Pure’s guest speaker, Nicole Y. Newman, Esq., guides viewers through some of the most common estate planning mistakes and shows how to balance family protection, wealth preservation, and cherished family values in the planning process.
Outline
- 0:00 – Welcome
- 0:48 – Dying Intestate
- 5:22 – Just a Will
- 10:53 – Joint Ownership
- 23:11 – Outright Distributions
- 38:20 – Choosing a Trust
- 42:42 – Funding Your Trust
- 45:45 – DIY Pitfalls
- 49:46 – Beyond the Trust
- 52:45 – Procrastination & Q&A
Transcription:
(NOTE: Transcriptions are an approximation and may not be entirely correct)
Joe Anderson, CFP®, AIF®: Hey, folks. Joe Anderson here, certified financial planner. Hey Congratulations on coming to the webinar. If you want our special offer, click below. It’s a free full review of your estate plan. If you have a trust, will, powers of attorney, and if you have to dust that thing off, guess what? It’s time for a review.
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Kathryn Bowie, CFP®: We are happy that you’re here, and it is my pleasure to introduce Nicole Newman.
Without further ado, Nicole, take it away.
Nicole Y. Newman, Esq.: Okay, perfect. Estate planning is the only area of law that my firm practices. So what I’m gonna do is I’m gonna walk us through the 10 most common mistakes that I see come through my office when it comes to estate planning. The first most common mistake that I see come through my office when it comes to estate planning is when somebody has died intestate.
So dying intestate just means you died and you did absolutely nothing to plan for what should happen to your assets when you pass away. if you make it to your grave without coming up with a plan for how your assets are gonna be distributed, the State of California gladly w- steps in with their backup plan.
And California’s backup plan for for transferring your assets at your death plays out in probate court. So probate is just the California court process of, one, retitling your assets because you died with your assets in, your name. Two, making sure your creditors get paid back if you had any.
And then three, identifying who your beneficiaries are going to be. here in California, we win the award for having the longest and most expensive probate process in the entire country. So here in California, you’re gonna see a probate take about two years, and that’s a pretty straightforward probate.
If problems pop up, it goes on for much longer than that. When this lengthy process is happening, it’s public, so that means anybody gets to pull the probate docket to see what you owned at your death, what you owed at your death, who your beneficiaries are going to be, what their names are, ages are, addresses are.
So it’s a lot of information that’s available to the public when we die and allow our assets to go through probate. When the court gets to the end of this long and public process, the court will do two major things. One, the court is going to identify who your beneficiaries are going to be. So this is called intestate succession.
So intestate succession is a word that I’m gonna refer back to quite a bit today, and that is just California’s order of who the State of California thinks should I- should inherit from you Once the court identifies who those individuals are going to be, the court is then going to determine what the probate fees are going to be.
And here in California, the probate fees at the current time come out to about 5% of the gross value of the assets going through probate. And so the key word there is gross. So that means if the only asset that you had going through probate was your house, and you … Your house was worth a million bucks, and you owed a million dollars on that property, the probate fees are still gonna be right around $50,000.
So it gets very expensive very quickly when we allow our assets to go through probate. Now, the other one with a backup plan for us is the IRS, and the IRS’s backup plan comes in the form of estate taxes. Now, here in California, we no longer have a state estate tax. I always have to say that slow, because it’s kind of a tongue twister.
But we no longer have a state estate tax. We used to, but it was phased out a long time ago. So this, is just done at the federal level. Now, there are several other states that do have an estate tax their own state estate tax, but we don’t, which … And it actually shocks a lot of people. But I do always warn my, especially my older clients that are fleeing California, so to speak, to go move to a different state, I do always tell them, “Hey, you might want to double check that state doesn’t have a state estate tax, and if they do, we got to make a plan for that.”
But in any case, there is an estate tax at the federal level. So basically, what the, federal government does every year is they set a dollar amount where they say, “All right, folks, you get to die with this level of a net worth this year, and we won’t tax your estate.” But if your net worth exceeds that number, they do tax it, and their tax rate has historically been between 40 and 55%.
So it can be a pretty big haircut on our way out of here. The key with the estate tax is to know while you are alive if your estate is going to be pot- be potentially subjected to the estate tax. Because if it is, there are strategies that we can utilize while you are alive to reduce or eliminate that estate tax bill.
But the key is, we need to know about it while you are alive. All right, so on to mistake number two. So jot down any questions that you have on probate or, the estate tax, and I will get to that at the end. So mistake number two is dying with just a will. So folks that have died and they at least put a will in place, they’re actually only a tiny little step above somebody that died and didn’t do anything at all.
Now, the reason why they’re a little tiny step above is because at least in your will, you named who your beneficiaries are going to be, rather than leaving it up to the court to decide that. But other than that, everything is exactly the same as if you didn’t have anything in at all, because a will does not avoid probate.
So that long, expensive public process still happens And I really emphasize this because people get this mixed up all the time, because people love to use the term will. People like to say, “Oh, I need to get my will done,” or, “I had my will drawn up.” Or even a lot of my own clients actually call their trust their will.
So I’ll see a lot of folks go out there and they get a will done, and they think they’re in good shape. Plus, in some other states, and I’m just saying some, not all, probate is very easy. So in those states where probate is easy, you’re still gonna see the will to be the most common document used, but that is not the case here in California.
Now, the other problem with people using wills is a lot of folks truly don’t understand what their will even says, and they don’t realize that intestate succession sneaks into wills or will plans all of the time, especially with what we call an I love you will. So an I love you will, that’s not a, a legal technical term.
That’s just kind of a, a slang term that we use for when a married person does a will. So c- because usually a married person will say, “Okay, when I die, I want all of my assets to go to my spouse, and if my spouse is dead, then down to my children.” And they think that’s what’s going to happen. But the problem is, when you die and your assets go to your spouse, your will is over.
So that whole section about going to your children is done. So now it’s going to depend on what your spouse does is what’s going to dictate what happens to your assets. And in fact I had an I love you will cause a lot of problems in my office for one of my paralegals. So this particular paralegal, she had been a paralegal for at least 20 years, and so she really knew what she was doing pretty well when it came to estate planning.
And she was taking care of her elderly grandmother who had substantial assets, and her grandmother always told her, “Listen, Teresa, you’re the only one that takes care of me. I want to make sure that you receive my assets when I die.” Teresa’s just like the rest of us, and who wants to ask Grandma or Grandpa or Mom or Dad, “Okay, what have you done to make sure I get everything?”
It’s an uncomfortable topic. It’s one that we tend to avoid with our loved ones. And so in Teresa’s case, Grandma died, and she had absolutely nothing in place. So intestate section, intestate succession, California’s backup rules, gave all of the assets to Teresa’s father. Teresa and her father had a very close relationship, and her father had told her, “Listen, Teresa I know what your grandmother wanted.
I know she wanted you to have the assets. I’m gonna make sure that happens.” a few months after that conversation, her father died of a brain aneurysm, so it was completely unexpected. And when he died, he had two things in place. One, he had a wife that was only eight years older than Teresa, and two, he had an I Love You will.
So all of Grandma’s assets had went to Dad, and now Dad’s assets and the newly acquired Grandma’s assets all went to his new spouse via the I Love You will. this woman took her, took her two kids, and she hightailed it out of California pretty quick. But she didn’t actually need to go anywhere, because there was absolutely nothing that Teresa could do about that about that will, because it was a completely valid will.
Even though it was not what Grandma wanted to have happen, it’s not what Dad wanted to have happen, and it was certainly not what Teresa wanted to have happen, it’s what took place. So we need to be very, careful when we’re utilizing wills, ’cause wills do shoot assets out sideways quite often. Now, the other area where that I’m gonna see that I see a lot of problems with the wills, especially the I Love You wills, is when people when we put grandma or grandpa or mom or dad away in a nursing home and we think they’re in there whittling away.
And so that’s what a lot of people think, but that’s not the case. A lot of the times they’re in there dating. So I will see a lot of problems with wills here in these nursing homes. They’re in there dating. Grandpa will find a new love interest, and he wants to take care of her the old-fashioned way, with a good old-fashioned will, and he wants to make sure, “Hey, if I die, I want to make sure she’s okay.
And then when she dies, then the assets can go to the kids.” when Grandpa uses a good old-fashioned I Love You will and everything goes to that new love interest, if he dies before her, now she’s got the assets. His will is done and gone. That whole section about his children is not going to control.
So like I said, we want to be very careful with the wills. So now we’re going to go on to mistake number three, so jot any questions that you have down about wills. So mistake number three is owning real property jointly. So I’ll have a lot of folks that will say, “You know what Nicole, I j- when I die, I just want my house to go to my son.
So you know what? I’m just gonna stick him on the deed as a joint tenant because joint tenancy avoids probate, right, Nicole?” And I always have to say, “Wrong. Joint tenancy is just going to delay that probate. The probate is still going to eventually happen.” But that is w- not why I typically do not recommend joint tenancies.
My advice for most of my clients is you want as few people on your deed as possible. Because when you start adding people to your deed, you are now exposing your property to all of their issues. So you put Junior on the deed, and now he gets in a car accident and gets sued. He goes through a divorce. He starts having financial issues.
guess whose property is gonna get pulled into his issue? Your property is if you put him on there as a joint tenant. And if you try to remove him at that point when trouble is brewing, it’s too late. If you try to remove him at that point, that would be a fraudulent conveyance by you, and it would be a fraudulent conveyance by anybody that helps you get him off the deed.
So my advice is, let’s not stick him on there at all in the first place. But the other big problem with joint tenancies are the potential tax issues that it can cause So I used to volunteer at a lot of elder law clinics around Orange County. It’s been about 20 or so years since I’ve done that, but I used to do it quite a bit, and I will never forget a particular elderly woman that had come in, that she was well into her 90s.
And she came in because she wanted to give her Newport Beach property to her grandson. So she had actually quitclaim deeded it over to him already, so she skipped even the joint tenancy. She just went right through it and deeded him the entire property. And she was coming in to confirm, “Hey, will this avoid probate?”
the answer was yes. If she dies first, it would’ve avoided probate because she just, she already gave her house away. It wouldn’t avoid probate if the grandson died first, but that wasn’t even the big issue here. The big issue was all of the tax consequences that they triggered by deeding the property over to the grandson.
So when she deeded this property over to her grandson, she deeded her basis in the property to him. And generally speaking, the basis in your property is what you paid for it, okay? So what you paid for your property is your basis, so when you go to sell your property, you will pay taxes on the difference between what you sold it for and that basis.
So when she transferred that property to her grandson, her basis transferred over to him. it was not a good result for her grandson, because she had purchased that property decades and decades prior for $26,000 in Newport Beach. it was worth substantially worth more than that. I want to say it was worth around two point, 2.2 point, $2.4 million at the time.
So if grandson ever went to go sell the property, he’s going to pay taxes on the difference between what he sold it for and that $26,000 number, so he’s gonna get hit with a huge tax bill. Whereas if grandma would have left him that property in her trust instead, he would have received what’s called a full step-up in the tax basis.
So full step-up in basis is something that you need to know, because politicians are always trying to take this away from us. So listen very carefully. A full step-up in basis means that in this case, when grandma dies, her property gets a full step-up in basis. In fact, most of her assets do, but I’m just gonna focus on the property for an example.
So that Newport Beach property, if it were worth $2.4 million at her death, that would be grandson’s new basis. And I’m not talking about property taxes. I’m gonna get into those in just a second. I’m talking about for capital gains purposes if he sells the property. So now his basis is $2.4 million because he got the full step-up in basis.
So that means if he were to sell the property, he would only pay taxes on the difference between what he sold it for and that date-of-death value. So if he sold it relatively quickly after grandma’s death, he would actually pay zero dollars in taxes. So I see this happen all the time in California, where we have so much real estate with substantial gain, and people end up paying tens of thousands if not hundreds of thousands of dollars in unnecessary capital gains taxes because they didn’t know any better.
They, try to take the easy route or what they thought was the cheap and easy route of just deeding it while they were alive. So we want to be very careful with just willy-nilly deeding our properties over. Now, the other tax issue that they triggered were the property tax issues So when she transferred that property over to her grandson, she thought the grandson was going to be able to keep his l- her, low property tax basis because they found the grandparent/grandchild exclusion form online.
So they thought that they meant that the property tax was transferred over, the t- property tax rate transferred over. But they didn’t read the fine print, and the fine print said only if the grandchild’s parent was dead. in this situation, the grandparent’s the grandchild’s parent was not dead, so the property taxes ended up getting reassessed even though grandma was still alive, and that was a huge reassessment.
I mean, I’m sure they were over there popping the champagne bottles over there at the assessor’s office. So we wanna be very, careful on the on triggering or not triggering property tax reassessments when we’re transferring properties. And then they also triggered gift and, estate tax issues as well, which I’m not gonna get into right now because this was a, a, little over 20 years ago, and these, those same gift and estate tax issues would not apply today.
but they, just triggered a whole host of, problems there. Now, the other area, the other issue with joint tenancies are when spouses own their property as joint tenants. So if you are married and you are purchasing real estate, you want to… ideally, you want to take title in the name of your trust if you have one, but if you don’t have a trust or if you do have a trust and you prefer to purchase in your own name and then put it in your trust, you want to take title as community property with right of survivorship, not joint tenants.
And the reason why is for the tax benefit of the survivor of you When you are married and when the first spouse dies, the surviving spouse will receive a full step-up in the tax basis if the property was community property. Okay? So the surviving spouse will get that full step-up in the tax basis.
They’ll be able to keep the low property taxes, but whatever the value of the property was on the date of death of the first spouse to die, that’s the new tax basis for the surviving spouse. So let’s say you purchased your property for $100,000. That’s your basis. And when the first spouse dies, the property’s now worth $1.1 million.
if it’s community property with right of survivorship on the deed, then the property will receive that full step-up in the tax basis to that $1.1 million. So if the surviving spouse decides they’re ready to downsize, then if they sell the property, they will pay zero taxes. So they will only pay taxes on the d- difference between what they sold it for and that date of death value versus what they sold it for and what they purchased it for.
If the property is joint tenants, the basis only steps up halfway. There is not a full step-up when the property is owned as joint tenants rather than community property with right of survivorship So a lot of folks will say, “You know what? Wait a minute, Nicole. I thought we were in California. I thought this was a community property state and all of our marital assets are community property.”
without getting into the nuances between community property and separate property, let’s just say the answer to that question is yes. Here in California, all your marital assets are community property. So the State of California will respect that, but the IRS looks at title, and if the title is joint tenants, they are not going to allow that step-up in basis.
So it’s an easy problem to fix. So when I’m pulling my client’s deed, and I’m … ‘Cause I’m gonna transfer the property into a trust for them, and I see that it’s joint tenants, I’m gonna fix that. I’m gonna transfer it from joint tenancy to community property with right of survivorship first, and then com- from community property with right of survivorship into the trust, so that way I can ensure that full step-up in the tax benefit tax basis for my surviving spouse.
Now, the other way to hold title to real property in California is as tenants in common. So tenants in common I will typically see when people are entered into a business transaction on a property, or they did the deed themselves and they forgot to specify how pro- how title should be held. If you forget to specify how title should be held on a deed, the default here in California is always tenants in common.
the problem with tenants in common is that as each tenant dies, their interest could end up in probate. So we want to make sure that if you own a property as tenants in common, and you do in fact want it to be tenants in common, you need to make sure that your interest is in your trust, and hopefully the other co-owners have their interest in their trust, so that way if they die a probate does not need to be opened.
And then last but not least, here in California we have the ability to use what are called transfer on death deeds or TOD deeds Now, transfer-on-death deeds are when we are able just to name a beneficiary directly on the deed. M- I myself personally will not do transfer-on-death deeds. If someone comes into my office and they really want a transfer-on-death deed, I just refer them out to a colleague that will do it for them, because I won’t.
And the reason why is because it’s very easy for a transfer-on-death deed to go wrong. There’s several elements that need to be met in order for that deed to be valid, and one of the elements has to be met by the recorder’s office, and sometimes they get backed up, busy over there, and that their element is not met.
But the deed will still get recorded. Everybody moves on their merry little way. Nobody notices until the person dies, the homeowner dies, and the beneficiary goes to sell the property. It’s gonna be ti- the title company that’s gonna notice the mistake, and then at that point, that transfer-on-death deed’s gonna be invalid.
So, my opinion is that the cost difference between a transfer-on-death deed and a trust, which I’m gonna get into trusts later in detail, is so nominal that it’s just not worth the risk. The other big problem with the transfer-on-death deeds is if the homeowner ended up using Medi-Cal during their life to help for end-of-life expenses, nursing home expenses, medical expenses, if they utilized Medi-Cal at any time during their life and then they died with their home in their name rather than in a trust, then the State of California gets to do a recovery against that property to pay itself back, to pay the state back.
if you used a transfer-on-death deed, then that means you, you’ll be dying with your house in your name, so you’re gonna make it real easy for the c- for the state to come in and do their recovery and pay themselves back with their inflated bill. So we need to be very, careful when utilizing transfer-on-death deeds.
Okay, so that’s enough for mistake number three. So, jot down any questions that you may have on that. Okay, so mistake number four is giving your assets outright to your heirs or your beneficiaries. So an outright distribution is just when you die and the assets transfer into the beneficiary’s name.
They can go do whatever they want with the asset. You’re dead, you’re gone. I usually gonna see these outright distributions in three situations. One, when somebody has died intestate. So if you failed the plan, the backup plan is always outright distributions for everybody. Wills will typically have outright distribution clauses, but so will trusts, with trusts that have outright distribution clauses.
So these are our trusts that say, “Okay, when I die,” or if you’re married, “When we both die, the assets are just gonna go equal shares to the beneficiaries outright and free of trust.” Or if you did the trust back when your back when your beneficiaries were younger, you probably did the old stages. So you probably said, “Okay, the assets will be held in trust for the beneficiary.
When they’re 25 they’ll get a third, when they’re 30 they get another third, and when they’re 35 they get it all.” So that’s effectively an outright distribution. the problem with outright distributions are certain types of beneficiaries. And our first problematic beneficiary is one that I’ve had to deal with far too often in my career, and these are our Frankies.
Now, Frankie are our children that just have not been motivated by life yet, and it’s looking like at Frankie’s age, it’s never gonna happen. So if you have a Frankie and you leave him his share outright, I am telling you it’s not gonna go well. They say that the average time that it takes for a beneficiary to blow through their inheritance, no matter how big or small, is 18 months I’m here to tell you that with a Frankie, it is much quicker than that, and I have a lot of upfront experience with this.
It is much quicker than that. 18 months would basically be forever for a Frankie. So if we have a Frankie, and we really love our Frankie, a- and maybe you loved him a little too much and that’s why he turned out the way he did, but if you love your Frankie and it pains you to think that Frankie would be broke within just a few months after your death, you would not want to leave him his share outright.
Or maybe you have a Frankie and you’ve had it with his deadbeat ways, but you don’t have the heart to disinherit him, but it pains you to think that he’s gonna blow through your hard-earned assets within a few months after your death, you would not want to leave him his share outright. Now, our other type of problematic beneficiary are our Marvins.
So our Marvins are our children who are the polar opposite of Frankie. These are our children who have been too motivated by life. These are our children that have gotten in every bad business deal. They have creditors after them. They have the IRS after them. You’ve had to bail them out. if you die and you leave a Marvin his share outright, not only is he going to be able to continue to squander his inheritance on these bad business deals his creditors are gonna be able to just levy his inheritance, oftentimes before we’re able to even give it to him.
I get the notice to my my office. So if you do not want to leave your assets to Marvin’s creditors, then you would not want to leave him his share outright Our other problematic beneficiaries are our son-in-laws. Now, our daughter-in-laws are problems, too, but I’m just gonna pick on the son-in-laws for today.
And this is so people can be honest with me with w- with how they feel about who their child married. So some of my clients will say, “You know what, Nicole? I love my son-in-law. My daughter couldn’t have done any better.” Other people will say, “I can’t stand my son-in-law. He was a, he’s a deadbeat.” It doesn’t matter which side of the fence people fall on, they almost all agree that if they die, they do not want their assets going to Fred here, especially if they have cute little grandchildren.
if you die and you leave your assets outright to your daughter, and then she later dies, the assets are going to go to Fred here. And even if Fred was the greatest guy that walked the face of the earth, if he decides to go get remarried, which they almost always do, and then he dies or divorces, now the assets are gonna end up with his new spouse rather than down to your cute little grandchildren.
So if you want to make sure that your grandchildren eventually inherit, or that you want to keep the assets in the family line, or you just flat out don’t want Fred to inherit, you would not want to leave your daughter her share outright, even if she were very responsible. Our other problematic beneficiaries are our children from a prior marriage So if we are in a blended family situation, you have to get the rules in place as soon as possible.
Because if you don’t, your children are gonna give your spouse a hard time, your spouse is gonna give your children a hard time if you die. Or even if you have a Brady Bunch situation where everybody loves each other, everybody gets along, and they would never think about giving each other a hard time, the law is going to cut out one half of the family, because the law does not favor blended families.
So if you and your spouse are married you don’t do any planning, you don’t get the rules in place, you die so everything goes to your husband, and now then he runs off and gets remarried, and he continues with the same behaviors, doesn’t do any planning with his new spouse, and then he dies, everything’s going to his new spouse.
when she dies, everything is going to go to her children. So let’s say she continues to not do any planning either. Everything is gonna go to her children, not your children, because your children are not her heirs. So we want to be very, careful with this situation. You can sit in probate court for one day, and you’re gonna hear this case come up over and over.
And it’s very, heartbreaking for the side of the family, for the kids that got caught at, get cut out. And it usually never has anything to do with the money. It’s always the principle of it. Because it seems to be Murphy’s Law that the children that get cut out are the children of the parent that brought all the assets into the marriage in the first place.
So if we are in a blended family situation, we need to get the rules in place as quickly as possible. Now, the other very unfortunate situation that I have to deal with a lot in the blended family situations are the very close stepparent-stepchild situations, where the stepparent and the stepchild, it’s, they, treat them as their own.
And that stepparent does have biological children, but those biological children, they’ve been estranged for them for 30 years, and it’s that stepchild that is the one that’s taking care of them till their dying breath. if that stepparent dies and doesn’t get a plan in place, doesn’t get the rules set out in place and they die intestate, the assets are gonna go to their biological children.
So it’s very, unfortunate, especially when we have to resort to hiring a private investigator just to find those biological children to give them their check. So again, we don’t want to make sure that everything, we, or we don’t want to assume, like I said, that everything just works itself out in a blended family situation, because it doesn’t.
Our other problematic beneficiary is one that strikes fear in a lot of hearts here in Southern California. I don’t have to bring this up to people, will usually bring it up to me. And this is the fear that if you die first, is your spouse gonna run off and get remarried and then leave all the assets to a new spouse rather than how the two of you agreed?
if you fail to put the plan or plan in place and get the rules laid down while both of you are alive, this absolutely can happen. It can happen if a slickster like Elaine comes in and makes sure it happens, or it can just happen by accident. Exactly the same as the stepchild situation.
You and your husband don’t plan, you die, your husband gets remarried, he continues to not plan and he dies, everything’s gonna go to Elaine. So we want to make sure we get those rules set out so that does not happen. And then of course, our last but not least problematic beneficiary is Congress always changing the laws.
So you want to make sure that you are not allowing the government to make more decisions on your behalf than needed when you die, or for you to leave more money to the feds or to the state when you die. It’s just not necessary if you plan ahead. So a lot of folks will say, “Okay, Nicole, if I’m not supposed to leave my assets outright to my children or to my beneficiaries, how am I supposed to do it?”
for spouses, how to protect it if you die and then your spouse ends up getting remarried that is something that I will talk to you privately about. For time purposes, we really don’t have time to get into that today, but that is something that I can talk to you privately about. But for our children or for our ultimate beneficiaries, I rarely recommend outright distributions, even when we have very responsible children.
For most of my clients, I recommend leaving the assets in what’s called an LAPT trust for your beneficiaries, and I’m gonna tell you what that means right now. So what I recommend for my clients is an LEPT trust for their beneficiary. So what this looks like is your trust will say, okay, when we die, or if you’re single, when I die, the assets go equal shares to the kids.
But rather than receiving that share outright, a trust gets automatically formed for each beneficiary, and the assets that beneficiary receives gets put inside of their respective trust rather than in their own name. These trusts that get created have the ability to last for that beneficiary’s lifetime.
So that’s what the L stands for. So just like your trust had the ability to carry on until you died, their trust can carry on until they die. What that’s going to do for the beneficiary is it’s going to create an asset protection trust. That’s what the APT stands for. So that means if the beneficiary got sued, their creditors would have a difficult, if not impossible, time accessing those assets in the trust.
If the beneficiary went through a divorce, their spouse would not be entitled to the assets in the trust. And since the as- the trust is lasting for the lifetime of the beneficiary, you can decide, if you wanted to, what happens to the assets when the beneficiary dies. So for example, you can say, all right, this trust here is gonna benefit our son while he’s alive, but when he dies, whatever is left in his trust is gonna go down to his children if he has any.
And if he doesn’t have any children, then it’s gonna go to the siblings, or you can say, “Let them pick.” You can say whatever you want there I recommend this structure for most of my clients, even if we have responsible beneficiaries. Because the big question becomes when people choose this option in their trust is, who should be the trustee of the child’s trust?
So a trustee of a trust, that is the person who’s in control of the assets inside the trust. They are not considered the owner, they’re just considered in control. if we have a beneficiary that’s very responsible, we just allow them to be their own trustee. So they’re in control of their own investment decisions, their own distribution decisions.
We’re basically saying, “Here, we’re serving you up this protection on a silver platter,” the type of protection they could never create on their own, and we’re trusting that they’re gonna do the right thing with it. But if we have a Marvin or a Frankie, we are going to have a third party be a trustee for them.
So we’re gonna have somebody more financially responsible and experienced than they are to be managing the trust for them and giving them appropriate distributions. And then if we have a younger beneficiary, then we will usually pick an age where we will state that we think that they would be responsible enough to be their own trustee.
But again, I recommend this even for our responsible beneficiaries, because you can never predict what the financial situation of your child or your beneficiary is going to be when you die. And when you die and we’re administering the trust, and I’ve got a beneficiary in a surprise lawsuit, they got maybe a car accident and got sued, it does not matter how careful or how frugal we live, any one of us can end up in a lawsuit.
So if I’ve got a beneficiary that we weren’t expecting in a lawsuit or maybe they’ve already got a judgment against them, and the trust tells me I have to give them their share outright, there’s nothing I can do to protect that share for them. But if we have a these, these d- these asset protection provisions inside your trust, we are able to we are able to go ahead and protect that, that protect that distribution.
Now, the other really important issue to address in your trust are if you have a disabled beneficiary that is receiving state benefits or, potentially could be receiving state benefits. If that is the case, then you need to make sure that your trust creates a special needs trust for that beneficiary.
Because if a special needs beneficiary or a disabled beneficiary that is utilizing state benefits receives from you outright, they will get kicked off their benefits. They have to receive in, within a special needs trust in order to retain their benefits. So very important that you have those provisions in your trust because for a beneficiary that gets kicked off their benefits, that could be dis- very disruptive for them.
In fact, they can’t get kicked off their benefits. So if I have a beneficiary that they just cannot get kicked off their benefits, but you have left them their share outright, now they have to go to the court for the court to s- to structure the special needs trust for them. the problem with allowing the court to structure the special needs trust after you’re gone is now the state of California becomes the ultimate beneficiary of that trust Whereas if you create the, the trust yourself, the special needs trust yourself while you’re alive, you get to pick the ultimate beneficiary.
And I have never had someone voluntarily pick the state of California. Now, in all of my trusts that I draft, I always put backup special needs provisions in all my trusts just in case. Because just like we can never predict what the financial situation of your beneficiary’s going to be when you die, we can’t predict what the physical condition of your beneficiary’s gonna be when you die.
Any one of us can end up special needs or disabled. So we want- if I have a surprise beneficiary that maybe wasn’t disabled at the time of your, when you drafted the trust or so- or we just have a surprise beneficiary, I wanna make sure I’m gonna be able to protect their share for them. Okay, so we’re gonna go ahead and go on to mistake number five, so jot down any questions that you have on this one and I’ll get those answered at the end.
So mistake number five is not having the right trust. So at this point we’ve learned we don’t wanna use a will here in California, so instead of wills in California, we use trusts. And trusts are basically just a rule book that you get to write when you’re alive that’s gonna cover the rules for three different time periods.
What are the rules when you’re alive? What are the rules gonna be when one of you dies if you’re married? And then what are the rules gonna be once both of you pass away? And the trigger for when it’s time to get a trust is, one, when you own, when you have real estate in your name, so you own a home or you own real estate, even if you have a mortgage, or two, you have assets in excess of $200,000.
Either one of those is what’s gonna trigger a, a probate, so that’s when you’re gonna wanna have a trust. So the big question becomes is, what kind of trust should you have? There’s two main types of trusts. There’s revocable trusts and there’s irrevocable trusts. Which type of trust you need just depends on your personal situation.
And to preempt the question can you have more than one trust? Yes. Some people have 10 trusts. But for most of us, we’re only gonna have one trust over our lifetime, and that’s gonna be the revocable trust. So the revocable trust is the easiest type of trust to have, means you can get rid of it whenever you want, change it as much as you want to, you get to stay in full control of all your assets.
So it’s a super simple trust to have. People will do revocable trusts for four main reasons. One is for probate avoidance. One or if you die with your assets in a properly drafted and properly funded, which I’m gonna get into funding here in just a few minutes, revocable trust, your assets will avoid probate at your death.
That long, expensive public process does not happen. Your assets get to pass privately outside of the court according to the rules you left behind, not according to the rules of California. We’re also able to do tax planning inside the trust. This is where you are able to maximize, if you are married, to maximize utilizing both of your estate tax exemptions.
Remember when I talked about the estate, tax exemption on slide one? if you are married, in order for you to utilize, for each spouse to utilize their estate tax exemption that they have been given, you need to be proactive about it, and the place that we’re are able to be proactive about that is in your revocable trust.
Because if you are not proactive, one of your exemptions is going to get lost as a married person, and that is something that I will go in more detail with you in private. Disability protection. So I will find that a lot of folks will spend time a lot of time in their trust talking about what should happen if they die, and they don’t spend nearly enough time talking about what should happen if they were ever declared mentally incapacitated and incapable of managing your finances.
if that’s not appropriately covered in your estate plan, in your trust, then a conservatorship will get opened over you, and that is another expensive and intrusive court process that we don’t want to have happen. And then we’re able to do that remarriage and dist- di- distribution protection that I talked about.
So if you die first, if your spouse gets remarried, or to protect the assets for your kids when you both are gone. So now an irrevocable trust. So an irrevocable trust, generally speaking, cannot be changed once it’s in place. So an irrevocable trust is more complicated, more expensive, and requires a lot more maintenance than a revocable trust.
So I will find people will use irrevocable trusts in a few situations. One, when they want asset protection for themselves. So these are folks that will come in and they say, “You know what, Nicole? I loved all that asset protection talk for my children and all that protection for my children. But what about me?
What if I get sued? Are my assets protected?” if you used a revocable trust, the answer is no, there’s no asset protection for you for a rev- with a revocable trust. We also use irrevocable trusts for protection from estate taxes. So if we total up your net worth and we realize that you’re gonna- your estate’s gonna pay an estate tax at your death, we’re able to reduce or eliminate that through a rev- the use of various types of irrevocable trusts.
And then protection from nursing home costs. So these are for people that are trying to get qualified for Medi-Cal or they don’t want the state to do a recovery after they die. That’s when we explore the use of irrevocable trusts. So go ahead and jot your questions down there and we’ll move on to mistake number six.
So mistake number six is not funding the trust properly. So this is actually a really big mistake most folks make that already have a trust. Funding the trust actually means moving your assets into the trust. So it does not mean all of your assets go into the trust. It’s different for everybody. So just because your neighbor did one thing does not mean that, that’s what you would do.
This is something that I talk privately to my clients about based on their own asset situation. So I’m just gonna give you very general answers for today of what goes in your trust, what doesn’t go in your trust. So the first one, real property. You own real estate? Yep, you want that in your trust. If you have real estate in other states, yes, you want it in your trust because real estate is dictated by the state that it is in.
So if you have four different properties in four different states and you die without a trust, there will be four probates opened upon your death. So we wanna make sure we get those properties in your trust. Personal property. So by tang- by personal property, I mean tangible personal property: cars, clothes, furniture, jewelry, digital assets.
Yes, they should all be in your trust. I’m gonna show you at a later slide exactly how to get those in very easily. Bank accounts, your regular checking and savings, yep, those should be in your trust, but some people do like to keep one or two smaller accounts out of your trust. That is something that I will talk to you privately about, the pros and cons of doing that.
Your brokerage accounts, so your non-retirement investment accounts. Yep, you are gonna want those in your trust. You’ll wanna retitle those in your trust, and your financial advisor will be able to help you do that. Business interests, so you have an LLC, S corp, sole proprietorship. Yep, you want those interests in your trust, so that way a probate can be avoided when you die.
Life insurance, this depends. So life insurance has three components: an owner, an insured, and a beneficiary. You are typically the owner and the insured, and then you name a beneficiary. You can change the ownership to the trust if you want to, but it’s not necessary. So I don’t usually make my clients do that.
I’m just focusing on updating the beneficiary. And is it okay for your trust to be in bene- a beneficiary in most situations? Yes. But IRAs and retirement accounts are a big no. Your IRA and your retirement account will never be owned by your trust while you’re alive. It has to be owned by you, so you are stuck with using the beneficiary designations.
And so you have to name beneficiaries on, your retirement accounts. And whether or not you should name your trust as a beneficiary is something that you need to get professional guidance on, because you if you don’t do it correctly, it could have adverse tax consequences. So it doesn’t mean a trust should never be the beneficiary on a retirement account, it just needs to be done correctly.
Okay? So we’ll go on to mistake number seven, so write down any questions there. So mistake number se- seven is not updating your estate plan. So if you, once you do your trust, you don’t wanna just stick it on the shelf and forget about it. My recommendation is every three to five years, du- take it down, dust it off, take a peek.
It does not mean you’re changing it every three to five years. Just remind yourself what you said, because laws change, decisions change, assets change. We wanna make sure we’re staying on top of that. Okay, so now mistake number eight. So mistake number eight is doing it yourself. So this is probably the biggest question that I will get for, from people, and this is where they’ll say, “You know what, Nicole?
I think you’re really great, but I think those LegalZoom prices are even better. So why should I use you instead of LegalZoom?” my first response to that is one of the founders of LegalZoom is actually my client, and, he didn’t even use his own system. But that’s usually not the reason why I don’t recommend LegalZoom.
Because of that, I do understand LegalZoom quite well, and I understand where they were going with it and the purpose of it, and I do like LegalZoom for certain situations. And in fact, I used to recommend LegalZoom for certain estate planning situations. I used to say, “You know what? If you just have a truly simple situation,” and by simple I mean you just have a house, a car, you never had children, you never got married, “go ahead and use LegalZoom.
You’re gonna be just fine.” And I used to say that until several years ago when Cindy came into my office, and Cindy had come into my office because her partner of 30 years had just passed away. And I call him a partner because California does not recognize common law marriage. So in the eyes of the law, they were nothing.
he was, he passed from a, a cancer and it was quite a battle that Cin- that Cindy had helped him through. And when he was dying, his doctor told Cindy, “Hey, listen, Cindy, I need you to go get a healthcare directive because if he come- becomes unable to communicate, I won’t be able to talk to you anymore.
And since this is terminal, you may as well wrap up his final affairs.” So they went home, they went online, they did the healthcare directive, they did a power of attorney, and they did a will. They printed it all up, they went to mailboxes, et cetera, they got it all notarized, and they took that healthcare directive back to the doctor, and it worked beautifully.
When he become u- became unable to communicate, the doctor was able to communicate with Cindy. When he died, she was able to plan for his funeral, despite his evil family’s protests. And I know they were evil because I ended up fighting them in court for many years. Everything was going s- really well for Cindy, until it came time to transfer the assets.
So when it came time to transfer the assets, they used a will. So where was Cindy headed? She was headed to probate, and she needed an attorney to help her. I was attorney number 10 that she went to go see because the nine prior attorneys would not take her case, and they would not take her case because that will was invalid.
And when I’m speaking live to people, I always ask people, “Why do you think that will was invalid?” So why don’t you try to take a guess in your own mind of why do you think Cin- Cindy’s partner’s will was invalid? I’ll tell you why. It was invalid because they notarized it. Here in California, if you notarize a will, it is automatically invalid.
All the other estate planning documents get notarized, but a will requires two separate witnesses. Now, I tell you about Cindy not to tell you, to teach you how to execute a will, because I’m hoping at this point we all realize we need to be doing a trust. But to show you that when it comes to estate planning, you don’t know what you don’t know.
And when you do the work yourself, your work does not get corrected until you die. And at that point, it’s too late to fix in most cases, if not very expensive to fix. So after Cindy’s case, I no longer recommend LegalZoom. Since we all know we’re gonna die, you may as well get that last act correctly and at least consult with an estate planning attorney.
Okay, so with that said, let’s go ahead and move on to mistake number five. We’re on the home stretch here. So mistake number f- nine, I should say, is believing a trust alone is enough. So you would never wanna do a trust just by itself, and I have, had my fair share of LegalZoom disasters with people doing just that.
There are several other documents that go along with a trust, speak to the trust, talk to the trust, support the trust. That’s what we call your estate plan. So I’m just gonna quickly go through and tell you what these other documents are. The first one is you wanna have an advance healthcare directive.
This is where you’re naming somebody to communicate your medical wishes for you if you became un- unable to communicate, including what kind of medical decisions you would want made, so that way you’re not leaving your loved ones guessing. You’re gonna wanna have a HIPAA authorization. This is where you are naming somebody the same people to be able to review and discuss your medical records if needed.
You’re gonna wanna have a financial durable power of attorney. This is where you’re naming someone to manage your financial affairs for you if you are ever declared mentally incapacitated and incapable of managing your finances. You’re gonna wanna have what’s called a pour over will. So even when we have a trust, we can’t escape these pesky wills, but this is a special will that just says, “Hey, if I die and I accidentally left an asset outside of my trust, I intend for the asset to pour over into my trust and be distributed according to what my trust says to do, not according to what California law says to do.”
So it’s a backup to make sure the trust is always the supporting document. You’re also gonna wanna have a certification of trust. This is just a little three, two or three-page document that you’ll give to title companies escrow companies, bank account, bank financial institutions when we’re opening accounts in the name of the trust or buying and selling real estate in the name of the trust.
It just gives them the highlights of your trust so that way they don’t have to read your big, long trust document. A community property agreement is just where we’re having you sign a document that where if you’re married, you’re stating you consider all assets to be community property, no matter how they’re titled.
This is to ensure that full step-up in the tax basis when if, you own any assets in joint tenancy, like we talked about earlier. Now, I’m gonna say we- you’re gonna rarely see these community property agreements anymore in estate planning, in estate plans, because people like to get divorced a lot more these days, and if we accidentally have transmuted separate property to community property through having you sign this, then divorce attorneys don’t like that.
They’ll usually come sue us for that. So we get very skittish, but they’re still, we still use them every so often. And then a declaration or general assignment, this is just where I take my client’s declaration that they declare that they consider everything that they can own by their trust is owned by their trust.
And where this document would come into play is if you died and you accidentally left more than $200,000 worth of assets outside of the trust, if, and you don’t name a beneficiary on that asset, a probate will need to be opened. However, before that probate is opened, we get one opportunity to go in front of the judge to prove that you wanted those assets in the trust.
If we’re able to prove that, then the judge does have the discretion to allow us to skip probate. it’s very hard to prove your intent when you’re dead, so that’s why I grab your declaration when you’re alive to be able to prove up that intent. So with that said, let’s go ahead and move right on into mistake number 10.
And mistake number 10 is procrastination. So when it comes to putting together an estate plan, to planning for our death, people love to procrastinate. And I find that people procrastinate for two major, reasons. One, because people just believe, oh, everything’s just gonna work out just fine. Things work themselves out.
That was my dad. I had to really get after him for a lot of years. Other people will just put it off because it’s not a pleasant topic. So, it’s not a pleasant topic to talk about, so people will avoid it, and they just don’t realize how difficult dying has become. There’s a lot of red tape everywhere when, we die now.
And so we wanna make it as easy as possible for our loved ones. So that’s why Pure Financial put on this webinar today to help educate you. And also if, I’m gonna answer any questions now. I’m gonna turn it over to questions here in a minute. But they will also provide, if you do want to talk to me personally, they will provide my contact information if you wanna talk to me personally, if you have any questions, or for me to review your own estate plan.
I always do free reviews. If your plan is great, I tell you it’s great. If there’s some deficiencies, I’ll point them out, or just to answer your overall questions. So with that said, I made it through, so let’s go ahead and I’ll open it up for questions here.
Kathryn Bowie, CFP®: Should a beneficiary trustee have their name on the checking account previous to a parent tru- passing?
Nicole Y. Newman, Esq.: Okay, so this is a great question. So usually the parent is going to be the own trustee of their trust. But if they’ve reached an age or a period of their time where they want their child to be helping them manage their finances, then usually they will appoint that adult child as a co-trustee on their trust with them while they’re still alive to help manage.
So yes, that’s a very common strategy. So good question.
Kathryn Bowie, CFP®: And when a trust is completed, to make the change to the trust, does a new trust need to be made or just an addendum, and can a person make the changes themselves?
Nicole Y. Newman, Esq.: Great question. So you just do an amendment. So once your trust is in place, then you just do an amendment to the trust.
Doing it yourself is not something that I would recommend, because there’s, there, there’s very strict rules on how an a- amendment i- is to be considered valid, kind of like the will example. And so if you do it wrong, it’s not gonna be a valid amendment.
Kathryn Bowie, CFP®: All right, we’re updating our trust and are advised to get a professional fiduciary trustee.
What questions to ask them, i.e. How big of a bond is recommended- et cetera. So maybe talk
Nicole Y. Newman, Esq.: about the different- Okay, so a professional fiduciary, so a professional fiduciary can be a great option in certain situations to be the successor trustee of your trust. In fact, I believe that they’re worth their weight in gold in, certain situations.
So if you’re interviewing a professional fiduciary, you’re definitely gonna wanna find out how their fee structure works. And you’re gonna wanna find out if there’s any type of assets that they don’t manage. And if they, if you have a special needs beneficiary or a potential special needs beneficiary, you want to ask them if they are able to manage special needs trusts.
So those would be some of the biggest questions. Those are some of the first questions that I ask right out of the gate for the professional fiduciary. But I also recommend for folks, if you do have, you are naming a professional fiduciary in your trust, that you also have a clause in the trust to make it easy, unless you have a unique circumstance, a unique beneficiary.
You wanna make it easy for the beneficiary to be able to remove and replace that professional fiduciary with another professional fiduciary.
Kathryn Bowie, CFP®: If you’re not a part of our Pure family, come in and talk to us and have us talk about your entire financial situation. It’s completely free. Bye. You have a wonderful day.
Nicole Y. Newman, Esq.: Yes, thank you. Bye-bye.
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IMPORTANT DISCLOSURES:
- Neither Pure Financial Advisors nor the presenter is affiliated or endorsed by the Internal Revenue Service (IRS) or affiliated with the United States government or any other governmental agency.
- This material is for information purposes only and is not intended as tax, legal, or investment recommendations.
- Consult your tax advisor for guidance. Tax laws and regulations are complex and subject to change.
- Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC an SEC Registered Investment Advisor.
- All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
- Pure Financial Advisors is not affiliated with Attorney Nicole Newman. References in this material to Attorney Nicole Newman does not constitute or imply endorsement, recommendation, or favoring by Pure Financial Advisors nor its employees.
CFP® – The CERTIFIED FINANCIAL PLANNER® certification is by the CFP Board of Standards, Inc. To attain the right to use the CFP® mark, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. 30 hours of continuing education is required every 2 years to maintain the certification. Esq. – Esquire (Esq.) is an honorary title that is placed after a practicing lawyer’s name. Practicing lawyers are those who have passed a state’s (or Washington, D.C.’s) bar exam and have been licensed by that jurisdiction’s bar association.
AIF® – The AIF® designation, administered by the Center for Fiduciary Studies fi360, certifies that the recipient has specialized knowledge of fiduciary standards of care and their application to the investment management process. To receive the AIF Designation, the individual must meet prerequisite criteria based on a combination of education, relevant industry experience, and/or ongoing professional development, complete a training program, successfully pass a comprehensive, closed-book final examination under the supervision of a proctor and agree to abide by the Code of Ethics and Conduct Standards. Six hours of continuing education is required annually to maintain the designation.
Esq. – Esquire (Esq.) is an honorary title that is placed after a practicing lawyer’s name. Practicing lawyers are those who have passed a state’s (or Washington, D.C.’s) bar exam and have been licensed by that jurisdiction’s bar association.
