Natural Catastrophes and your Estate Plan

From the tornados that ripped through Alabama and Missouri just last month and the two catastrophic fires currently raging in south-eastern Arizona, Mother Nature has not been too kind lately.  And as hurricane season has officially begun, coastal cities hope they're not added to the casualty list.  Natural disasters like this serve as an apt metaphor and constant reminder of the importance of proper estate planning.

It is very hard to predict the exact time and severity of a natural disaster, so it is always important to be prepared.  Similarly, you just won't know when life's "tornado" will affect you and your loved ones, so taking the steps to create and execute an estate plan is also an important part in preparing for your future.

Many people have been lucky to survive these recent catastrophes, but still countless others have been injured and left disabled.  Disability planning is another crucial component in an effective estate plan.  Special needs trusts, health care directives, and powers of attorney are just a few of planning tools that most people overlook, to their peril, even if they do have an estate plan.

Also, because natural disasters--and any tragedies in life--are so unpredictable, it is imperative that you keep your plan up to date.  We recommend that you enroll in a formal maintenance program with your estate planning professional.  As an alternative, you should review your plan with an estate planning attorney once every two years, and after a significant life change has occurred such as divorce or a new child.

Be prepared for the unexpected by ensuring that you have a thorough, effective estate plan in place before you get caught out in the rain.

Quality and Net Worth Are Not Synonymous*

Jack Kent Cooke started his business as a high school drop-out selling encyclopedias door-to-door, and grew until he owned a collection of media companies, sports teams, and real estate valued at $1.3 billion.  Most know him as former owner of the Washington Redskins football franchise.  Although a successful and sophisticated businessman, his estate planning failed miserably.

What Does This Have to Do With You? Though most of us don't have estates worth $1.3 billion, this is a great case study on how planning that is not well-designed and customized according to a client's wishes can result in devastating financial and emotional costs after their death.  This is not an issue of net worth.  It is a planning quality issue.

Jack Kent Cooke's Plan: Mr. Cooke has a will that was amended eight times.  It left seven executors, most of them former employees.  When presented with the will, most of them had never seen it before.

The Widow's Claim: Ms. Ramallo Cooke was Mr. Cooke's wife, whom he divorced once and then remarried.  Despite having signed a prenuptial agreement on her remarriage, a fight ensued, ending in a $10 million settlement to Ms. Cooke to end the expensive litigation ($6.8 million in legal bills.)

Sell Which Assets? An executor, Stuart Haney worked with Mr. Cooke to create the Jack Kent Cooke Foundation to help underprivileged students.  Due to a large estate tax bill, the only way the foundation could be funded was to sell assets of the estate.  Cooke's son (also an executor), has worked in management of the Redskins for most of his life, shared his father's passion for football, and dreamed of someday owning the Redskins.  Cooke, Jr. was adamant that the Redskins franchise not pass from family control.  However, because the sale of the team promised the best return, the executors, against the protests of Cooke, Jr., chose to auction the Redskins.  Cooke, Jr. was outbid an the team passed out of family control.

Paying the Executors: The will didn't specify how much the executors should be paid.  In Virginia, up to 5% of the estate is allowed.  Again, lawyers were hired, and litigation began.  Cooke, Jr. claimed that executors' fees exceeding $5 million were unreasonable.  The remaining executors felt that they earned and deserved the 5% fee ($37.6 million).  The case was decided in favor of the 5% fee.  Subsequently the count commissioner of accounts cut his fee to $415,000 to avoid further litigation.

In the End: Cooke, Jr. never received the Redskins, which he dreamed about and worked towards his entire life.  The executors were divided and bitter, and still have to work together as board members for the Foundation.  The estate settlement lasted 7 years and cost $64 million in professional fees.

Learning from Mistakes: Most clients believe that their situation is straightforward and simple and that they don't have a lot of money.  They may not have the wealth of Jack Kent Cooke, but proper planning is every bit as important for them as it was for him.  If they fail to plan well, or if their plan fails them, the result can be financial and emotional devastation for their families and loved ones after death.

*Adapted from the Planning Partners Press.

The Pitfalls of Joint Ownership (Part 3 of 3)*

In Part 1 of this article, we explained how Joint Tenancy with Right of Survivorship ("JTWROS") works.  We noted that it is a form of asset ownership where each owner is deemed to own 100% of the asset, and whoever lives the longest gets the whole thing!  We also introduced some of the pitfalls of owning things in this way, and began to explore the details of each pitfall in Part 2.  In this final installment, we'll explore two more potential pitfalls of joint ownership, and offer a possible solution.

In Part 2, we discussed these two pitfalls of joint ownership:

(1) There is no control, and property may pass to unintended heirs.


(2) There are no planning opportunities.

There are two more problems of which you should be aware:

(3) Probate is at best delayed, not totally avoided.

In spite of the concerns already discussed, some advisors continue to recommend joint tenancy!  Why?  The major reason given is because joint tenancy property bypasses the entire probate process.  But this is not entirely true.

With married couples, joint tenancy does not avoid probate -- it only delays it.  Because joint tenancy passes outside all will or trust planning, it does avoid probate -- on the death of the first spouse.  When the second spouse dies, however, there will be a probate.  In situations where both spouses die together, there will be at least one probate and perhaps two.

(4) For non-spousal owners, unintentional gift taxes and death taxes can be generated.

When non-spouses create joint tenancy, they often create a gift tax as well.  Frequently, an older parent designates a son or daughter as a joint tenant on bank accounts and/or other property.  The moment this is done, the transfer of property is often considered by the IRS to be a gift, and if valued above $13,000 (in 2010) it will have to be reported to the IRS.  In some cases, a gift tax may be immediately due.

When a non-spouse joint tenant dies, the surviving tenant gets the property.  If a parent with three children makes one child a joint tenant (on the house, for example), then that child inherits the property, no matter what the parent's will or trust says.  The result is that (1) if the child is selfish, he or she may legally keep the entire property or (2) if the child is generous and shares the inheritance, he or she may have to pay a gift tax.  Joint tenancy makes estate tax planning extremely difficult and may rob clients of the ability to reduce the estate tax burden imposed on their loved ones.

For many clients, the solution to all of these concerns is the creation of revocable living trusts, and the transfer of title to trust ownership rather than joint tenancy.

*Adapted from The Planning Partners Press

The Pitfalls of Joint Ownership (Part 2 of 3)*

In Part 1 of this article, we introduced the mechanics and the danger of owning assets as Joint Tenants with Right of Survivorship.  In this installment, we'll begin to take a look at each of the potential pitfalls in more detail.

(1) There is no control, and property may pass to unintended heirs.  Joint tenancy property passes to the surviving joint tenant and no one else, no matter what you do.  If it is your intent to leave your property to your spouse and then to your children, joint tenancy is not for you.

Joint tenancy provides no means of ensuring that your property will pass to whom you want.  For example, if your spouse remarries, your children may inadvertently be disinherited.  Or, against your wishes, your spouse may choose to disinherit some or all of your children after your death.  If you and your spouse die together in an accident, significant questions may arise as to who is going to inherit your property.

While joint tenants are living, they can sell their interest in the joint property, and they can give their interest away.  In this respect, joint tenancy is similar to other forms of ownership.  It is only on the death of a joint tenant that its unique features come into play.

In some states, joint tenancy between a husband and a wife is called tenancy by the entirety.  It works exactly like joint tenancy with right of survivorship, except that it is more restrictive.  While both spouses are alive, the approval of both is necessary before the property can be transferred.

A joint tenant has the authority to take all the money from a bank account and has significant control over other types of property.  This "control" can be dangerous, especially since a deceased tenant would have had no opportunity to leave any instructions restricting the use of the joint tenancy property.

Even though property is titled in joint tenancy, the joint tenant who dies is presumed to own 100% of the property.  As a result, the deceased tenant's family not only loses the property, which passes to the surviving joint tenant), but also must pay all of the death taxes.  Joint tenancy between non-spouses can create the worst possible tax scenario: full taxation on property one doesn't even own.

(2) There are no planning opportunities.  What if your spouse or your children need assistance in managing the property you left them?  Joint tenancy cannot help.  What if you want to leave instructions for your loved ones as to how, when and why your property is to be used?  Joint tenancy offers no opportunity for instructions of any kind.

If you become disabled, your joint tenancy property may be tied up in a living probate while you desperately need it for your own and your loved ones' care.  If your spouse is disabled when you die, the probate court will "inherit" the joint tenancy property and determine how and when it is to be used for your spouse's benefit.

More pitfalls and possible solutions next time in the final installment of this article.

*Adapted from the Planning Partners Press.

The Pitfalls of Joint Ownership (Part 1 of 3)*

Joint property, also known as joint tenancy with right of survivorship ("JTWROS"), is nothing but a planning pitfall.  Although JTWROS has been assailed for years by many estate planning experts, it remains--unfortunately--a very popular form of property ownership.  JTWROS is a pitfall because you cannot control where such property passes after your death.

In joint tenancy, each person owns the entire asset, not a part of the asset.  This legal fiction of two or more people owning 100% of the same asset is derived from the full name given to joint tenancy: "joint tenancy with right of survivorship."  "Right of survivorship" means that whoever dies last owns the property.  The previous joint tenants merely had the use of the property while they were alive.

JTWROS property is "uncontrollable."  Even if a joint tenant intends to have his or her share pass to loved ones, the property is not controlled by the instructions in the joint tenant's will or trust.  JTWROS property automatically passes to its surviving owners by operation of law.

Property that is owned in JTWROS can be a trap--the term itself has nice connotations.  It implies "the two of us," a partnership, a marriage of title as well as love.  On the surface, at least, it appears to be the right way for people who care for each other to own property.  It's psychologically pleasing, which for many people is the real advantage of owning their property jointly.

As with many other latent problems, JTWROS is easy and convenient.  Odds are that when you were married (if you are), one of the first financial actions you and your spouse took was to open a checking or savings account.  The clerk who helped set up your account put it in your joint names when you answered yes to, "Both names on the account?"  The same is true of your first house or your first care. It seems that all of those involved (primarily clerks and salespeople), whether or not they knew what they were doing, took control of your planning and titled your property in joint tenancy.

For most people, the disadvantages of JTWROS far exceed any advantages.  Some of the more devastating pitfalls of JTWROS are:

(1) There is no control, and property may pass to unintended heirs;
(2) There are no planning opportunities;
(3) For married couples, probate is at best delayed, not totally avoided; and
(4) For non-spousal owners, unintentional gift taxes and death taxes can be generated.

In part 2 of this article, we'll explore each of those problems in more detail.  Our goal is to help you gain a clear understanding of why you should avoid titling assets in joint tenancy, and to suggest other ways you might own property that will enable you to maintain the control you desire.

*Article adapted from Planning Partners Press.

TITLE = RESULT: The Importance of Proper Ownership (Part 2 of 2)*

In part 1, we talked about the importance of how property is owned.  The fact is that plan results are tied directly to how assets are titled.  That's why we say, "Title = Result."

In separate property states, such as Arkansas and Missouri, the three primary forms of property ownership include fee simple, tenancy in common, and joint tenancy with right of survivorship ("JTWROS").

We have already covered fee simple, and began a discussion on tenancy in common.  We used the example of you and a friend who own a horse as tenants in common.  We discussed how each of you would own 50% of the horse, and that there is probably no problem with that--unless the two of you have a falling out.

If you can't reach an agreement on who owns the horse, and what one co-tenant is going to pay the other for their half, you are likely to end up in court with a judge ordering a sale.  Other challenges can arise even if you and your co-owner get along fine.  Issues arise if one of you wants to sell your half to a third party, or if one of you becomes mentally disabled.

You can sell your 50% interest in the horse anytime you want, or you can give it away.  Your other tenant cannot prevent either action.  Even if you sell the horse to your friend's worst enemy, your friend cannot do anything about it!  The real problem is getting someone to buy your part of the horse.  This new tenant will have to deal with your friend, and they, too, will have to agree on what to do with the horse.

Disability can be a problem for both you and your co-tenant.  If you are disabled to such an extent that you cannot manage your own affairs, and you have not done proper revocable trust planning, a probate court will likely control your part of the property.  The court may demand that the property should be sold--and your other tenant will have little or no control over the whole process.

At your death, you can leave your share of the property to whomever you want.  Without proper planning, it will go through probate, leaving your other tenant once again under the control of the court.  You may leave your share to several heirs, making life that much more difficult for the other tenant.

JOINT TENANCY WITH RIGHT OF SURVIVORSHIP ("JTWROS") is very common and very misunderstood.  It is routinely used by spouses, but people who are not married use it, too.  Although similar to tenancy in common, JTWROS has totally different results.  If you own property in JTWROS:

(1) You own all of it with someone else;
(2) You can (a) give your interest away or (b) sell your interest; and
(3) You cannot leave your interest on death.

There are so many possible pitfalls with JTWROS that the next article will be devoted to that topic.

*Adapted from Planning Partners Press.

TITLE = RESULT: The Importance of Proper Ownership (Part 1 of 2)*

How you own your property helps determine its distribution when you die, or its use if you become disabled.  It is important to double-check that you own the property the way you think you do.  Planning with property you don't actually own is like no planning at all.

The three primary forms of property ownership include fee simple, tenancy in common, and joint tenancy with right of survivorship ("JTWROS").  In Arizona, we also have community property and community property with right of survivorship ("CPWROS").  Each form of ownership has its own inherent features.  I will save the discussion of the community property concepts for another time.  Today, I will begin our discussion of fee simple and tenancy in common ownership.  

FEE SIMPLE is simple.  You and only you own the property.  Property in fee simple means you own all of it.  You can (1) give it away, (2) sell it or (3) leave it on death.

Is there any pitfall with fee simple property?  Yes.  Property owned in your own name is subject to both a living probate in the case of a disability and a death probate upon death.  In short, what may appear to be maximum control, may actually result in a total loss of control upon disability or death.  

TENANCY IN COMMON means that you and others own part of an asset.  Each "tenant" has less control of the whole property than would one person who owned it in fee simple.  With tenancy in common property, you can (1) give your part of it away, (2) sell your part or (3) leave it at your death.

Tenancy in common requires that you own the property with one or more other people.  Each tenant owns a percentage of the whole asset.  For example, if there are two tenants, each owns 50% of the whole asset.  If there are three, each owns 33 1/3%.  The number of possible tenants in tenancy in common has no limit.

For example, if you and a friend own a horse as tenants in common, you each own 50% of that horse.  But who owns which half?  It really doesn't matter while both of you are alive, healthy, and getting along.  You accommodate each other: each paying half of the expenses and receiving half of any income from trail rides.  You have an agreement about when each of you gets to use the horse.  If you should quarrel, however, problems can arise.  You can't demand your half of the horse.  Very likely, you and your ex-friend will have to sell the horse--if you can both agree on the price and manner of sale.  

In case you and your friend cannot reach any agreement, you can go to court and have the judge sell the horse.  This method is expensive, and odds are you won't get the best price for the horse.  But when tenants in common can't agree, courts are virtually the only recourse available.

Next time we'll continue our discussion on tenancy in common ownership, and introduce the planning pitfalls of joint tenancy with right of survivorship.

*Article adapted from Planning Partners Press.

Avoiding the Scary Side of Healthcare

It’s 8:00 p.m., and the pain in your chest is still there. You finally admit to your loved one that maybe it’s time to got to the hospital. You can see their worry as they grab the car keys and hurry you out the door to the emergency room…

Let’s face it, going to the hospital can be a little frightening. But there are ways to prepare yourself and your loved ones. A little bit of preparation can make the experience better for everyone: you, your family, and the hospital staff.

1. Make sure that your healthcare power of attorney is up-to-date. This document names the person (or persons) you would like to make medical decisions for you if you can’t do so. Review this document periodically to make sure your choice(s) is still valid.

2. Review your Living Will. This document states your desires regarding treatments you would (or would not) want to receive in the hospital if you cannot make these decisions yourself. Your living will is an important resource for your healthcare power of attorney should he or she need to make decisions about your care.

3. Make your decision about organ donation and document it. If you would like to donate your organs at the time of your passing, make that decision now and put it in writing. One organ donor can save up to eight (8) lives, and the need far exceeds the supply.

4. Talk to your loved ones about your healthcare choices: who you’ve named as your healthcare power of attorney, what your medical wishes are, and whether you want to be an organ donor. The more they know in advance, the easier it will be for them if they ever have to step in.

5. Carry your DocuBank wallet card. Our firm provides this card because we know that immediate access to your emergency information and healthcare directives is important. Make sure that your card is next to your driver’s license in your wallet at all times.

6. Update the emergency information you store with DocuBank. This includes your allergies and medical conditions that display on your Emergency Card and can help with your emergency treatment. Also update your doctor’s and emergency contacts’ names and phone numbers.

At the hospital, the E.R. staff ask you many questions. One of them is whether you have a living will or other healthcare directive (they may call it an “advance directive”). You or your loved one presents your DocuBank card. Hospital staff can make immediate note of the allergies and medical conditions on your card. They then use the card to obtain your directives, adding them to your chart immediately. There is no fuss about where your living will is or who should go back home to get it. Your card takes the stress of you and your family when the focus should be on your health, not your healthcare directives. The doctor comes in and you start to relax a little…

9 ways to cause a dispute after you die - probate and trust administration nightmares

The following link will take you to a post written by another member of the National Network of Estate Planning Attorneys, David Otis Edwards of the Edwards Group, LLC.  I found the post to be quite funny and thought you all might enjoy it, too!  

David Otis Edwards, Edwards Group, LLC: 9 ways to cause a dispute after you die - probate and trust administration nightmares