529 Plan or Roth IRA

I read a column in USA Today over the weekend that compared Roth IRAs to 529 Plans.  The certified financial planner who wrote the article makes a strong case for why, when it comes to saving for a child’s college education, a Roth IRA (owned by a parent) might be a better investment vehicle than a 529 Plan for the benefit of the child.  This column got me thinking about Roth IRAs and caused me to do some digging into the comments made by the financial planner in the column.  I did some research on my own and also spoke to Paul Dolce, CFP, of Financial Solutions, in Dublin, Ohio.  It turns out that the USA Today column is a bit misleading in saying that 529 Plans and Roth IRAs work so similarly, for reasons that I will get into here.  But on the whole, the column is absolutely correct in suggesting that anybody who is thinking about saving for a child’s college expenses should consider a Roth IRA instead of, or in addition to, a 529 Plan.

By way of background, a 529 Plan allows contributions to grow tax-free and distributions to be made without any taxes or penalty, if the distributions are for qualifying educational expenses.  So if you take $10,000 today, sock it away in a 529 Plan for your kid’s college, and then it grows to $20,000 in 15 years, you can use that $20,000 for college and not owe any tax on your $10,000 in gain.  That all sounds great, but what if you need the money, or your kid decides not to go to college?  Well if you end up taking a withdrawal from the 529 Plan for something other than qualifying educational expenses, the earnings become taxable, and there’s a 10% penalty assessed on the earnings portion of a withdrawal.  The division of each withdrawal into earnings and contributions is done on a pro rata basis, unlike the withdrawals from Roth IRAs, which are treated as coming from contributions first.

Roth IRAs, on the other hand, are designed for retirement savings, but are tremendously flexible because of the withdrawal rules.  At any time after the Roth IRA is established, an individual can withdraw contributions that were made to the Roth IRA for any reason without any penalty.  If an individual has had a Roth IRA for at least five years, contributions and earnings can be withdrawn without any penalty and without any taxes if the distribution is a qualified distribution (examples of qualified distributions include distributions after the individual has reached age 59 1/2, or a withdrawal to help the Roth IRA owner or a qualifying family member buy a first home for the individual or a family member).

Distributions from a Roth IRA to pay for qualifying educational expenses aren’t treated quite the same as qualifying distributions, since the earnings portion of the distribution is subject to tax (which the USA Today column fails to note).  This is a key difference between the Roth IRA and the 529 Plan, where earnings distributed for qualified educational expenses aren’t subject to income tax.

If investment flexibility is what really pumps your tires, Roth IRAs easily have 529 Plans beat.  529 Plans are state-sponsored programs and come with limited investment options which typically include mutual funds, CDs, and bonds.  With Roth IRAs, investors can actively manage the account and have a much broader array of investment options.

In addition to earnings being subject to income tax when distributed for educational purposes, Roth IRAs have a few other shortcomings as compared to 529 Plans.  529 Plans allow for significantly greater annual contributions (annual contributions are capped at $5,000 for individuals under 50, or $6,000 for individuals 50 and over), can have more favorable gift tax treatment when it comes time to start using the funds for a child’s college, and do not have income limits that prohibit high-earners from participating.  Also, if you live in Ohio, contributions to an Ohio 529 Plan allow you to get a state income tax deduction of up to $2,000.

If you are considering setting up or continuing to fund a 529 Plan for a child, you should consider contacting a financial planner to discuss whether a Roth IRA might be a better option for you.  Not only can a financial planner help you determine whether a Roth IRA is appropriate, but he or she can also help you navigate the rules regarding contributions and withdrawals, which can be tricky to navigate.  As Paul Dolce, CFP, noted, “it’s very easy to mess up and make costly mistakes.   And some of the mistakes can come with very large penalties.”

Nevermind, I’m Back

In my last post, on February 2, 2012, I announced that I was going to stop blogging.  A funny thing happened since then.  A lot more people actually started reading my blog.

For the most part, my readers consisted of a few devoted followers and then people who stumbled upon the blog while looking for pictures of Britney Spears driving with her baby in her lap, or for information about Sasquatches or Pez dispensers.  But I’ve had more traffic in each of the last three months than in any prior months, and that was without putting up a single post.

One reader in particular made me want to keep the blog around.  This reader is battling cancer and trying to get his affairs in order, and he wrote to thank me for making the Survivor’s Checklist available.  The checklist has been downloaded almost 200 times.  As I watched so many people use it and then not say anything to me about it, I admittedly became disheartened.  I asked myself, “Why am I giving out free information?  What am I getting out of this?”  And then when that gentleman wrote me to express his gratitude, it was a reminder of why I started the blog, and, quite frankly, why I became an attorney in the first place.

In any event, I promise my next post will be more informative than this one, as there are plenty of topics that merit some discussion.  If you have any topics in mind, feel free to send me an email and let me know.

Goodbye, Blog.

I will be taking down this blog in the very near future.  I expect that my firm will begin sending out a newsletter sometime soon.  If you would like to receive the newsletter, please email me and I would be happy to add you to our mailing list.

I would like to thank everybody who subscribed to or frequented my blog.   Hopefully, you learned something and had a laugh or two.

Politics, Taxes, and Job Creation

Mitt Romney came out and said that he paid taxes at the rate of about 15% for his income.  To a number of people who are not acquainted with our federal tax system, there was some surprise that so much income would be taxed at a relatively low rate.  But as Romney said, his income comes primarily from investments, as opposed to ordinary income.  This explanation made sense to people who know the tax system, but to everybody else, it was reason to take a look at how “tax brackets” differ from “tax rates.”

When news of Romney’s effective tax rate broke, Gingrich joked that his own tax plan, which calls for individuals to have the option to pay at a 15% flat tax rate, should be renamed the “Mitt Romney 15% flat tax.”  That joke masks the truth behind Gingrich’s tax plan. His tax plan eliminates the capital gains tax.  As a result, under Gingrich’s plan, Mitt Romney’s effective tax rate could actually be close to zero.   I am interested to hear Gingrich talk about how Romney would be taxed under Gingrich’s own tax plan, and I am bothered that the issue wasn’t raised in last night’s debate.

On the topic of taxes, I am even more bothered by the perceived danger in taxing wealthy Americans, or, as they are now called, the “job creators.”  Everyone is worried about the unemployment rate, and those worries are justified.  But not everybody who is in a high tax bracket is a job creator, and not all job creators are in a high tax bracket.  I have sat down with individuals who have significant wealth that produces significant income.  Typically, they have large investment portfolios that easily produce six-figure dividends and interest income each year.  Their tax rates have no impact on job creation.  If anything, higher tax rates might mean more work for attorneys, accountants, and financial advisors who are there to help them navigate the tax system.  But whether the government taxes their dividends at 35% or 15%, they are not hiring anybody to sit with them and watch their checks from investment income arrive in the mail.  And just to be clear, I am not expressing any opinion as to what the tax rate on dividends ought to be.  I am simply noting the disconnect between tax rates and the number of jobs created by individuals with significant investment assets.

Even as to those individuals who are actually in a position to create jobs–the real “job creators”–personal income tax rates are not a driving factor in whether they hire employees.  Trust me, I have business clients who are job creators, and I have talked with them about this decision.  The owner’s individual tax rate is never raised as an issue.  The obvious analysis facing any business owner who is contemplating the hiring of an employee is whether the addition of the employee will allow the employer to make more money.  During that analysis, taxes are discussed, but it’s always the taxes an employer faces whenever he or she hires an employee.  These taxes include social security taxes, Medicare taxes, federal unemployment taxes, and state unemployment taxes.  On top of that, there is also the cost of workers’ compensation insurance.  As a bit of an aside, workers’ comp is a major complaint among Ohio businesses because they can only get workers’ compensation insurance coverage from the State of Ohio.  The State, in effect, has a monopoly when it comes to the workers’ compensation insurance business.

Most employees probably don’t realize that their employers have to bear these costs, but if you’re an employee making $50,000, your employer is probably paying upwards of $5,000 just to employ you.  On your pay stub, when you see what comes out for social security tax and Medicare tax, your employer is paying the exact same amount, as those taxes are split 50/50 between the you and your employer.  As to the unemployment taxes and workers’ comp, your employer bears those costs entirely.

Because of these costs and the hassle of dealing with all the red tape that comes with hiring an employee, a number of businesses just hire consultants or independent contractors.  It’s much easier to issue a 1099 to individuals and let them worry about picking up the entire tax burden and workers’ comp.  If anybody in Washington wanted to take a serious stab at creating jobs, they would stop making employers pay these taxes and fund social security, Medicaid, and unemployment through income taxes.  Personally, I’m not sure how one can take the position that capital gains should not be taxed, yet still tax employers on the wages and salaries they pay to employees, especially when one’s primary goal is supposedly job creation.  If job creation is the supreme goal, employers would not have to pay taxes on wages and salaries and we may even have government-sponsored health care so that employers didn’t need to be concerned about paying for those costs, as well.

New Website and Why It’s Been So Long

I have not posted on my blog since September 27, 2011.  Even before that post, I hadn’t put up more than three posts in any one month since June of last year.  To be honest with you, I had doubts as to whether to continue this blog.  Those doubts still remain.  There are quite a few reasons.  I won’t bore you with all of them, but I will say that a significant reason is that I don’t want to be known simply for estate planning.  My practice has progressed and evolved to the point that I still devote a significant amount of time to estate planning and probate clients, but I now am increasingly involved in representing business clients.  My estate planning focus is nothing new to anybody who has read this blog, but my business practice might be.

Just as my own practice has evolved, so too has the practice of every attorney at Jones, Troyan, Pappas & Perkins.  In order to better describe our areas of practice, and to better describe our approach to practicing law, we have updated our website, which you can find at www.jonestroyan.com.  I invite you to visit our website so that you can learn about my practice, as well as the practice of each of the other attorneys at the firm.

Answers to a Few Common Questions

What is “probate”?

This is a big one.  The Ohio State Bar Association provides a nice summary of “probate,” as far as what assets are included (or excluded) and how the probate process works.  You can get to that summary by clicking HERE.

Why should probate be avoided?

The summary from the Ohio State Bar Association doesn’t really point out why probate generally ought to be avoided.  Probate can be expensive and time-consuming.  Let’s take the example of a house.  If a house passes outside of probate by way of a TOD affidavit or to a surviving owner, in the case of joint and survivorship property, you can simply file an affidavit and death certificate, and the beneficiary takes title to the house.  You might pay an attorney a nominal fee to prepare the affidavit, and then there’s a recording cost of $30 or so (it’s really $28 for the first two pages and $8 for each additional page).  However, if the house passes through probate, an estate needs to be opened ($50 to $200), an appraisal has to be done ($150 or more), the attorney fee will be larger, because the work required typically is greater, and the document conveying the property will still need to be recorded.  That’s just one example, and there are a countless number of other examples.

Another big reason to avoid probate is that most probate filings are public record.  Anybody can go down to the courthouse and pull the estate file to see what the Will said, what the assets were, how much those assets were worth, and who received them.  While nobody wants this information to be made public, this can be particularly problematic for owners of small businesses (a court-appointed appraiser will issue an appraisal report, and the value of the business and the report will be public record).

Why do I still need a Will if I have a trust?  Isn’t the trust distributing all my assets?

The answer varies.  Invariably, though, you need a Will to cover any assets that just so happen to pass through probate.  Often times, people think they have all of their ducks in a row so that probate will be avoided, but there might be a checking account, or car, or boat, or something that they owned personally, and for which no beneficiaries was named.  Since your trust disposes of your property to your beneficiaries, the Will needs to direct those wandering ducks through probate and over to the trust.  A Will also allows you to name a guardian for minor (or incompetent) children, and an executor, who might file a final tax return and then take care of some other minor loose ends.

You can read another attorney’s explanation HERE.  Like me, he has a beard, which means you can trust anything he says.

Do dinosaurs have butts?

Actually, I only got this question once, and it came from my 3-year-old son.  I’ll just throw it out there in case anybody else was curious.  I’m no paleontologist.  In fact, I just looked up the spelling of “paleontologist.”  But I am fairly certain that dinosaurs do have butts.  I say “fairly” because I am, after all, an attorney, and nothing I say can be unequivocal.

Are assets in my trust protected from my creditors while I am alive?

This is a common misconception.  I think the confusion arises because there are three things estate planning attorneys are always talking about avoiding: (1) estate taxes, (2) probate, and (3) creditors.  If an asset avoids probate, that does not necessarily mean it avoids estate taxes or claims of creditors.

As a general rule, if you’re simply talking about a revocable living trust, where you retain the right to amend it or revoke it during your lifetime, it can help you avoid probate, but it won’t do anything for you when it comes to protecting you from creditors, at least not during your lifetime.  If you’re talking about an irrevocable trust, it gets a little trickier, as creditors generally can only reach your interest in the trust.  So if you set up the trust for your kids or your spouse and you are not a beneficiary, your creditors are out of luck.  But if it’s a GRAT or QPRT, under which you have some income interest, your creditors can reach your income interest.

If I get divorced, is my spouse still a beneficiary?

Yes and no.  This is controlled by state statute (except for qualified retirement plans, in which case it’s controlled by ERISA).  As to qualified retirement plans, you can get a summary on how those assets work by clicking HERE.  But focusing just on what your estate plan documents say, under Ohio law, in the event of a divorce, any provision in your Will, revocable trust, or power of attorney that mentions your spouse will be automatically revoked.

However, any provision in an irrevocable trust that names your spouse will not automatically be revoked.  Whether the spouse remains as a beneficiary, or trustee, for that matter, depends upon the language in the trust.  If having the ex-spouse remain as a beneficiary or trustee is not desired, the trust might say something to the effect of “my ‘spouse’ refers to the person to whom I am married at the time of my death.”  With a provision like that in your trust, your “spouse” is not likely to read it and think of you as Ohio’s closest thing to Don Juan, but it will keep your spouse, should she become your ex-spouse, from benefiting from your irrevocable life insurance trust.

Keeping Beneficiaries in the Dark

The Ohio Trust Code, which became effective back in 2007, had quite an impact on how trusts in Ohio are drafted and administered.  One of the biggest changes came with respect to keeping beneficiaries informed.  Under R.C. 5808.13, a beneficiary now has a number of rights, one of which is being able to request and obtain a full copy of the trust agreement.

Why is this potentially a big deal?  Well let’s take the classic example of Scrooge McDuck, and his grandnephews, Huey, Dewey, and Louie.  Let’s suppose McDuck decides he wants to name all three of them as beneficiaries of his trust, but he wants Huey to get 50% of the trust and  Dewey and Louie to each get 25%.  If McDuck wants to keep the unequal distributions a secret from his grandnephews, what are his options?

Well one option is to name a beneficiary surrogate, pursuant to R.C. 5801.04(C).  This beneficiary surrogate would receive the information (trust reports, copies of the trust, etc.) that would otherwise need to go to the beneficiary.  But this option has some shortcomings.  Most notably, nobody really knows what the heck the beneficiary surrogate is supposed to do for the beneficiary.  If there are any fiduciary duties, what are they?  Can the beneficiary sue the beneficiary surrogate if the beneficiary surrogate has a copy of the trust, but won’t give it to the beneficiary?

The better option, in my estimation, is to create one or more separate trusts.

As to McDuck’s quandary, he can have a trust that leaves 25% of its assets to McDuck Trust A, and leaves the remaining 75% of McDuck’s assets in equal one-third shares to each grandnephew.  Then McDuck Trust A could leave everything to Huey.  If you follow that math, you’ll see that Dewey and Louie still ultimately end up with 25% of everything (.75/3), while Huey still ends up with 50% of everything (.25 + .75/3).  When the grandnephews see the McDuck Trust, they see each of them being treated the same.  Dewey and Louie aren’t beneficiaries of McDuck Trust A, so they cannot see the trust agreement to know who has been named as a beneficiary, and ultimately, they have no way of knowing that Huey is getting that other 25%.  For all Dewey and Louie know, McDuck Trust A leaves everything to Glittering Goldie.

I share this story because I think it illustrates a very important point: attorneys should strive to be creative problem solvers, not parade rainers.  If you have a goal and some legal roadblock is in the way, your attorney should be looking for a legal and ethical way to get around it.  We are here to advocate for you, not inhibit you.

A Change is Gonna Come

When Sam Cooke famously sang that “a change is gonna come,” he probably wasn’t talking about the practice of estate planning in 2011 and beyond, but he certainly could have been.  In my estimation, change is gonna come, if it hasn’t come already, for two reasons.

First, estate taxes are less of a concern.  Over the past decade, the federal estate tax exemption has gone from $675,000 to $5,000,000, and the top tax rate has fallen from 55% to 35%.  On a more local level, the Ohio estate tax, which currently is imposed on net estates over $338,333, has been repealed, effective January 1, 2013.  The threat of estate taxes motivated people to have a professional prepared estate plan, and allowed attorneys to justify the hefty legal bill that came with those plans, even if the plans consisted of little more than an “off the rack” AB trust.  I am not necessarily criticizing attorneys who sent those bills, as many of them spent considerable time reviewing estate tax issues with clients before the clients decided on how to proceed.  But the fact remains that, for the vast majority of people, that threat is now gone, and that time spent talking about estate taxes is simply not necessary.

Second, whether or not we want to admit it, attorneys who practice in estate planning need to compete with software programs like Legal Zoom, Rocket Lawyer, and  Quicken WillMaker.  Last month, I cited a Consumer Reports study that found the programs to be deficient with respect to all but the simplest of situations (leaving everything to a spouse with no contingencies).  Even though these programs are not as good as professionally prepared documents, these programs are far more economical, and have been very successful in turning clients in need of good estate plans into consumers settling for inadequate substitutes.

So how will the profession change given these developments?  In the next decade, how will most people who need an estate plan go about getting one?  I think these are questions any attorney who wants to practice in estate planning must consider.  I am still trying to find my own answers to these questions, and obviously the answers are developing over time.  As soon as you think you have it figured out, new legislation or technology can throw you a curveball.

As I formulate my answers, I am also working on providing a new model of service.  For most people who need an estate plan, the traditional model used by attorneys is simply too expensive, and the software programs are too cheap and unreliable when it comes to producing quality documents.  My goal is to be able to provide high quality, cost-effective estate plans to these clients in a fashion that they have not yet seen, and perhaps that does not yet exist.  I believe there is a new solution out there for these clients, and I intend to find it.  If you would like to help me, I welcome your thoughts.

How to Calculate the Growth of Money

I had a chance to impress a client the other day with my high school math skills.

Somebody owed my client money at 6% interest, and nothing had been paid for 8 years.  The client pulled out his smartphone and multiplied the balance due by 1.06, then multiplied that figure by 1.06, then multiplied that figure by 1.06, and he did that repeatedly until he couldn’t remember whether he had just done it 7 times or 8 times.  He became frustrated, which was understandable.  If there’s anything more frustrating that struggling with a math problem, it’s paying an attorney to sit there and watch you struggle with a math problem (don’t worry–I cut him some slack on the bill).

His approach to solving this problem is one way to do it.  To show you how this long version works, let’s say he was owed $10,000.  The balance due after each year would be as follows:

1. $10,600
2. $11,236
3. $11,910
4. $12,625
5. $13,382
6. $14,185
7. $15,036
8. $15,938

This approach obviously becomes more difficult as you add more and more years.  Fortunately, there’s an easier way, which I showed him after I grabbed my scientific calculator from my office (if you don’t have a scientific calculator, here is an online scientific calculator).  If you type in 1.06, then click on the “yx” button (the “x” should be in superscript), then type in 8, and then multiply that number by $10,000, you’ll get…wait for it…wait for it…$15,938!  The same number!

As you can see, the first number you entered is 1 plus the annual percentage interest rate, and the next number you entered is the number of years the money has to grow.

How can this be of use to you?  If you assume you’ll make 8% per year for the next 30 years on whatever you put into your retirement account this year, you’ll see that this amount will be just over ten times larger in 30 years.  So $10,000 saved now would be over $100,000 in 30 years.  Even if you assume a more modest 5% over the next 30 years, that $10,000 would still become over $43,000.

The lesson here is that saving early and often is a good way to retire rich.  The other lesson here is that interest due on debt is not small potatoes, especially when the amount owed is substantial or the interest rate is high.

How People Find Me

I always get a kick out of seeing what search terms on Google lead people to my blog.   I get a hefty amount of traffic from people looking for estate planning information, but every once in a while, Google’s magical search algorithms directs people to my website who are undoubtedly disappointed when they find this blog.

Here are some of the more interesting search terms that have led visitors to my blog:

• How many pairs of sweatpants college
• How many pairs of sweatpants to bring off to college
• Claire’s age on Modern Family
• Driving holding a baby
• matt gibson peyton manning
• matthew gibson oil
• cool band aid
• boat shoes dorky or cool
• pez dispenser checklist
• drew gooden bad hair
• lebron hand holdin
• Barry Bonds older v new

Writing Your Own Will with LegalZoom, Rocket Lawyer, or Quicken WillMaker

Consumer Reports recently reviewed will preparation software from LegalZoom, Rocket Lawyer, and Quicken WillMaker, to determine the effectiveness of the programs, and to see if the software actually produced quality documents.

You can read more about how the study was conducted by clicking on the link above, but the conclusion reached in the study was that “All three are better than nothing if you have no will. But unless your needs are very simple—say, you want to leave everything to your spouse with no other provisions—none of them is likely to meet your needs. And [Consumer Reports] found problems with all three.“  Among the problems were outdated information, insufficient customization, too little (or too much) flexibility, and incompleteness.

I am not the least bit surprised by the study’s findings, as I would have given you an opinion about the software programs that was almost identical to the conclusion.  I don’t want to pick on anybody who uses these programs to make a Will.  If you want to pay $30 or $40 for one of these programs and trust that it’ll produce a Will that accomplishes what you need it to accomplish, that’s your decision, and I at least applaud you for deciding to make a Will.  But you need to realize what you are getting when you prepare your own Will, and you need to realize what you would be getting if you hired an attorney to prepare your estate plan.

With the programs, as the study suggests, you’re getting a document that probably works better than nothing, but that also is unlikely to meet your needs.  With an attorney, you’re getting documents that are tailored to your precise needs, and you’re getting the confidence that comes with professionally-prepared documents.  And in the event something goes horribly wrong, would you rather be on the phone with Product Support at Quicken or the attorney’s malpractice provider?  I have seen instances in which estate planning has gone very wrong, and let me assure you that the attorney or the attorney’s malpractice provider is going to do a lot more for you than somebody at a Quicken call center.

Whether it’s fixing a sink, investing money, or preparing an estate plan, people are constantly faced with the decision of whether to bring in an expert or whether to go the DIY route.  Nowadays, a lot more people are enticed by the temptation to go the ultra low-cost route on the estate plan.  As an attorney who devotes most of his practice to estate planning, I realize I might be seen as bias on this issue, but I strongly believe that your estate plan is not a time to do it yourself.  You can see my fees for an estate plan on this blog, but if you are considering retaining another attorney, I would suggest that you make sure he or she practices mostly in estate planning, and that you feel comfortable talking openly about fees during your initial consultation.

Where Do We Go From Here?

The Ohio estate tax is officially repealed.  Repeal occurred when Governor Kasich signed the budget bill, but repeal will not take affect for any dates of death prior to December 31, 2012.

So what does repeal mean for your estate plan?  Should you throw tax planning to the wind?  I still need to read up on what other attorneys have to say on this subject, but I will go out on a limb and throw out some thoughts on this issue.

First, don’t update your documents, yet, if the only changes you’re going to make deal with the tax.  If you did tax planning on account of the Ohio estate tax, just wait until the second half of 2012 to update your documents.  For your sake, I certainly hope you live past December 31, 2012, but there’s no use paying an attorney to do updating when the law isn’t effective for another year and a half.  Of course, if you have other changes to make, you can still update your documents.  Your attorney should have a plan in place to deal with estate tax repeal, and the fact that repeal won’t occur for another year and a half.

Second, QTIP planning, which was very popular in Ohio, will no longer be such a great idea for most people.  As you might know, if a trust is drafted so that it’s subject to a QTIP election, the trust has the ability to be treated as either subject to the marital deduction or included in the taxable estate of the first spouse to die.  This election can be over a certain percentage of the trust, and it does not have to be consistent on both the federal and Ohio estate tax returns.  Absent an election, all of the property is going to be treated as though it is included in the taxable estate of the first spouse to die.  So in effect, the QTIP election allows you to receive a marital deduction.

Beginning in 2013, a QTIP election cannot be counted on.  The election must be made on the estate tax return, and there won’t be an Ohio estate tax return form to fill out for dates of death in or after 2013.  You might ask, “Why does any of this matter?  There’s no estate tax, so who cares.”  Well it matters because you lose out on the ability to get a step-up in basis both at the death of the first spouse, and again at the death of the second spouse.  You would get this benefit if you simply left all of the assets to the surviving spouse.

Now you might ask “Well why are you still wasting your breath?  Let’s just leave everything to the surviving spouse and be done with it.”  There’s some merit to that point, but a trust still might be a good idea.  For a married couple without federal estate tax issues, but who wants to give the surviving spouse creditor protection, or who wants to place “strings” on how the money can be used during the surviving spouse’s lifetime, a trust is needed.  However, to achieve the income tax objectives mentioned in the previous paragraph, the trust needs to give the surviving spouse a general testamentary power of appointment.  This power of appointment will allow for a step-up in basis at the surviving spouse’s death, and could result in significant income tax savings for beneficiaries.

So the long and short of this second thought is this: expect to see a lot of trusts set up that give the surviving spouse all of the income, provide discretionary distributions of principal to the surviving spouse for health, maintenance and support, and that give the surviving spouse a general testamentary power of appointment.

Third, and finally, estate planning in Ohio will certainly change as a result of the repeal of the Ohio estate tax.  Planning had already changed, in point of fact, when the federal estate tax exemption rose so dramatically over the past few years.   Even though estate taxes might not matter to you, don’t get lazy about your estate plan.  If there was any silver lining to the days when estate tax planning was such a big deal, it’s that people were actually addressing the non-tax issues, such as who should be named as guardian, or executor, or trustee, or whether to make outright distributions or hold money in trust for children.  At the end of the day, these are, and always have been, the most important decisions involving your estate plan.  You still ought to have an estate plan and ought to confront these very important decisions.

Crossing Paths with a Wild Turkey

I fancy myself as a lover of wildlife, especially birds.  I can probably identify about 20 bird species, which I realize is pretty pitiful for a bird lover.  Mostly, I just like to see really big birds.  I think it started when I was a kid and my family went to the Grand Canyon.  We were in the middle of the woods, sitting around a campfire, after the sun had set, and a park ranger was talking about the California Condor and its impressive windspan, which can be 9 feet or longer.   As soon as I heard the description of the California Condor, I immediately imagined some bird that looked like Manute Bol with a cape landing right next to me to listen to the park ranger speak, and then taking off back into the night sky before anybody else saw him.  That image, and a fascination with big birds, has always stuck with me.

With that background in mind, you can understand how excited I was when, a few weeks ago, I heard a tapping on my office window, only to open up my blinds and see a wild turkey staring at me.  Our firm is located in a fairly secluded location just north of Columbus, and my office sits on the ground floor.  It’s fairly common for deer to wander past my window.  If you visit my office, you’re more likely to see the guy in the neighboring office building peeping in my window during his smoking break than you are to actually see a deer, but if you hung out here for a week, especially during deer mating season, you’re likely to come within about 20 feet of a deer.  But you don’t see wild turkeys as often as you see deer.  Had it not been for my window, I could have easily reached out and touched this turkey.

That first day, he hung out by my window from about 6:30 AM to 8:00 AM.  During that span, his presence went from utterly amazing to pretty gosh darn cool.  The next day, he was there again, and a few other people in the office were able to see him up close.  It went on like that for about a week.  My bosses surmised that the wild turkey was a female (I disagree), and by about the fourth or fifth day, started to say, with very little enthusiasm, “look, your girlfriend is back.”

Then one day last week, we had a client arrive for a 7:30 AM meeting.  As he came in the door, and with great excitement, he reported that there was a wild turkey on the hood of the black car in the parking lot, and that the turkey was looking at himself in the windshield.  To the client, this may have seemed awesome.  To me, as a frequent observer of the turkey, and, perhaps more importantly, as the owner of the black car, the turkey was really starting to wear out his welcome.

I haven’t seen the turkey since I heard he was on top of my car.  Now that a week has passed since he and I last crossed paths with one another, I feel bad that I had started to take the turkey for granted.  He was a good bird.  He even refrained from doing his business on my car.

I don’t want to tell you a boring, pointless story about a wild turkey, so I suppose I should wrap it up with some kind of lesson.  That way, it can just be a boring story about a wild turkey.  If there is anything to be learned from my encounter with the wild turkey, perhaps it’s that we ought to appreciate the good things in life, even if we are blessed with them every day.  After all, there’s no guarantee that the good things will be back again tomorrow, standing on top of your car and looking at the reflection in your windshield.

Thoughts After Meeting with a Widow

Earlier this week, I met with a widow whose husband recently and unexpectedly passed away.  She and her husband had a few young children, all of whom were elementary or middle school aged.  From my prospective, these meetings represent both the best and the worst part of the practice of law.

On the one hand, what a young widow or widower and young children are forced to endure when a spouse, or parent, as the case may be, passes away is gut-wrenching.  It is difficult to sit down with people when they are facing that kind of tragedy.  When I read the story of the Good Humor Man to my three-year-old son, there are definitely times when I envy him, and I can see the appeal of handing out ice cream, finding lost puppies, and ringing that special “ting-a-ling-a-ling” bell.

On the other hand, it is tremendously rewarding to be able to sit down with a client in her position and give her compassionate and quality legal services at a very reasonable price.  I cannot tell you how good it feels to receive a thank you note from a widow or widower who tells me that it was a pleasure to work with me.  While the Good Humor Man is out fattening up America’s children, I sleep well at night knowing that, in a small but valuable way, I was able to help somebody deal with a terrible personal loss.

But enough about me.  There are actually two reasons why I share this story with you.

First, don’t take life, or tomorrow, for granted.  I am as guilty as anybody about always planning for the future and not taking enough time to “stop and smell the roses.”  But I am occasionally reminded of how precious life can be.  There is no such thing as a bad day when you are able to wake up and say “I love you” to somebody.  Always remember that there are a lot of people who are not fortunate enough to have somebody there to repeat those words.

Second, as I have said on a number of occasions, if you have young children, you should strongly consider buying term life insurance.  It’s cheap if you’re young and healthy.  In the unlikely, but certainly possible, event that you pass away at a young age, you don’t want to leave your family to endure a life of financial hardship, on top of the emotional hardship they will face.

If you need help tracking down quotes for a term life policy, let me know, and I can put you in touch with somebody who can help.  If you had a policy but had one or more children since you bought that policy and have doubts about whether you are adequately insured, again, let me know, and I’ll give you the information of somebody with whom you should talk.

I can tell you from first hand experience.  As tragic as my meetings with young widows or widowers might be, the meetings are far worse when the deceased spouse’s failure to buy sufficient life insurance has left the surviving spouse and the children facing the prospect of financial ruin.

Ruling from the Grave

I was recently having a discussion with a financial planner and our mutual clients concerning this topic.  To make a long story short, the clients had young children, and had a number of ideas as to how they wanted their assets to be spent for the children.  Basically, in the event the clients passed away while their children were young, the clients wanted their assets to pass to a trust for the children, and they wanted the trustee to spend money quite freely on the upbringing of the children.  The clients thought the money would be most valuable to the children if it was spent while they were young on the best private schools, the best universities, life-altering trips to foreign lands, etc., as opposed to keeping it until they were older.  Regardless of whether I agree with this approach, I don’t think there is any doubt that there is plenty of logic behind their thinking.

The clients had met with another attorney a few years back who advised them against mentioning this desire to have the trustee spend loosely.  The attorney thought that this would create some potential liability for the trustee in the event the trustee decided not to make a discretionary distribution.  So the attorney drafted the trust to simply say that the trustee was authorized to distribute income or principal from the trust for any purpose.  That was all it said.

I adamantly disagree with how this attorney resolved this situation.  If a trust is properly drafted, the trustee will never be liable for making, or not making, a discretionary distribution, as long as the trustee is not acting in bad faith and is not grossly negligent. If the trust does not contain a provision that limits the trustee’s liability, then the trustee should think twice, or three times, before agreeing to serve.

The financial planner then raised the question of “ruling from the grave,” and wondered whether including a trust provision that expressed the clients’ goals might be too restrictive.  In my mind, there’s a difference between ruling from the grave and throwing the trustee a bone.  There’s a difference between requiring and suggesting.  There’s a difference between imposing a mandate and offering some guidance.  People normally use the phrase “ruling from the grave” when parents attempt to control their children’s choices and behavior through the terms of the trust.  Undoubtedly, this can be a major problem, and I advise clients whenever I think a proposed provision might be overreaching.

But getting back to the clients who wanted the trustee to spend freely while the children were young, what’s more likely to clue the trustee into this goal, saying that “the trustee can make a distribution for any purpose the trustee deems appropriate in the trustee’s discretion,” or saying that “the trustee can make a distribution for any purpose the trustee deems appropriate in the trustee’s discretion, including, but not limited to, supporting and maintaining the child, providing the child with an education, caring for the child’s health, enabling the child to travel, assisting the child with the purchase of a home, or assisting the child in enter a business or profession.”

The bottom line is that you want your wishes to be carried out and you need to give the trustee the freedom to exercise discretion and the flexibility to account for changes in circumstances when carrying out your wishes.

Deeds and Estate Planning: Don’t Quit Claim!

I see this fairly frequently–whether it’s a married person transferring a property to a spouse for estate equalization purposes, or an individual or couple transferring property to a trust for probate avoidance purposes.  It’s just a simple transfer where possession isn’t really changing hands, and money isn’t changing hands.

Often times, people think “simple transfer” and immediately think “quit claim.”  Don’t be among those people.  The problem with a quit claim deed in this situation is that it comes without warranties, and because it comes without warranties, the grantor (the person from whom the property is being transferred) will not be liable if there happens to be a title defect.  Since the grantor is not liable, the title company that issued the title commitment to the grantor is off the hook.

The bottom line is that, whenever you, your trust, or a loved one is the grantee (the person to whom property is being transferred), there’s no reason to give a deed without warranties.

New and Improved Survivor’s Checklist

The response from readers and clients to the Survivor’s Checklist has been impressive.  In fact, I was so impressed that I decided to put some more time into creating something a little more beefed up.  Think of the old Survivor’s Checklist as Barry Bonds circa 1991, and the new Survivor’s Checklist as Barry Bonds circa 2004.

So here are the new and improved Survivor’s Checklists, which you can download below in the PDF version, or you can email me and request the Excel version:

• Survivor’s Checklist for Married Couples (PDF)
• Married Couple’s Letter to Trusted Individual (PDF)
• Survivor’s Checklist for Unmarried Adults (PDF)
• Unmarried Adult’s Letter to Trusted Individual (PDF)

My only request is that you honor my copyright protection of these documents and use them only for your personal use, or to send to friends and family.

The Excel versions, in my opinion, are much better than the PDF versions.  They are easier to update, and can allow you to get creative if you are inclined to make modifications to the checklist.  I just hesitate to throw the Excel versions to the cyberspace wolves.  I have no problem emailing it to anybody who ask for it, though.

To the readers who contacted me after I posted the prior checklist, thank you for inspiring me to improve upon my work.  And to my wife, who read my post and emailed me with the question “So are we filling these out?”, thank you for reminding me to look at my work not just through the lens of the attorney making the form, but also the client who has to fill it out.

If you have any recommendations on how the checklist can be improved, or, for that matter, on anything else relating to the blog, please do not hesitate to contact me.

Survivor’s Checklist (Part 2): Thoughts from a Survivor

The Survivor’s Checklist, which was provided in my post from yesterday, was also sent to my estate planning clients.  One woman who received it was a client whose husband recently passed away.  I had the honor of helping her administer her husband’s estate and update her own estate plan documents.  The client was still mourning the death of her husband when she came to me for help, and the last thing she wanted to do was involve herself in the probate process.  Fortunately, most of their assets were owned jointly, and with respect to the few assets he held in his name alone, he had designated his wife as the beneficiary.  The estate administration process was simplified because all of their assets passed to her upon her husband’s death without the need to deal with the probate court.  But while her husband did an admirable job of putting his ducks in a row, in terms of avoiding probate, my client still had trouble gathering up all of the asset information and finding out who she needed to contact.

I rambled on in my last post trying to impress upon my readers the importance of completing the checklist, but my client wrote me an email last night after she received the checklist, which she gave me permission to share, and which summed up the importance far better than my post.

Here is what she said:

Matt, such a wonderful and helpful resource.  Thanks for putting it together.  As I now know first-hand, a checklist like this would truly have saved me hours of work at a very difficult time.  There are so many other details that have to be managed as well, that any consolidation of information is so beneficial.

So there you have it.  Do yourself and your loved ones a favor and take some time to complete the checklist.  It might take you an hour or so, but it will be worth it given the time, the pain, and the frustration it will save your friends or family.

Survivor’s Checklist

After clients sign their estate plan, the first topic we discuss is where the originals will be kept.  After the clients decide where they want to stick the originals (my law firm’s safe or their safe), the second topic tends to be how their friends or family members are going to know (1) that the clients actually signed estate planning documents, and (2) where those documents can be found.

In reality, the issue is bigger than just your estate plan documents.  How can you assure anybody will find out about all of your bank accounts?  What about your life insurance?  What about your safe deposit box full of rare and exotic Pez dispensers?  And then what are you going to do with your Facebook and Twitter accounts?  What’s going to become of them?

The answer is simple, or at least it can be.  I present to you the Survivor’s Checklist.   It gives you one central location to list your assets, your advisors, your user name and passwords for websites, and all kinds of information.  It starts with a letter that you can send to one or more trusted persons that simply says where the checklist is located.  That way, the trusted person knows how to find all that important personal information, without being given the information during your lifetime.

At the end of the checklist is an explanation of how popular websites (Facebook, Gmail/Google, Yahoo!, Twitter) deal with an account holder’s death.  These “digital assets” are a relatively new area of estate planning, so the law surrounding how they are handled when an individual passes away is very much unsettled.  If you don’t like the standard protocol that governs how each website handles accounts, you may want to leave somebody with your user name and password, and with instructions on how you want the accounts to be handled.  The checklist, of course, provides you with this opportunity.

The checklist can be very difficult to complete for those of us who are disorganized.  But if it’s tough for you to locate the information needed to complete the checklist, imagine how challenging it will be for your friends and family if you were to pass away.  Even worse, imagine how awful it would be if they weren’t able to locate the information and your beneficiaries lost out on valuable assets.

So do yourself and your family a favor by printing out the checklist, filling it out, and letting somebody know where it’s located.

“What Do Other People Do?”

I get this question quite frequently from estate planning clients, especially from younger clients.  The question comes up for one of two reasons.  The first reason is if the clients are cost-conscious.  They understand that the less they deviate from something relatively standard, the less expensive their estate plan will be.  The second reason is if the clients are having trouble conceptualizing how a trust works or what type of options are available.

Before getting into “what other people do,” I tell clients, and should tell you, that I am capable of, and actually enjoy, drafting provisions to accommodate unique wishes.  I never tell clients that what they want to do cannot be done.  While some people might call me an estate planning attorney, I really think of myself as an estate planning artist.  My job is not to be a form jockey.  My job is to craft a unique document, tailored to a client’s exact wishes.  Microsoft Word is like my canvas, and the keyboard is like my paintbrush.  I will inform clients if I think the provisions relating to their exact wishes will be expensive to draft, or overly difficult to administer down the road, just to make sure clients are fully informed before making any decision.   But if you tell me that you want your trustee to buy your children wooden backscratchers ever year for Christmas, I will listen to you, and I will make sure your trust agreement says that the backscratcher needs to be made of wood, not plastic, and that each child gets his or her own backscratcher, and are not to be forced to share backscratchers.

In effect, my job is to make the estate planning documents fit you, not to make you fit the estate planning documents.  Backscratcher jokes aside, I take that job very seriously.  More often than not, those unique wishes can still be done without too much of an increase to the overall cost, but they invariably cause at least some increase in the cost.

Despite my willingness to help clients who want to be creative, the reality is that most clients eventually pick among a few options.  The options are almost like estate planning value meals.  Without getting into all of those options, I would say that it is very easy to outfit clients who want one of these options with an estate plan at a relatively low cost.  If you have seen my fees page, you know that my typical estate planning fees when a trust is involved range from $500 to $700.  For clients whose plans hardly deviate from one of these common options, the fees rarely exceed $500.

I mention all of this because most people are intimidated by the process of putting together an estate plan or having to deal with an attorney (not because attorneys are scary, but just because their bills are).  They realize that they need an estate plan, but they aren’t excited to talk about it, they don’t want to spend much time thinking about it, and they don’t want to take out a second mortgage to pay for it.  If you are one of those people, you can call me, tell me just a bit about your family and financial situation, and ask me what other people in your situation typically do.  I can tell you the options, you can pick and choose what you like, and I can end the phone conversation by telling you exactly what the cost will be.  In less than a week, your estate plan can be signed and you can be done with the process.