Real Wealth Leadership

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The dangers of amateur estate planning

  • I’m not talking about wills and trusts prepared by specialized estate attorneys. I’m more concerned about the do-it- yourself variety that can have unforeseen consequences that can be devastating. Below are a couple of quick examples among many. My objective is not to cover them all, but encourage you seek advice from a competent estate planner. If you decide to take us up on our free offers mentioned below and want some guidance in this area, we will be very happy to provide it. This is such an important part of your overall plan!

    A big mistake is putting bank and brokerage accounts in joint names with your children. This is not the best way to leave money to them when you die. Use POD designations or wills/trusts instead. One reason is simple: If your child is sued, goes through a divorce, or has another legal issue – auto accident, for instance –accounts so titled are on the table and could be lost to both you and your child. Beyond this, there control, divorce risk, and other pitfalls to avoid.

    Another mistake is not using a living trust – combined with a proper power of attorney – where you have a lot of your family’s assets on which you depend for retirement income in one spouse’s name, like in an IRA or 401(k). These accounts can’t be titled in joint names. If, for example, your spouse loses competency and a judge appoints a guardian, there is no assurance that the guardian is going to see that your needs are met. His or her duty lies elsewhere. There are many other dangers that can lead to being locked out of important retirement assets, but the cure is simple – get a proper estate plan. In many cases, the cost of the work will be returned dozens – if not hundreds – of times in saved probate costs and taxes, not to mention the inestimable value of dodging the kind of bullets we’ve been discussing here. And if you are concerned about asset protection from financial predators – and you should be! – estate planning is a very effect time to address this as well. If we get a chance to sit down with you sometime, ask for a copy of my Advanced Asset Protection for Successful Families report – with my compliments!

The long term care elephant

  • There’s been lots of discussion about long term care in recent years, and for good reason, as this is a very important and expensive issue especially when we consider the possibility that you will live a long time. You should review your own needs in this regard, but my emphasis here is not your care, but on your spouse’s needs. Here are the facts: as long as Medicare lasts in its current guise, it will pay for decent long term care for those who need it. But the catch is that “needing it” means that your joint assets have been spent down to the poverty level. That means that you – and only you – are responsible for the costs of your spouse’s care until the money’s nearly gone. That could leave you without adequate funds to support yourself, and could even push you toward the poverty line, whether you need care or not. Take note: existing Medicaid laws require most couples’ assets to be completely drained before paying for long term care. Given the current debt issues in the United States, it is likely these laws will get even tougher. Fortunately, you can deal with this issue by using insurance and some more advanced estate planning techniques. The time to plan is now, before the dice break the wrong way and before your retirement dreams are potentially shattered.

Trust protectors, estate planning, and other advanced methods

  • As mentioned in this section, estate planning and asset protection planning (as well as income tax control, business planning, and all the other trappings of wealth management, while we are at it) are best addressed together. While we deal with smart estate planning and the other elements of wealth management in other reports, a few mentions of estate planning aspects are appropriate here.

    The first are trust protectors. These are something that seem to make perfect sense to most parents when asked, but we rarely find in new clients' existing estate planning. Protectors basically protect the kids (or other trust beneficiaries or trustees) from being forced to write a check against their interests, such as to satisfy a judgment, or divide assets in a divorce. In many cases, the child's inheritance is given in a trust of which the child is trustee, but a protector - their brother, maybe - takes over if a threat appears. Giving the child their inheritance in their own special trust helps to prevent it from becoming marital property and hence at divorce risk, as in "of course I love you honey and would love to put your name on the account, but Daddy set it up in a trust fund and that's how he wants it..." without restricting their access to the funds since they are the trustee (unless a threat appears, and they automatically lose trustee powers to the protector until the threat passes). Similar measures can be used to protect kids' inheritance, say if one spouse dies and the other remarries, from the clutches of a future step parent. For this and many other very important reasons, living trusts (the kind that exist now, and you would know because your bank and brokerage statements should be in the name of "The Ma & Pa Joint Living Trust dated x/x of 2012) are much preferred over testamentary trusts (the kind that are written into your very thick will but don't actually come into being until you die). Ditto for life insurance, which should be owned (or at least made payable to depending on your estate tax situation) by its own special kind of trust, which should include asset protection aspects.

    As a quick sampling of more advanced techniques, consider these. Asset protection trusts (APT's, domestic or offshore) are irrevocable and transfer control to outside parties as trustees, with protectors as control. SLAT's (spousal lifetime access trusts) have more limited asset protection power (but this can and should be shored up using personal holding companies and the other techniques discussed above) but allow the couple complete control and access to income, while still getting the property out of the taxable estate - and eliminating estate and gift tax entirely if done right in the right fact pattern. Finally, the so-called dynasty trust can eliminate all gift and estate taxes for the family for many generations, or forever, if this is desired, while still availing the family and descendants of the full benefit of the family assets, which can compound mightily over time in the absence of transfer taxes. They work by granting rights in trust assets to the family which approach, but technically don't equal, actual ownership (which would trigger estate, gift and generation skipping transfer tax for families with sufficient wealth). Often these techniques, like the family limited partnership concept discussed above, serve multiple purposes - to reduce the size of the taxable estate using long-accepted discount opportunities, to protect assets against predatory attack, and to set up the structure to provide for family on down the line.

Why you want to tax-freeze your estate

  • If your estate is likely to grow to taxable levels (right now over about $5.5M for individuals, including everything you own, which includes life insurance death benefits, but not so long ago it was only $600K, and with the fiscal situation, there’s no telling if it will stay as high as it is), everything over the exemption amount could be taxed at rates that start at 18% and got to 40% fast. An estate freeze caps the taxable value at current levels, limiting or eliminating tax. There are a lot of ways to do this, some much better than others, but many exposed taxpayers are never advised to prevent what could be a huge problem while there is still time. This oversight exists at all wealth levels. For instance, James Gandolfini (Tony from The Sopranos) left a $70M estate, and needlessly paid some $44M in estate taxes . . . and he had some elaborate (but maybe not so good) estate planning in place.

Plan to avoid guardianship expenses

  • Avoiding dependence on our children ranks as one of retirees’ very worst fears. No one wants to be a financial burden on their children especially when so many young families are struggling to achieve financial security themselves. But what retirees should fear more than dependency is guardianship. Guardianship is where a court appoints someone else to take the legal responsibility to manage your assets and make decisions for you. Unless you have planned to avoid guardianship, it can become required if you ever get to the point where you cannot manage your affairs, typically from cognitive ailments like Alzheimer’s, or other disabling accidents or conditions.

    Guardianship is a big problem for many reasons. The procedure is expensive and demeaning, requiring that you be proven legally incompetent, often while you are forced to look on. Once you are stripped of power and responsibility for your own affairs and the guardianship is in place, the appointed guardian, (selected by a judge– not you or your family!), is tightly managed by the court. This in itself costs an amazing amount of money and hassle for you and your dependents. In short, guardianship is a thoroughly unpleasant and needlessly expensive mess.

    Without proper planning, guardianship is a very easy mess to fall into. Fortunately, it can easily be avoided with common estate planning devices such as powers of attorney and living trusts. In my view, living trusts are far superior because they give you more flexibility and precision in controlling your estate and can help protect your heirs from lawsuits and other financial predators. Living trusts are also much more acceptable to banks, brokerages, and other custodians of your money; powers of attorney can often be rejected by asset custodians, who in the worst cases must be sued to recognize them, which can take a long time, during which you may be very uncomfortable. Living trusts not only allow much more effective estate planning, but can save their cost many, many times over by avoiding needless probate fees and loss of control.