and keep reading for more information on estate planning.

Action 1: Call your lawyer.

If you currently have a will, ask your attorney how long the probate process typically takes in your county Also, ask how the fee is determined to settle an estate, if there is a statutory limit, and what the fee would be for your estate.

Action 2: Review your will.

If you currently have a will, take it out of the file and read it.

Do you need to change your beneficiaries?

Do you need to update the real estate and investment assets described?

Do you need to change your personal representative?

Familiarize yourself with the terms of your current will This is the heart of your current estate plan.

Keep these points in mind as you read the following chapters on trusts.

CHAPTER THREE:

TRUSTS VERSUS WILLS

Are you familiar with a situation in which someone died and no probate process followed?

In the settlement of that estate, the heirs wouldn’t have encountered the problemsmentioned in the previous chapter because several ways exist to avoid most of thoseproblems

One way is called a trust Using a living trust is becoming the most popular way toavoid going through probate Now, don’t get distracted by the word trust Many peopleare allergic to this word because it seems to be related to the word estate Often, estateconjures up a picture of a large mansion complete with rolling hills, tennis court and pool

in the backyard, with a BMW parked in the four-car garage

Yes, that’s one definition of estate If you have this type of an estate, you will needserious estate planning and that’s when it is especially important to have a trust Whilethe common perception about using a trust is that it’s just for the wealthy, this simplyisn’t true Those of us with smaller “estates” can also greatly benefit from using a trust

Who Manages the Trust?

Many people are uneasy about putting their estates into a trust because they believeonly a bank can be the manager or trustee of their trust It’s not true, but thismisconception is amazingly prevalent Even attorneys don’t always know the truth abouttrusts

One said, “Most of my clients are adamant about wanting to retain control over theirproperty They don’t want to give it up and put it in the hands of a bank, a trust company,

or even their friendly neighborhood attorney.”

Obviously, this attorney didn’t fully understand how trusts work The fact is you can

be the trustee of your own trust That is actually the most common way to do it Andwhen you die, a family member or friend can take over the operations of the trust Youdon’t need a bank or trust company to act as trustee unless that is what you want.Unfortunately, many people are in the dark about trusts

Let’s turn up the light and discuss trusts

Different Names for a Trust

Trusts have different names A “living” trust is established while you are living—thetrust must do what you want it to do upon your death, as if you were still living

A living trust is sometimes referred to as an inter vivos trust Inter vivos is Latin forbetween the living A living trust is often referred to as a revocable trust or a revocableliving trust because you may alter, amend, or even revoke the trust during your lifetime.This is the opposite of an irrevocable trust, which you can’t alter, amend, or revoke after

it has been established.

Some people refer to the living trust as a grantor trust because the person whoestablishes the trust is the grantor who retains control during his lifetime They are alltalking about the same kind of trust with the same characteristics, so don’t be concernedabout the different terminology

Basic Requirements

Let’s review the basic requirements and parameters of a trust:

1 A trust must be in writing—the document must outline, describe, and incorporateall of its terms

2 A trust must have a grantor—also called the settlor or trustor, this is the personsetting up the trust

3 The trust must have a trustee—this is the manager who controls, operates, andmanages all the property held in the trust

4 The trust must have a beneficiary—this person or persons inherit the estate

My Family’s Trust

I have set up a revocable living trust for my family so I’ll use that as an example todescribe how a trust operates Of course, my trust is in writing My wife and I are thesettlors because we established or settled the trust We didn’t want a bank or trustcompany acting as trustee for our trust We wish to remain in full control of our assets, so

we are also the trustees; we manage our own trust We can still buy, sell, reinvest, orgive away any trust assets without the approval of any bank We have transferred all ofour property into the trust

I am married and my wife joined me in setting up our trust She also joined in thetransfer of property into the trust Therefore, she is a co-settlor and a co-trustee My wifehas as much to say about the use of that trust property as I do In the event thatsomething happens to me, she can continue to manage the trust without any furtherchanges

How a Living Trust works.

If we both die in a common disaster, we’ve named a third person to carry on with therevocable living trust, called the successor trustee Many people will name a bank or atrust company as successor trustee because these institutions have experience andexpertise in trust management Again, you can name anyone you desire as successortrustee; you don’t have to name a bank or trust company to that position

Now that most of our children are grown, my wife and I considered our options forsuccessor trustee We have complete confidence in all of our children, but we chose ouroldest son and have named him the successor trustee of our trust

Finally, our trust agreement names the beneficiaries of the trust: our five children.They will receive our property in the event of both our deaths However, as of thiswriting, one of our children is under age 21, and neither he nor we want him to receive

an outright inheritance of property So his inheritance will be held in trust for him, withhis brother managing the finances

Some people choose to hold an inheritance until certain ages are reached Forexample, some don’t want their children to receive large sums of money until they reach

a certain age A trust allows you to designate that your children receive their inheritance

in stages, such as 1/3 on each birthday, i.e., ages 21, 25 and 30 The objective is toensure they will wisely handle their inheritance as they mature Even if you choose todistribute your estate in stages, the successor trustee has access to as much of theprincipal in the trust as necessary to pay medical expenses, education costs, and generalcosts of well-being without needing to go to court to receive approval to release anyfunds

Because we set up a living trust, upon our deaths our property won’t be tied up inthe courts It is available for immediate use by our children—without probate In addition,the settlement of our estate remains private

Plan for the Worst

Princess Diana, a world-renowned figure, did not plan to die in a crash in 1997, while hersons were small But she did Prince William, her oldest son, was only five at the time Itwould not have been wise to leave him a large inheritance, even if the law would appoint

a conservator for that money Diana’s will provided that her sons become eligible toreceive their inheritance from their mother when they reach age 30 In 2012, whenWilliam reached that ripe old age, it was estimated he would receive ten million BritishPounds, about $16 million dollars

One lesson here for us mortals who hope to have something to pass along is that anestate can be planned so that children only receive the money when we say so Also, hadDiana created a trust, we wouldn’t be reading all of this on the Internet, because a trustkeeps this information private

Even children, who won’t receive an outright distribution until they reach thespecified ages, can still have the immediate benefit of the trust The trust may providethat the beneficiaries have the right to use all the income as successor trustee They mayalso have access to as much of the principal in the trust as necessary for the dailymaintenance, care, and education of the children The successor trustee can pay for theirmedical expenses, education costs, and general costs of wellbeing without needing to go

to court to receive approval to release any funds In addition, all of this activity in theestate remains private

Schedule of Trust Assets

Attached to the trust is a schedule of trust assets, an itemized list of all the property

that has been transferred to the trust The schedule of trust assets typically describes andidentifies your home, bank accounts, investments, and other personal property items.Obviously, you need to adjust this list from time to time when you sell, reinvest, change,

or purchase assets But that does not require the trust to be amended A legiblehandwritten note on the schedule will do nicely

It is easy to keep the schedule up to date For example, you may have yourinvestments in a certificate of deposit (CD) When it matures, merely write on yourschedule of trust assets that you cashed out the CD and note the date Then, if youpurchase another investment, simply add a description of the new asset to your schedule

of trust assets to keep your list current And make sure the Trust is shown as the owner

of the CD

When my wife and I transferred our property into our trust, we took that property out

of our own names and put it into the name of the trust, showing both of us as trustees We still have full control, use, and management of that property, but it’s nolonger in our names In the event of our deaths, no assets are in our personal names—noproperty or investments are under our ownership to go through the probate process.Remember, if a person has no real or personal property in his name at the time of death(or if there is some, but it does not reach the state’s threshold, in Arizona, $50,000),there is no probate Probate gets eliminated completely Because there is no probate, theproperty isn’t tied up in the court system and unavailable for use By setting up a trust,we’ve eliminated the time—an average of ten months to two years—that our heirs mustwait for our property to be distributed

co-Buying and Selling a Home—a Trust Asset

What if, after setting up the trust and transferring the home into it, you want to sell it? Noproblem Of course, the title company will need to know that you have the right to sellyour house, so you will show them a copy of the trust (It’s a good idea to let thesuccessor trustee also know the details of the trust However, it remains private from therest of the world.) In your estate plan notebook, you listed your home on your trust’sschedule of trust assets, so next to the description of the home on the schedule, yousimply mark it as sold, enter the date of the sale, and initial the entry You then depositthe money received from the sale of the house into a bank account that is already in thetrust’s name and on the schedule of trust assets When you purchase a new home withthat money, you add a description of the new home on the schedule of trust assets And

then and this is important – at the close of escrow, you create and record a deed to

your new home in the name of your trust It doesn’t do any good if you write it in yourschedule but don’t record a new deed

Another great benefit of a trust is the privacy factor When my wife and I die, no onewill need to file our trust with the court Or record it Or make it a matter of public record

It is a private document Only those who have a need to know will be given informationabout our trust.

The privacy issue is certainly beneficial However, the most important consideration

in choosing between using a trust or will is generally bottom-line costs An attorney canprepare an average will for $400 to $500 and set up a simple trust for about $2,000 to

$2,500 (Of course, those costs depend on the attorney you hire and the complexities ofyour particular estate.) It doesn’t require a CPA to immediately figure that it costs fivetimes more to set up the average trust versus the average will The key words here are

“set up.” The prices I just quoted are for exactly that—“setting up” your will or trust.Those up-front costs don’t include the cost of administering your wishes after your death

When you die, what does it cost to carry out your carefully laid plans? Many peoplebelieve it is simply the cost to create the document that plans their estate: their will ortrust If your attorney draws up a will for you, it may cost $400 However, upon yourdeath, your estate goes through the probate process Then the fees for settling yourestate could easily reach $10,000 (it is estimated between 5-10% of the total estate) So

if you have a home worth $200,000, the legal expense of probate is likely in the range of

$10,000-$20,000 Now the total cost of settling your estate isn’t $400—it’s at least awhopping $10,400! This explains why a will is one of the most expensive legal documents

in this country See Chapter Two for more details

Some very well-known people have left diminished estates for their heirs because they went through

Your successor trustee might feel unsure about how to distribute your propertyaccording to your trust and want to have some counsel and advice Often, the successortrustee will go to an attorney to review the trust document and learn how to proceed.Let’s assume this happens The attorney visits with the successor trustee and mayprepare some transfer documents The attorney charges a few hundred dollars for thisservice (A reasonable fee to review and help settle an estate with a trust is about $500.)Now the total cost of your estate plan is $2,500 Compare this to using a will for yourestate plan, which would cost $10,400 The numbers speak for themselves—a willactually costs four times more than a trust!

Remember, of all legal documents, a will is the most likely to be contested It is alsoone of the most expensive legal documents because of the total costs to settle an estate

The Story of Mrs Will and Mrs Trust

An attorney, Mr X, opened his office as a sole practitioner and was not yet anexperienced estate planning attorney In one month, two elderly widows each requestedlegal assistance Both ladies had similar problems We’ll refer to the first lady as Mrs Will.She said, “Mr X, I’ve been to see a doctor and he tells me that I’m suffering fromterminal cancer I have only four or five months left to live I want to have a new willdrawn so I can leave my property to my family and have everything organized upon mydeath.”

As they visited, Mr X learned that she had an average-size estate She wasn’twealthy, but she owned her own home; had some stocks and bonds, bank accounts, andCDs; and owned various other property She owned a parcel of real estate in Coloradoand she owned interesting personal items—including an antique-doll collection, withwhich her granddaughter Sarah had fallen in love Mrs Will specifically wanted to leave

the doll collection to Sarah Mr X prepared a will for her, which they later reviewedtogether When she signed it, she went her way, thinking her estate had been adequatelyput in order.

The second widow asked Mr X to come to her home She required an oxygenmachine and it was difficult for her to get around We’ll refer to her as Mrs Trust It wasdistressing to hear her utter almost the exact same news that Mrs Will had divulged only

a few days earlier, saying, “Mr X, my doctor tells me that I’m suffering from terminalcancer I have only about four months left to live I want to put my estate in order andleave it to my family.”

Mrs Trust’s estate was about the same size as Mrs Will’s estate Mrs Trust ownedher home, had some bank accounts and other investments, and had a few treasuredpersonal items She wasn’t wealthy, but she wanted what she possessed to be left to herfamily However, Mrs Trust had one other request She said, “We’ve only recentlycompleted the probate of my deceased husband’s estate He died three years ago Hisprobate was closed just last year I don’t want my children to go through that processupon my death What do you recommend?”

Mr X suggested she set up a simple revocable living trust And that is exactly whatshe did Mrs Trust transferred her property into her trust: her home, bank accounts, andother investments She listed everything on the Schedule of Trust Assets She namedherself as the trustee, she named one of her sons to act as successor trustee in the event

of her death, and she named all her children as equal beneficiaries She signed the trustand transfer documents, satisfied that her affairs were now in order

Settling Mrs Will’s Estate

As the doctor predicted, Mrs Will died about four months later Her son came to seeher lawyer and said, “Mr X, we know you prepared a will for Mother She died last week;we’d like you to handle the probate of her estate.” He began the probate process.Remember what this involves: He had to prepare a Petition for Admission to Probate,listing the information concerning Mrs Will’s estate This included names and address ofall beneficiaries of the will, Mr Will’s name and address as personal representative, and

an estimate of the value of the estate Together with the will, he took the petitiondowntown and filed it with the court He went to see the probate judge, who reviewedthe petition and the will He found everything to be in order and named Mr Will to act asthe personal representative Mr X prepared the Notice to Creditors and the Notice toBeneficiaries Mr Will began listing the property in his mother’s estate for the Inventoryand Appraisement required by the court

About three weeks later, Mr Will ran into the attorney’s office Agitated, hedemanded, “Mr X, what have you done to me?”

Mr X responded, “I don’t know, what have I done?”

He explained that several years earlier, he had been divorced At that time, he wasliving in another state The court in that state had ordered him to pay child support and

alimony He didn’t want to pay child support and alimony so he had moved to Arizona andhad been in hiding from his ex-wife ever since In an interesting quirk of fate, thedaughter for whom this man had refused to pay child support was Sarah, thegranddaughter who was to receive Mrs Will’s antique doll collection Sarah was one ofthe named beneficiaries.

Mr X had done his job and obtained Sarah’s address Per his legal responsibility, hehad sent her notice of her grandmother’s death Sarah was living with her mother, the Ex-Mrs Will, who now knew where her ex-husband was residing She immediately filed alawsuit against Mr Will to collect back payments for the child support and alimony heowed For this, Mr Will was angry with Mr X

He explained, “Mr Will, just because you’ve violated the court order doesn’t meanthat I can disobey the law I have to give notice of your mother’s death to creditors and

to the beneficiaries Your daughter was one of them I suggest you pay the back childsupport and alimony.” He eventually complied, but he was extremely unhappy with thewhole ordeal

In the process of probating the estate, Mr X had published the Notice to Creditors

He received several creditors’ claims against Mrs Will’s estate He had found evidence ofthe existence of several of those claims in her records so he knew she had contracted forthose debts, services, or products But other creditors submitted claims for which norecords were found and those claims were disallowed Some of the creditors whoseclaims were disallowed filed an action within the probate court to have their claimsallowed This required additional hearings at the courthouse They had to hear witnessesand produce evidence, which required additional time Eventually, the judge allowedsome of those claims and disallowed others All this cost the estate additional money andtime delays

In addition, Mrs Will owned property: her summer home in Colorado When you ownreal property in another state, a probate is required in that state as well Yes, that’s right

—a second probate So the estate had to hire a Colorado attorney and have him begin anancillary probate in the state of Colorado This step doubled the attorneys’ fees to settlethe estate The attorney eventually sold the Colorado property, the money received forthe sale was transferred into the Arizona probate, and then he closed the ancillaryprobate At long last, the attorney thought he was ready to close out the Arizona probateand distribute the remaining assets

He prepared a plan for distribution based on the will that Mrs Will had dictated Hefiled this plan with the court and sent it to the heirs However, some of the heirs didn’tagree with this plan, and wouldn’t approve it For that reason, Mrs Will’s estate wasn’tsettled until the court entered its own decision on the matter of distribution Severalyears had passed since Mrs Will’s death Because the family never agreed on the plan fordistribution, this developed hard feelings among the siblings Some of them still don’tspeak to each other

I think you get the picture and it’s not a pretty one It seems that somethinghappened at every step in the probate of Mrs Will’s estate to cause additional delay, cost

to the estate, and disagreement: the disputed creditor claims, the unpaid alimony and

child support, the Colorado property requiring a Colorado ancillary probate, and thedisagreement about the final distribution of property.

Settling Mrs Trust’s Estate

Thankfully, and illustratively, the ending to Mrs Trust’s story is much simpler andhappier for her family When she died (about the same time as Mrs Will did) her soncame to see her attorney He asked, “Mr X, we know you prepared this trust for Mother;we’d like to distribute the property I am named the successor trustee What do I need todo?” Mr X reviewed the trust document with him and explained his duties as thesuccessor trustee He asked for help in preparing some of the legal documents to transfersome of the property Within two weeks, Mrs Trust’s estate was fully settled andcompletely distributed The fees charged for the attorney’s involvement were extremelysmall Mr Trust felt good about his experience and the settlement of his mother’s estate

Trust the Trust!

Mr X learned a lot from settling those two estates Thereafter, whenever someonecame into his law office and declared, “Mr X, I’d like to have a will drawn,” he explainssome of the problems often linked with wills, namely the probate process It may takeone to two years, or more, to settle the will It may cost between 5 and 10 percent of thevalue of the estate, or more Probate records are open to the public and the settlementwon’t remain private

Many people are unaware of all the problems that probate causes They are alsounaware that they can avoid probate by using of a revocable living trust Most of myclients have learned to trust the trust! Yet some people still want to have their estateplanned with the use of only a will That’s fine with me; you can lead a horse to water,but… At least I know they’re making an educated decision and I’m happy to prepare awill for them

It is the attorney’s obligation to thoroughly explain the total costs of wills and trusts

to his clients If this had been the case, perhaps Mrs Will would have chosen a revocableliving trust instead of a will This would have eliminated the probate in both Colorado andArizona by transferring both pieces of real property to one trust (A trust can holdproperty in more than one state.) The trust would have been able to distribute theproperty in her estate within a short period of time after her death Perhaps Mrs Will’sheirs would still be speaking to each other

Prescription - Chapter 3 - Trusts vs Wills

Take a moment to complete the following action items.

Action 1: How would your heirs be affected by the

probate process?

—Do a quick estimate of the current value of your estate including the equity in your home, your investments, and other property Then ask yourself this question: “If both my spouse and I tragically die tomorrow, how will the probate process affect our estate and, more important, impact our heirs?” Using this chapter as a guide, write down the implications to your heirs if they had to weather a lengthy, expensive probate process.

Action 2: How would your heirs be affected by the trust

CHAPTER FOUR:

“TRUST ME ”

By now, you see how a revocable living trust is an excellent tool to avoid the hassle andexcess costs of probate But circumventing the probate issue isn’t the only advantage ofestablishing a revocable living trust This kind of trust:

Helps you reduce or eliminate unnecessary taxes

Provides flexibility in the event you become mentally or physically incapacitated(the most neglected problem in estate planning)

Helps you select the best type(s) of power of attorney

Helps you face the reality of the importance of a living will

Addresses the issue that, legally, a minor child is considered an incapacitatedperson

Allows professionals who hold stock in their own corporation to protect thecorporation from serious loss of value in the event of that person’s death

Solves the problems inherent in joint tenancy, right of survivorship, and communityproperty

Let’s investigate these issues in depth

Paying Excess Federal Estate Taxes

One significant cost of settling an estate is often overlooked: the federal estate tax.Unfortunately, most of us don’t have to deal with that problem I say “unfortunately”because most of us do not have an estate worth over $5.12 million—the current amountexempt from federal estate tax as of January 1, 2013 Note the applicable exclusionamount for United States federal estate taxes, presented in Figure 4.1

For the year: The Applicable Exclusion Amount for U.S Federal Estate Taxes

on December 31, 2012, but Congress, in the notorious “fiscal cliff” deal, voted to retainthe limit For now

If you are married and have a large estate, you can use a trust to allow both spouses

to retain that $5.12 million exemption Through your trust, you may protect up to $10.24million from any federal estate tax and, furthermore, reduce the tax that is assessed onanything over that amount

Notice in the applicable exclusion amount chart that the exclusion amount wasrepealed altogether in 2010, so the IRS didn’t impose an estate tax on those who died inthat year But that repeal wasn’t permanent With the current limit of $5.12 million, mostpeople need not worry about this issue But for those with large estates (including lifeinsurance!), this can seriously affect an estate; the federal estate tax is 35% minimum

To help reduce estate taxes, married couples have an unlimited marital deduction.Many people are confused by this phrase It means that upon the death of either spouse,there is an unlimited marital deduction—no estate tax is imposed at that time Because

of this marital deduction, the surviving spouse won’t have to pay any taxes on the value

of the assets left behind This is true no matter the size of the estate, whether it’s valued

at $10,000 or $10 million The IRS does not assess tax at the death of the first spouse.

However, upon the death of the second spouse, all the assets get included in thatperson’s taxable estate The second spouse to die enjoys only one federal estate taxexemption of $5.12 million (as of Jan.1, 2013) In short, a married couple benefits fromonly one federal estate tax exemption of $5.12 million—not an exemption of $5.12 millionfor each spouse

Here’s where the trusty trust could make a huge difference in the amount ofinheritance you’re able to leave to your beneficiaries Let’s say you and your spouse haveasked your attorney to set up a revocable living trust with a provision for an A/B trust(this type of trust is sometimes referred to as a marital deduction trust) By using an A/Btrust, a married couple retains the applicable exclusion amount for each spouse With anA/B trust, upon the death of either spouse, the trust assets may be split into two shares:Share A (the survivor’s share) and Share B (the decedent’s share) Each share retains the

$5.12 million exemption With these high thresholds in place, most people need not worryabout A/B trusts today

This is how an A/B trust works: The surviving spouse has full and complete use of allthe income and principal of Share A (the survivor’s share) of the trust The survivingspouse also has the right to all the income of Share B (the decedent’s share) of the trust

In addition, the surviving spouse may use as much of the principal of Share B as isnecessary to maintain such spouse’s current standard of living, or to provide for anyillness or accident The A/B trust has one simple stipulation: The surviving spouse can usethe principal from Share B only after the principal from Share A has been exhausted.Because the decedent’s share has been locked in and can’t be used except for emergency

or necessity, both shares are allowed to retain that $5.12 million federal tax exemption

By using a simple revocable living trust with A/B split, the total federal tax exemptioncan be doubled to $10.24 million! And beautifully, the surviving spouse may still retaincontrol and make all investments and other decisions affecting the trust

If you currently have a living trust that doesn’t include this provision, you may add an

A/B trust with an amendment or a trust restatement To determine if your trust has anA/B trust election, search the table of contents of your living trust for “separate trusts,”

“marital trust” or a similar description

Revocable Living Trust with A/B provision.

Becoming Mentally or Physically Incapacitated

A revocable living trust can be your safety net should you become incapacitated.Perhaps the best way to present the benefits of a trust in this area is to share this story

Several years ago, a woman we’ll call Mrs Banks made an appointment with herlawyer She requested that he prepare a revocable living trust for her $250,000 estate.She wanted to leave it to her family without going through the hassles of probate Thelawyer prepared the trust and notified her that it was ready for her signature Before shecould come in to sign it, she was involved in a car accident This placed her in thehospital for several months—physically incapacitated and mentally unable to handle herown affairs

Mrs Banks’ neighbor, Mr Nosey, was a close friend Before the accident, he’d been

helping her with investments and tax planning He was legitimately concerned that shewasn’t able to pay her bills over this extended period of time Mr Nosey and his attorneyfriend decided they should ask the court to appoint a conservator to pay Mrs Banks’ billsand take care of her other needs Mr Nosey and his attorney friend filed a request withthe court to name a conservator The process is similar to a probate process and is,therefore, often referred to as a living probate An attorney must file a Petition forAppointment of Conservator, give notices to creditors, and compile an inventory andaccounting, and so on.

Since Mr Nosey had previously been helping Mrs Banks with her estate (paying thetaxes, etc.), he was well versed on the condition of her property and could compile afairly complete picture of her assets And when Mr Nosey and his attorney applied to thecourt for help, the court responded The judge appointed a social worker to be theguardian for Mrs Banks, to visit her at the hospital and to make sure her physical needswere being met The court also ordered that a bank be appointed as the trustee of Mrs.Banks’ property The judge required that the bank would have its attorneys draw up atrust agreement for Mrs Banks Then the court, with the help of the bank’s attorneys,would transfer all of Mrs Banks’ property over to this court-approved trust The bankwould then begin to pay her bills

Happily, after some time, Mrs Banks began to recover and was eventually able toreturn home But what was the state of her affairs? Not as she had left them Her Cadillachad been sold Her furs were placed in storage somewhere She wasn’t able to accountfor all her jewelry and other items She was allowed a meager weekly living allowance of

$175 Poor Mrs Banks! This was an unsatisfactory situation

In frustration, she came to an attorney for advice to regain control over her ownproperty She shared the sad tale of her deplorable situation at this meeting Mrs Bankstook with her the court documents to show what had happened The lawyer explainedthat she needed to have the court-approved trust “set aside” or overturned To do this,she needed to see the doctor who declared her incapacitated and have him verify thatshe had recovered

Mrs Banks did so She made an appointment with the doctor, who examined her andasked her to respond to questions on a series of tests Because these tests were criticallyimportant to her personal freedom, the poor woman was under severe pressure andbecame flustered She had a difficult time with one test: an exercise in countingbackward The doctor asked her questions about specific dates, events, persons, andplaces in her life to which he knew the answers Tragically, Mrs Banks couldn’t recalleverything and was unable to offer complete answers The doctor was reluctant to sign aletter stating she had fully recovered

At the court hearing regarding her conservatorship, Mrs Banks felt much more likeherself When the judge interviewed her on the witness stand, she responded normally.But because the doctor hadn’t signed the letter stating she had fully recovered, the judgewas reluctant to set aside that court-approved trust and return her own property to Mrs.Banks The judge did increase her living allowance, but the court-appointed bankcontinued to serve as trustee of her trust and control her assets

About 18 months later, Mrs Banks passed away, possibly due in part to a brokenspirit and a broken heart, brought about by loss of control over her own property and herlife It was doubly sad to realize that if she had been able to sign the revocable livingtrust prepared for her, Mrs Banks’ daughter could have taken over the management ofher mother’s property When Mrs Banks had recovered sufficiently, the daughter couldhave turned the property back to her mother’s charge The family could have handled thewhole disturbing affair easily, without the costly and extensive courtroom procedure Andwho knows? Mrs Banks might have lived much longer This dramatic story reveals howpowerful and valuable a trust can be—not just when someone dies but also if someonebecomes incapacitated.

A revocable living trust completely eliminates the need for a conservatorship In yourown trust, you may specify that you’ll act as trustee until your death, disability, or legalincapacity And in the event of your incapacity, it names someone to act as the successortrustee Your successor trustee will be able to take over the management of your trustwithout being appointed by the court I believe mental or physical incapacity is one of themost neglected problems in estate planning A revocable living trust will protect you fromthis contingency

At the Mercy of the Court

A celebrated figure who didn’t get around to planning his estate was Groucho Marx In hislater years, Groucho had become incapacitated and completely dependent on others Atthe time, a young woman, Erin Fleming, lived with Groucho and cared for his needs Sheneeded to have authority granted to her by the court to enable her to provide for certainbasic needs and manage the household So she applied for a conservatorship When ErinFleming sought the appointment, she was opposed by some of Marx’s shirttail relatives

As Groucho sat despondently in the courtroom, the judge appointed a bank as the trustee

of his estate and required that a written trust be created The trust was approved, whicheventually left the estate to these shirttail relatives upon Groucho’s death No one knows

if Groucho wanted to leave his estate to Erin Fleming or his relatives But if Groucho haddone basic planning, he would have made that decision himself instead of being at themercy of a court

Power of Attorney

One of the benefits of a revocable living trust is that it gives authority to thesuccessor trustee to act for the settlor if the settlor/trustee becomes incapacitated Thesettlor (or grantor) is the creator of the trust, the person funding the trust with assets.The trustee is the manager of the trust Normally, the settlor and trustee is the sameperson The successor trustee is a person designated in the trust to act as trustee in the

event of the death of the settler/trustee, but also upon the disability or incapacity of thesettler.

The trust agreement grants the successor trustee the power to manage the trust andits assets for the benefit of the incapacitated trustee if a disability occurs However, thesuccessor trustee must prove such incapacity with a letter from the settlor’s medicaldoctor To successfully request this letter from the doctor, the trust agreement mustgrant this authority to the successor trustee This required language, often referred to as

“HIPAA” language, is mandated by the Federal Health Insurance Portability andAccountability Act (HIPAA) When this language is part of trust agreement, the medicaldoctor is specifically authorized to share the respective medical records with thesuccessor trustee If this language isn’t in the trust agreement, the successor trusteemust go to court, ask a judge for permission to act on behalf of the trust, and show agood reason for the court to grant this authority Doctors who release medical recordswithout the proper authority are subject to penalties and fines.)

A power of attorney is an instrument authorizing someone else to act as your agent

or attorney-in-fact With a power of attorney, you name someone to act in your place,name, and stead as your agent For example, you may need someone to pay your bills ifyou’re unable to do so In many instances, it’s easier to use a power of attorney to allowthe successor trustee to manage the trust assets This is especially true if the trustee isexpected to be incapacitated for a short duration For example, the trustee may plan toundergo a medical operation or simply be out of town for an extended period of time andmay need someone to manage certain actions regarding a trust asset Many unforeseenreasons exist to grant a power of attorney to the person named as successor trustee

This was a lot easier before they were so concerned about protecting the identity of the

patient

A power of attorney may be general (broad or all inclusive) or special (limited tocertain uses) It may become effective immediately or become valid upon your disability(this is called a springing power of attorney) After the HIPAA law was passed, springingpower of attorney became essentially useless because it creates such a dilemma: Youragent can’t act on your behalf unless you are proven to be incapacitated You can’t beproven to be incapacitated without your medical records Your agent doesn’t have access

to your medical records without the express authority mandated by the HIPAA law—or acourt order So the question becomes, “How can this springing power of attorney springinto effect?” It’s a Catch-22

A power of attorney is void upon your death and also upon your disability—unlessyou direct that it is effective even in the event of your disability This is called a durablepower of attorney You may combine the characteristics you need into one power ofattorney I’ve found the most suitable power of attorney is this: general durable power ofattorney

It’s a good idea to update your power of attorney about every two to three years.Most banks look at an older power of attorney as being stale and won’t honor it Somebanks even require that a power of attorney be declared on a preprinted form and not beolder than two years Check with your bank regarding its requirements Note, though,

that a bank’s requirements may be the bank’s policy, not legal requirements However,it’s not easy to argue with a bank about the appropriateness of its policies or the legality

of your legal documents It’s easier just to go along with your bank’s policy Or changebanks

The state of Arizona has recognized the problem of requiring regular updates to yourpower of attorney The Arizona legislature has approved a law stating a power ofattorney is valid “ regardless of how much time has elapsed, unless the instrumentstates a definite termination time.” (ARS 14-1551)

Living Will

Preparing your living trust reminds you that you won’t be here forever You maybecome incapacitated before you die If you know you don’t want to be kept on lifesupport just to prolong the dying process, you must prepare a living will

A living will is a document that expresses your desire to not be kept on artificial, prolonging, medical procedures when you are terminally ill or when you have no prospectfor recovering from a serious illness In your living will, you may give certain health-caredirectives and name an agent to make medical decisions on your behalf if you’re unable

life-to make these decisions yourself This designation of a health-care agent is often done in

a separate health-care power of attorney Some states allow you to include these twomost important documents—the living will and the health-care power of attorney—in onecomplete document This helps eliminate the possibility of confusing the terminology inthe two documents, which would lead to improper decisions I recommend, wherepossible, to combine these two documents

The Value of Having a Living Will

The importance of having a living will was dramatically emphasized by the 2005 saga ofTerri Schiavo in Florida She was kept on artificial life support for more than 11 years—even after the Florida courts had repeatedly found, based on reliable medical testimonythat she was in a permanent, vegetative state with no possibility of recovery The Floridalegislature, Florida governor, the United States Supreme Court, the United StatesCongress, and the federal courts all became involved in the case They systematicallytried to overrule the husband’s request that Terri be allowed to die a natural death,without the use of extraneous heroic measures to extend the dying process

No matter where you stand on this issue, most people would agree that Terri should havebeen able to express her own wishes in this matter Years of legal haggling and familyheartache could have been avoided if Terri Schiavo had executed a valid living will inwriting before her injury