Preparing Children for Inheritances in the Future

Almost three quarters of the wealthiest people in the world—those whose net worth is higher than $30 million—are self-made, according to a Wealth-X report. Look closer into the world’s wealthiest, and only about a quarter have a combination of inherited and self-made money, while only 8.5% inherited their wealth.

Transferring wealth and having it last more than two generations is very difficult, says an article that offers suggestions: “4 Ways to Prepare Children Now to Oversee their Inheritance Later” from Forbes. A decades-long study of 2,500 families found that 70% of family fortunes disappear by just the second generation. By the third generation, that number leaps to 90%.

Why is wealth retention so difficult? One of the key reasons is a lack of preparation. Parents may devote time and resources to ensure that their estate is organized, but they must also prepare their children to oversee and sustain inherited wealth and give them the skills, values and knowledge needed.

How can parents make sure their family wealth endures? Here are a few steps:

Have an estate plan created. This lets you maximize the inheritance left to heirs, by minimizing taxes and asset distribution costs. When the children are minors, establish guardians in case both parents die early and make a plan to distribute assets over their lifetimes, so they don’t receive a large inheritance all at once.

Give your children a financial education. Children need to be taught how to save, what compound interest can do, how investments work and how money is earned. Let them handle money early and experience the consequences of poor decision making. Better to learn at a young age with small amounts of money, than when they are adults and the stakes are higher.

Let them know what the family’s net worth is and apprise them of any changes. These discussions should be age-appropriate, but financial openness and honesty that starts young eliminates confusion and mixed messages. Give them a small stake in the planning, by allowing them to choose a charity and make a donation to it. Delegating even a small portion of control and letting the child see how it feels to be a steward of wealth is an important lesson.

Encourage children to build their own wealth. Many wealthy parents worry that knowing there is an inheritance in their future will prevent their children from having any ambitions. Grant a limited amount of control over portions of their inheritance at certain ages and teach them about options: investing, saving, donating or spending.

A financial education that starts early and provides time for lessons to be learned, will make children at any economic level better prepared for good decision making throughout their lives.

Reference: Forbes (July 1, 2020) “4 Ways to Prepare Children Now to Oversee their Inheritance Later”

How Do I Include Care for My Children in Estate Planning?

To make certain that parents’ wishes are followed, they should create a will that designates a guardian and a conservator in case both parents die, counsels The Choteau (MT) Acantha article entitled “Plan for children’s future when making out a will.”

A guardianship provides for the care of the children, until they reach adulthood (usually age 18) and gives the guardian the authority and responsibility of a parent. A guardian makes decisions about a child’s well-being, education and health. A conservatorship is designed to manage and distribute funds and assets left to children, until they’re age 18. A single individual can be appointed to do both roles, or separate people can be designated as guardian and conservator.

Frequently, the toughest decisions parents have is agreeing who they want to have the responsibility of raising their children and managing their money. Usually they select a person with similar values, lifestyle and child rearing beliefs.

It can be important to talk about the issue with older children, because some states (like Montana) permit children ages 14 and older to ask a court to appoint a guardian, other than the person named in parents’ wills.

You should also name a backup guardian and conservator, in case their first choices aren’t up to the task and review your choices periodically.

In many states, the law stipulates that when children attain the age of 18, they are able to get the property that was in the care of a conservator, no matter what their capability to manage it. Another option is to leave the assets in a trust, rather than a conservatorship.

Parents can provide in their wills the property that they want to pass directly to the trust, which is also called a testamentary trust. These assets can include life insurance payments, funds from checking accounts, stocks, bonds, or other funds. Parents can create a trust agreement with an experienced estate planning attorney that provides their named trustee with the power to manage the trust assets and use the income for their children’s benefit.

The trust agreement goes into effect at the death of both parents. It says the way in which the parents want the money to be spent, who the trustee should be and when the trust ends. The trustee must follow the parents’ instructions for the children.

Reference: Choteau (MT) Acantha (May 13, 2020) “Plan for children’s future when making out a will”

There Is a Difference between Probate and Trust Administration

Many people get these two things confused. A recent article, “Appreciating the differences between probate and trust administration,” from Lake County News clarifies the distinctions.

Let’s start with probate, which is a court-supervised process. To begin the probate process, a legal notice must be published in a newspaper and court appearances are needed. However, to start trust administration, a letter of notice is mailed to the decedent’s heirs and beneficiaries. Trust administration is far more private, which is why many people chose this path.

In the probate process, the last will and testament and any documents in the court file are available to the public. While the general public may not have any specific interest in your will, estranged relatives, relatives you never knew you had, creditors and scammers have easy and completely legal access to this information.

If there is no will, the court documents that are created in intestacy (the heirs inherit according to state law), are also available to anyone who wants to see them.

In trust administration, the only people who can see trust documents are the heirs and beneficiaries.

There are cost differences. In probate, a court filing fee must be paid for each petition. There are also at least two petitions from start to finish in probate, plus the newspaper publication fee. The fees vary, depending upon the jurisdiction. Add to that the attorney’s and personal representative’s fees, which also vary by jurisdiction. Some are on an hourly basis, while others are computed as a sliding scale percentage of the value of the estate under management. For example, each may be paid 4% of the first $100,000, 3% of the next $100,000 and 2% of any excess value of the estate under management. The court also has the discretion to add fees, if the estate is more time consuming and complex than the average estate.

For trust administration, the trustee and the estate planning attorney are typically paid on an hourly basis, or however the attorney sets their fee structure. Expenses are likely to be far lower, since there is no court involvement.

There are similarities between probate and trust administration. Both require that the decedent’s assets be collected, safeguarded, inventoried and appraised for tax and/or distribution purposes. Both also require that the decedent’s creditors be notified, and debts be paid. Tax obligations must be fulfilled, and the debts and administration expenses must be paid. Finally, the decedent’s beneficiaries must be informed about the estate and its administration.

The use of trusts in estate planning can be a means of minimizing taxes and planning for family assets to be passed to future generations in a private and controlled fashion. This is the reason for the popularity of trusts in estate planning.

It should be noted that a higher level of competency—mental comprehension—must be possessed by an individual to execute a trust than to execute a will. A person whose capacity may be questionable because of Alzheimer’s or another illness may not be legally competent enough to execute a trust. Their heirs may face challenges to the estate plan in that case.

Reference: Lake County News (July 4, 2020) “Appreciating the differences between probate and trust administration”

What are the Different Kinds of Powers of Attorney?

If I asked you what you thought is the most important document in your estate plan, you may say it’s your last will and testament or your trust. However, that’s not always the case. In many situations, the most important planning document may be a well-drafted power of attorney, says The Miami News-Record’s recent article entitled “Power of attorney options match different circumstances.”

When a person can’t make his or her own decisions because of health, injury, or other unfortunate circumstances, a power of attorney (POA) is essential. A POA is implemented to help their loved ones make important decisions on their behalf. It helps guide decision-making, enhances comfort and provides the best care for those who can’t ask for it themselves. A POA permits the named individual to manage their affairs.

To know which type of POA is appropriate for a given circumstance, you should know about each one and how they can offer help. There are five power of attorney forms.

Durable and Non-Durable Power of Attorney. This is the most common. These leave a person with full control of another person’s decisions, if they’re unable to make them. A Durable POA continues to be in effect when you are incapacitated. That is what the “durable” part means. A Non-Durable Power of Attorney is revoked, when you become incapacitated. Be sure you know which version you are signing.

Medical Power of Attorney. Especially in a hospice setting, it permits another person to make medical decisions on the patient’s behalf, if they lose the ability to communicate. This includes decisions about treatment. In this situation, the POA takes the role of patient advocate, typically with the presiding physician’s consent.

Springing Power of Attorney. This POA is frequently an alternative to an immediately effective POA, whether it durable or non-durable. Some people may not feel comfortable granting someone else power of attorney, while they’re healthy. This POA takes effect only upon a specified event, condition, or date.

Limited Power of Attorney. This POA provides the agent with the authority to handle financial, investment and banking issues. It’s usually used for one-time transactions, when the principal is unable to complete them due to incapacitation, illness, or other commitments.

If you don’t have a power of attorney, ask a qualified elder law or estate planning attorney to help you create one. If you already have a POA, review it to be sure it has everything needed, especially if you have a very old POA or one that was drafted in a state other than the one in which you reside.

Reference: The Miami (OK) News-Record (July 7, 2020) “Power of attorney options match different circumstances”

Estate Planning Is a Gift and a Legacy for Loved Ones

Without an end of life plan, a doctor you’ve never even met might decide how you spend your last moments, and your loved ones may live with the burden of not knowing what you would have wished. These are just a few reasons why “End-Of-Life Planning is a ‘Lifetime Gift’ To Your Loved Ones,” as discussed in a recent article from npr.org.

It’s important to recognize that planning for the end of your life is actually not all about you. It’s about the ones you love: your parents, spouse or your children. They are the ones who will benefit from the decisions you make to prepare for the end of your life, and life after you are gone. It is a gift to those you love.

So, what should you do?

Start by preparing to have an estate plan created. If you have an estate plan but haven’t reviewed it in the last three or four years, find it and review it. If you can’t find it, then you definitely need a new one. An estate planning attorney can help you create an estate plan, including a will and other documents.

In the will, you name an executor, someone who you trust completely to carry out your directions. Some people choose a spouse or adult child to be their executor. It’s a lot of work, so pick someone who is smart, organized and trustworthy. They’ll be in charge of all of your financial assets and communicating how the estate is distributed to everyone in your will.

Create an inventory. This includes things that are of financial and sentimental value. People fight over sentimental things, so giving your family specific directions may avoid squabbles.

If you have children under age 18, name a guardian for them. This should be a person who knows your children and will raise them with same values as you would.

Pets are often overlooked in estate planning. If you want to protect your pet, in many states you can create a pet trust. It includes funds that are to be used specifically for care for your pet, and a trustee who will be responsible for ensuring that the funds are used as you intended.

Digital accounts are also part of your property, including social media, online photos, everything in your online cloud storage, credit card rewards, email, frequent flyer miles and digital assets.

Make sure your will is executed and in compliance with the laws of your state. If your will is found to be invalid, then it is as if you never made a will, and all your planning will be undone.

You also need an advance directive, a legal document that covers health care and protects your wishes at the end of life. One part of an advance directive gives a person medical power of attorney, so they can make decisions for you if you cannot. The other part is a living will, where you share how you want to be cared for and what interventions you do or don’t want if you are near death.

Reference: npr.org (June 30, 2020) “End-Of-Life Planning is a ‘Lifetime Gift’ To Your Loved Ones”

Should I Write My Will During the Pandemic?

Writing a will allows you to instruct your executor how you want your property to be distributed, when you die. If you have minor children, your will says who will raise them if you die and their other parent is deceased.

The Oakland Press’s article entitled Writing a will today is more important than ever” says that if you pass away without a will, the state will make these critical decisions for you. What the state decides may not reflect your wishes. This may create conflict and stress within your family and cause financial troubles for those you leave behind.

In addition, none of your assets will go to your favorite charities.

A will, and other estate planning documents, are critical because this gives you control over how your affairs are handled when you die. This includes the way in which your assets are distributed and who will take care of your children, if they’re minors.

When you draft your will, it’s important that it’s legally valid. There’s no guarantee that a will prepared without an estate planning lawyer will meet the criteria. If the probate judge doesn’t accept your will, it’s as if you died without one.

As a result, it’s very important that you work with a qualified estate planning attorney to prepare your estate plan. If you don’t, it is possible that your will or other estate documents you purchased online might not meet the state requirements.

Therefore, you’ve wasted money, and your instructions may not be followed. This can mean uncertainty in how your estate is eventually administered, and it can make an already stressful situation even worse for your family.

An experienced estate planning attorney can make sure your will meets the state’s requirements, decreases hard feelings within your family and keeps your family from challenging its validity in court.

If you have a will, consider updating it, especially if a beneficiary listed on the document has died, if you’ve sold your home and bought another, given away some of your possessions, your financial circumstances or the value of your property has changed, or your charity relationships have changed.

You may want to change your estate plan, when your children become adults or if others that were provided for in the estate plan are no longer living.

Reference: Oakland Press (May 16, 2020) Writing a will today is more important than ever”

How Does Social Security Benefits Work in My Estate Planning?

A financial power of attorney (POA) is a critical element of an estate plan. This document makes certain that a person you named takes care of your finances, when you are unable. Part of managing your finances is coordinating your Social Security benefits—whether you already are getting them or will apply for them down the road.

However, what many people don’t realize, is that the Social Security Administration (SSA) doesn’t recognize POAs. Instead, as part of your estate plan, you need to contact the SSA and make an advance designation of a representative payee, according to Forbes’ article entitled “The Surprising But Essential Estate Planning Step For Social Security Benefits.”

This feature lets an individual select one or more people to manage their Social Security benefits. The SSA then, in most situations, must work with the named individual or individuals. You can designate up to three people as advance designees and list them in order of priority. If the first one isn’t available or is unable to perform the role, the SSA will move to the next one on your list.

A person who’s already getting benefits may name an advance designee at any point. Someone claiming benefits can name the designee during the claiming process. You can also change the designees at any time.

When you name a designee, the SSA will evaluate him or her and determine the person’s suitability to act on your behalf. Once he or she is accepted, a designee becomes the representative payee for your benefits. They will get the benefits on your behalf and are required to use the money to pay for your current needs.

A representative payee typically is an individual. However, it can also be a social service agency, a nursing home, or one of several other organizations recognized by the SSA to serve in this capacity.

If you don’t name designated appointees, the SSA will designate a representative payee on your behalf, if it feels you need help managing your money. Relatives or friends can apply to be a representative payee, or the SSA can choose a person. When a person becomes a designated payee, he or she is required to file an annual report with SSA as to how the benefits were spent.

Being a designated representative doesn’t give that person any legal authority over any other aspect of your finances or personal life. You still need the financial POA, so they can manage the rest of your finances.

Reference: Forbes (April 17, 2020) “The Surprising But Essential Estate Planning Step For Social Security Benefits”

Your Estate Plan Needs to Be Customized

The only thing worse than having no estate plan, is an estate plan created from a ‘fill-in-the-blank’ form, according to the recent article “Don’t settle for a generic estate plan” from The News-Enterprise. Compare having an estate plan created to buying a home. Before you start packing, you think about the kind of house you want and how much you can spend. You also talk with real estate agents and mortgage brokers to get ready.

Even when you find a house you love, you don’t write a check right away. You hire an engineer to inspect the property. You might even bring in contractors for repair estimates. At some point, you contact an insurance agent to learn how much it will cost to protect the house. You rely on professionals, because buying a home is an expensive proposition and you want to be sure it will suit your needs and be a sound investment.

The same process goes for your estate plan. You need the advice of a skilled professional–the estate planning lawyer. Sometimes you want input from trusted family members or friends. There other times when you need the estate planning lawyer to help you get past the emotions that can tangle up an estate plan and anticipate any family dynamics that could become a problem in the future.

An estate planning attorney will also help you to avoid problems you may not anticipate. If the family includes a special needs individual, leaving money to that person could result in their losing government benefits. Giving property to an adult child to try to avoid nursing home costs could backfire, making you ineligible for Medicaid coverage and cause your offspring to have an unexpected tax bill.

Your estate planning lawyer should work with your team of professional advisors, including your financial advisor, accountant and, if you own a business, your business advisor. Think of it this way—you wouldn’t ask your real estate agent to do a termite inspection or repair a faulty chimney. Your estate plan needs to be created and updated by a skilled professional: the estate planning lawyer.

Once your estate plan is completed, it’s not done yet. Make sure that the people who need to have original documents—like a power of attorney—have original documents or tell them where they can be found when needed. Keep in mind that many financial institutions will only accept their own power of attorney forms, so you may need to include those in your estate plan.

Medical documents, like advance directives and healthcare powers of attorney, should be given to the people you selected to make decisions on your behalf. Make a list of the documents in your estate plan and where they can be found.

Preparing an estate plan is not just signing a series of fill-in-the-blank forms. It is a means of protecting and passing down the estate that you have devoted a lifetime to creating, no matter its size.

Reference: The News-Enterprise (June 23, 2020) “Don’t settle for a generic estate plan”

Possible Pitfalls for Special Needs Planning for Parents

Public benefits for disabled individuals include health care, supplemental income, and resources, like day programs and other vital services. Some benefits are based on the individual’s disability status, but others are “needs tested,” where eligibility is determined based on financial resources, as explained in the article “Planning for loved ones with special needs” from NWTimes.com.

Needs testing” is something that parents must address as part of special needs planning, in concert with their own estate planning. This ensures that the individual’s government benefits will continue, while their family has the comfort of knowing that after the parents die, their child may have access to resources to cover additional costs and maintain a quality of life they may not otherwise have.

Families must be very careful to make informed planning decisions, otherwise their loved ones may lose the benefits they rely upon.

A variety of special planning tools may be used, and the importance of skilled help from an elder law estate planning attorney cannot be overstated.

One family received a “re-determination” letter from the Social Security Administration. This is the process whereby the SSA scrutinizes a person’s eligibility for benefits, based on their possible access to other non-governmental resources. Once the process begins, the potential exists for a disabled person to lose benefits or be required to pay back benefits if they were deemed to have wrongfully received them.

In this case, a woman who lived in California, engaged in a periodic phone call with California Medicaid. California is known for aggressively pursuing on-going benefits eligibility. The woman mentioned a trust that had been created as a result of estate planning done by her late father. The brief mention was enough to spark an in-depth review of planning. The SSA requested no less than 15 different items, including estate documents, account history and a review of all disbursements for the last two years.

The process has created a tremendous amount of stress for the woman and for her family. The re-determination will also create expenses, as the attorney who drafted the original trust in Indiana, where the father lived, will need to work with a special needs attorney in California, who is knowledgeable about the process in the state.

Similar to estate planning, the special needs process required by Medicaid and the SSA is a constantly evolving process, and not a “one-and-done” transaction. Special needs and estate planning documents created as recently as three or four years ago should be reviewed.

Reference: NWTimes.com (June 21, 2020) “Planning for loved ones with special needs”

How Is the Inheritance Tax on My Estate Paid?

If your state has an inheritance tax, you should have an idea how it will be paid when you pass away.

Financial institutions may not withhold the tax before the inheritances are paid, and if there won’t be enough in the residue of your estate to pay the tax, you need some options.

Nj.com’s recent article entitled, “How can I be sure the inheritance tax is paid when I die?” says that, while it’s admirable to try to avoid trouble for your executors, there’s a simple solution.

The article suggests that you can remove all beneficiary designations from your financial accounts. When you add beneficiary designations to your financial accounts, you create non-probate assets, or assets that aren’t distributed pursuant to your will.

If you do this, those assets will become probate assets, or assets that pass through your will. As a result, you can then state in your will how these assets should be distributed.

For instance, it can be based on percentages of your estate or based on which financial institution holds the assets, or another method.

With these assets now being probate assets, the executor of your will is now able to withhold the inheritance tax on each of the distributions, before distributing the rest.

The amount of inheritance tax paid by the beneficiary is the same whether the distribution is made as a probate asset or a non-probate asset, except for life insurance.

However, if the financial account is a retirement account, by having it paid to the estate instead of directly to a beneficiary, the payout period may be lessened. Therefore, you should speak with an experienced estate planning attorney.

Reference: nj.com (May 5, 2020) “How can I be sure the inheritance tax is paid when I die?”