Safeguarding the Nest

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Safeguarding the Nest

Brenda Geiger, J.D.Trust Planning and

Asset Protection Attorney


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Saeguarding the Nest

2nd Edition (2010)

Brenda Geiger, J.D.

2701 Loker Avenue West, Suite 150

Carlsbad, CA 92010

Reproduction o this material

With the limited exception noted below, no part o this book may be reproduced,stored in a retrieval system, or transmitted, in any orm or by any means, either elec-

tronic, mechanical, photocopying, microilm, recording, or otherwise, without writ-ten permission rom the author, except in the case o brie quotations embodiedin articles and reviews. Any reproduction or any other purpose, including but notlimited to resale or other distribution, without prior written permission rom the au-thor is prohibited and will be regarded as unlawul usage o copyrighted materials.

Copyright (2010)


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Table of Contents

Why You Need This Book ...........................................................................................Page 6

5 Things Every Parent Must Know ........................................................................... Page 10

13 Tips or Choosing a Guardian or Minor Children .................................................Page 14

Protecting Children with Asset Protection Trusts ..................................................... Page 18

Protecting a Special Needs Child ............................................................................. Page 19

The 25 Most Common Estate Planning Mistakes......................................................Page 21

How to Create a Sound Estate Plan ..........................................................................Page 34

New Federal Estate Law or 2011 ............................................................................ Page 37

The Retirement Plan Trust .......................................................................................Page 41

Strategies or the $5 Million Plus Estate ...................................................................Page 43

Keep Your Family Home in the Family: Qualifed Personal Residence Trust ...............Page 47

What to Look or When Hiring an Attorney.............................................................. Page 51

Trust Continuity and Legacy Planning Program .......................................................Page 53

Case Studies (What Went Wrong?) ..........................................................................Page 57

More About The Author ...........................................................................................Page 60

Receive Continuing Legal News From Us .................................................................Page 60

NoteThis book is not intended to be legal advice.The inormation contained

within this book is or educational purposes only. Beore making any legaldecisions, you should consult a qualifed estate planning attorney frst.


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To my beautiful little boy and my precious baby girl,

I love you with all my heart.

You capture the meaning of life for me.


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Introduction


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Guide to Family Legal Protection

Why You Need This Book

Y

ou have done yoursel a huge avor by obtaining this book. I am soglad you purchased it. This book could save your amily heartache

and pain i the unthinkable happens to you. Please read very careully.These pages contain vital inormation that you and your amily need to know.A lot o misleading inormation about estate planning is out there. I wrote thisbook so that you could have good, solid inormation about estate planningand how to ind the right attorney to help put your plan in place.

Who is the Author?

My name is Brenda Geiger and I help amilies create legal plans to protecttheir children and their loved ones. My law irm also counsels clients on as-set protection planning and business succession planning to pass down theamily business. We help businesses incorporate or orm as other legal busi-ness entities. My practice is limited to only these types o interrelated cases.

On a more personal note, Im a wie and mother o two small children. Thetopic o this book is near and dear to my heart because I have given muchthought and consideration along with my husband to legally protecting our

own children should the unthinkable happen to us. Im also a requent speak-er on estate planning issues or proessional organizations. I teach classes toother proessionals on estate planning topics and I have written two otherbooks and numerous articles on estate planning. For more inormation onmy background or my law irm, please visit www.geigerlawoffice.net.

Whats the Book About?

This book is about the steps you need to take to protect your children andloved ones and to help your amily avoid writing a huge check to the IRS.

I some decision regarding your plan is holding you back, remember thathaving a plan in place is better than having no plan in place. The doc-uments that make up an estate plan can easily be changed to relect anychange in decision you may make later. I cant impress enough upon youthat i you do nothing, the state will decide what happens to your childrenand to your assets i something happens to you and your spouse. I you do

not make your wishes known, the state will decide or you. You may alsounwillingly give the IRS a ree pass to a portion o your assets.

Im here to help you understand the basics o a sound estate plan, in plainEnglish to protect your loved ones, plus let you know how you can save abundle on estate taxes.


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Brenda Geiger, J.D.

Another aspect o the planning process that we will venture into is how tochoose your attorney. Because many people are unsure how to determinewhich attorney to hire to help design their estate plan, they all victim to priceshopping. But Caveat Emptor, buyer beware. There are many attorneys whodo not specialize in trusts and estates, or who simply have a trust mill opera-

tion. They are oten the lowest priced attorneys in town because they aremore concerned with volume than with learning about your personal situationor staying current with law changes and state o the art trust planning. Theycan also be unaware o advanced legal concepts that will bring real value toyou and your amily. Counseling and results should be the ocus o the criteriayou set and the documents prepared merely the byproduct o the counseling.

Why Did I Write This Book?

Simply put, Im tired o seeing the consequences o poor or no estate plan-ning. Ive seen amilies lose a lot o money to estate taxes and probate eesbecause they didnt have a plan in place. Ive seen children taken into cus-tody by Child Protective Services because their parents didnt nominate aguardian or their children and the amilies had to hash it out in court. Iveseen amily harmony destroyed by siblings squabbling over property letwithout any direction as to the intended recipient.

Children also can lose their drive to become productive members o soci-ety because they inherit too much money beore they are ready to man-age it responsibly. Ive watched amilies suer through painul and embar-rassing conservatorship proceedings because they never created an estateplan. Im also tired o seeing the harm that can be caused by a lawyer whodabbles in drating wills and trusts. The lawyer pulls a orm will or trustout o a desk drawer, changes the names, and calls it an estate plan. Like-wise, the attorney who drats the same canned trust or every client whocomes in the door.

I you care about your amily and want to make sure that you, your amilyand your assets are protected to the ullest extent allowed under the law,you need useul inormation you can trust. And you need the counsel oan attorney who stays current on all o the legal developments. You alsoneed a relationship with your lawyer that lasts a lietime. Your estate planneeds to change rom time to time as your amily changes, your inancialoutlook changes, and o course, as tax laws change. Having continuity withone attorney that you trust is worth its weight in gold.

Try to do it yoursel and you may end up doing more harm than good.Most online wills and trusts out there are not valid in all states. Even i youind one that is, it is easy to make mistakes that can cause litigation laterthrough inexperienced drating. Weve seen a lot o these online willsand trusts and they usually do not meet the amilys basic goals and needs.


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I wrote this one-o-a-kind book so that you could have good, honest, useulinormation to review and study in the comort o your own home. Frankly,this book also saves me time. We get many calls each day rom people ask-ing us questions about estate planning. Ive packed a ton o inormationinto this book and it saves me hours in educating potential clients who call

my oice or appointments. I cant accept every case. There simply wouldnot be enough time to get all the work done and provide the kind o ser-vice that I give my clients. Writing this book gives me a chance to talk toyou about estate planning so that you can make an inormed decisionregarding what steps to take next.


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Brenda Geiger, J.D.

Protecting Your Family


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5 Things Every Parent Must KnowAbout Protecting Their Minor Children

1. You Must Legally Document Who Should Raise Your Kids

It is so important to designate in writing exactly who you want to have cus-tody o your children i something happens to you. I you dont do this, yourchildren could be raised by someone you would never choose! Maybe youknow who you would want to raise your kids and theyve even agreed. May-be youve even told your amily and riends, but havent documented it. Thisis a recipe or disaster and in the ollowing paragraphs you will see why.

A couple o years ago, there was a couple living in Newport Beach, CA. Theywere the parents o two young children (5 and 7). One night, the couple wentout to dinner and a movie and let their children with their neighborhood sitter.They let the sitter their cell phone numbers and asked her to call i there wereany problems with the kids. In a sad twist o events, mom and dad were hit by adrunk driver who crossed the median, killing them instantly. When the police o-icer discovered where they lived by looking at the husbands drivers license, hesaw the pictures o 2 smiling, small children in his wallet. The oicers heart sank.

The police drove to their home where they ound the babysitter waitingup or the parents and the children ast asleep in bed. The police askedthe sitter or a phone number o a relative or close riend and she couldproduce neither. Because the police did not know who to contact to givetemporary custody, the children were taken into Child Protective Servicesor the evening until it could be determined where to place them. Whenthe husbands sister discovered that her brother and sister-in-law had been

killed in the accident, she immediately tried to

obtain custody o the children.

However, there were other amily members whowanted the children as well. She knew that it washer brother and sister-in-laws wishes that sheraise the children i anything were to happen tothem but there was no documentation to that

eect. Further, there was no estate plan in place to inance the care andraising o their children. The deceased parents estate went through a long

expensive probate and the aunt racked up thousands o dollars in legalees ighting or permanent custody o the children. When all was said anddone and she inally got permanent custody, she was nearly bankrupt.

This tragedy could have been easily prevented. These parents could havedesignated in writing exactly who they wanted to care or their children,

Because the police did notknow who to contact to

give temporary custody

of the children, the

children were taken into

Child Protective Services


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Brenda Geiger, J.D.

both temporarily and or the longterm, with a Guardianship Nominationdocument. And its important that thisbe done properly. A lot o times peo-ple say things like, I want my brother

Tom and sister-in-law Jane. But whenI ask questions like, Well, do you reallywant Tom and Jane both as your desig-nated guardians? What i Tom died orTom and Jane got divorced? Do you really want Jane as a legal guardianor do you really just want Tom to be their guardian? So its important todesignate in writing exactly who you want to care or your children.

2. Make Sure Your Children Are Never Raised By the OnePerson You Know You DONT Want

Do you know whats as important as documenting who you do want tocare or your children? Its who you DONT want to care or your children.This is an oten-overlooked step because it can be such a sensitive issue.But, i theres someone in your amily you know you would never want toraise your children, dont you want to do everything you can to prevent

that rom ever happening?

Clearly designate in writing anyone that you would never want to care oryour children i something happens to you. This reduces the risk o thathappening. This document never needs to be discussed or revealed unlessabsolutely necessary, so you dont have to worry about hurting anyoneseelings. You can have the absolute peace o mind o knowing that yourchildren will never be raised by that one person you would never select. Inmy oice, we keep this document in our iles and will produce it in court i

the person you speciied tries to obtain custody o your children.

3. Provide Financial Resources to Protect Your Children

As a parent, its your responsibility to provide enough inancial resourcesto make sure that whoever is raising your children will not struggle inan-cially. Unortunately, Ive seen what happens when parents think theyvemade adequate provisions, but insuicient planning thwarts their inten-tions. The plans they made are then tied up in court or months or even

years. First, you need to have suicient savings and investment resourcesto care or your children i you cant be there or else you need to have ad-equate lie insurance, or some combination o both.

Work with a trusted advisor to determine exactly how much insurancewould be suicient to support your amily i something should happen to


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you. As a general rule o thumb, 10 times your annual salary or lie insur-ance is what you should have at a minimum or a death beneit on a lieinsurance policy. And, youll have to consider what kind o insurance topurchase. Your attorney and inancial advisor can help you make this im-portant decision.

And, most importantly, make sure the inancial resources you do leave oryour children are totally protected by a trust. In many circumstances, its best

to designate a trust as thebeneiciary o your lie insur-ance so it doesnt get pulledinto the court process orpassed to your children at age18. This will help make sure

its available when its mostneeded. It also helps makesure the assets are managedproperly or your children andcan be protected rom law-suits, creditors and predators.

4. Protect Your Childrens Financial Well Being with Sub-

Trusts within Your Revocable Living Trust

By creating sub-trusts within your revocable living trust, you can make surethat the money you leave to your children is actually available or their care,that it is not mismanaged, and that it is asset protected. For example, in Cali-ornia, i you ail to designate a trust to hold your assets or your children, thecourt will appoint a guardian or inances to handle the money until they reachage 18. The guardian may or may not be the person you would want handlingyour childrens inances. By creating sub-trusts in your living trust (that are cre-ated only i you and your spouse are gone), you can select a successor trusteeo your choice to take charge o the inances, who can be, but doesnt have tobe, the same person as the physical guardian or your children.

5. Make Sure Your Estate Plan Covers Incapacity Planning

Some o the issues we discussed above could be handled by executing awill. However, you need more than that to properly protect your amily.

A will governs what happens i you die, but does nothing i you becomeincapacitated. I you were incapacitated, your amily would be aced withhaving to go to court to get permission to act on your behal unless youexecute the proper estate planning documents. Also, in Caliornia, as inmost states, a will still goes through the probate process, whereas a trust


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Brenda Geiger, J.D.

does not. Probate in Caliornia, on average, costs ive times more than atrust administration, and is open to the prying eyes o the public. Probatecan also take anywhere rom 12-24 months to complete (trust administra-tion typically takes 4-6 months, sometimes less).

Here is a checklist o the basic estate plan documents your plan shouldcontain:

A Revocable Living Trust

A Trust Summary

A Pour-Over Will or you and your spouse

A Durable Power o Attorney or you and your spouse

A Health Care Directive or you and your spouse HIPAA Authorizations or you and your spouse (to make sure the people

you choose have access to your medical records)

An Assignment o Personal Property or you and your spouse

A Personal Property Memorandum

A Certiication o Trust

A Trust Transer Deed transerring your amily home to your trust

A Guardianship Nomination document (to ensure your children arecared or by the individuals you choose i you and your spouse bothbecome incapacitated or die) and

A Community Property Agreement (i appropriate).


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13 Tips for Choosing a Guardian

for Your Minor Children

While its diicult enough to think about not being there to raiseyour children, imagine a court choosing a guardian with no inputrom you. Imagine your relatives arguing in court over who gets

your childrenor having them agree on someone you would not have cho-sen. Thats why its important to nominate a guardian while its still up to you.Here are some tips to help you make your best choice.

Tip #1:Think beyond the obvious choices. Make a list o all the peopleyou know who you would trust to take care o your children. You dont

need to limit your list to close amily members. While siblings and parentscan be excellent choices, consider also extendedamily members who are old enough to raise yourchildren cousins, aunts, uncles, nieces, nephews,even second cousins once removed.

Tip #2:Friends can make excellent guardians.Beyond amily, consider close riends, amilieswith whom your amily is close, the amilies o

your childrens riends, riends you know rom your place o worship, eventeachers or childcare providers with whom you and your children have aspecial relationship.

Tip #3: Dont stress about finances or the size of someones house.Dont eliminate anyone rom consideration because you dont think theyhave the inancial wherewithal to take care o your children. You can takecare o the inances with what you leave them or by having adequate lieinsurance. You can even instruct your trustee to provide unds or your

chosen guardian to build an addition to their home or move to a largerhome to accommodate your children.

Tip #4:Focus on love. Consider whether each couple or person on yourlist would truly love your children i appointed their guardian. I they havechildren o their own, will your children play second iddle? Or is the couplesuiciently loving to make your children eel loved no matter what?

Tip #5: Consider values and philosophies. Ask yoursel which people on

your list most closely share your values and philosophies with respect to your: religious belies

moral values

child-rearing philosophy

Think beyond the

obvious choices. Make

a list of all the people

you know who you

would trust to take care

of your children.


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Brenda Geiger, J.D.

educational values

social values

Tip #6: Personality counts. Consider whether each o your candidateshas the personality traits that would work or your children.

Are they loving?

Are they good role models?

Do they have the patience to take on parenting your children?

How aectionate are they? (I your amily is particularly aectionate, aguardian who is loving but not physically aectionate could be damaging.)

I theyre airly young, how mature are they?

Tip #7: Consider practical factors. For example:

How would raising children it into their liestyle?

I theyre older, do they have the necessary health and stamina? Do theyreally want to be parents o a young child at their stage in lie?

Do they have other children? How would your children get along withtheirs? Are there potential problems i your children were to live withtheirs? How easily could the problems be dealt with? (For instance, do

you want to place a child who struggles in school with a high-achievingchild o the same age or whom everything comes easily?)

How close do they live to other important people in your childrenslives?

I a couple divorced, or one person died, would you be comortablewith either o them acting as the sole guardian?

Tip #8: Look for a good but not a perfect choice. Most likely, no one

on your list will seem perect that is, just like you. But i you truly con-sider what matters to you most, you will probably be able to make somereasonable choices. In the end, trust your instincts. I one couple or per-son meets all o your criteria, but or some reason doesnt eel right, dontchoose them. By the same token, i someone eels much more right thanany o the others on your list, theres good reason or it. Make your primarychoice, then some backup choices. Its essential that both you and yourspouse agree. I you cannot make a decision, or i you and your spousecannot agree, a good counseling-based estate-planning attorney can help

you through the process.

Tip #9: Select a temporary as well as a permanent guardian. Temporaryguardians may be appointed i both parents become temporarily unable tocare or their children or example, as the result o a car accident. Depend-ing on your choice or permanent guardians, you may want to designate di-


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erent people to act as temporary guardians. I your choice or a permanentguardian lives a considerable distance away, choose someone close by toserve as temporary guardian. I youre temporarily disabled, youll want yourchildren close by. And you wont want their lives unnecessarily disrupted bymoving them to a new town and school. I you have no relatives or close

riends nearby, consider amilies o your childrens riends. Its also importantto have temporary guardians in your area because it may take time or yourpermanent guardians to arrive.

Tip #10: Consider a Guardianship Panel. Because its diicult to predictwhat your childrens needs will be as they grow older, consider appointinga Guardianship Panel to decide who would be the best guardian whenand i it becomes necessary. Choose trusted relatives and riends to makeup the panel. This allows or maximum lexibility, so the most appropriatechoice can be made at the time a guardian is actually needed. The Panelcan consult with your children and assess their needs and desires to makethe most appropriate choice based on the current situation.

Tip #11: Write down your reasons. I youve chosen riends over relatives,or a more distant relative over a closer one, be sure to explain your deci-sion in writing. That way in the unlikely event your choice is challengedby people who eel they should have been chosen a court should readilyuphold your decision, knowing youve made your choice or good, solidreasons.

Tip #12: Have backup guardians. Nominate atleast 3 guardians in successive order. I a irst choiceguardian is unwilling or unable to take custody oyour children, the Court will know your second andthird choices or raising your children.

Tip #13: Talk with everyone involved. I your chil-

dren are old enough and mature enough, talk withthem to get their input as well. And be sure to con-er with the people youd like to choose, to ensuretheyre willing to be chosen and would eel comortable acting as guard-ians. Once youve made your choice, there are steps you can take to makesure the potential guardians youve chosen will have the guidance andsupport they need. Here are a ew ideas:

Drat a letter to convey inormation about your children, your parentingvalues and your hopes and dreams or your children.

Set up a trust that will hold the assets you pass to your children, and instructthe trustee to provide necessary inancial assistance to the guardians. Youcan also create speciic instructions in a letter about special things youd

Write down your

reasons. If youve

chosen friends over

relatives, or a more

distant relative over a

closer one, be sure to

explain your decisionin writing.


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Brenda Geiger, J.D.

like the trust unds used or(or example, annual trips oryour children to visit closeriends and relatives, a par-ticular summer camp, etc.).

Designate mentors as spe-cial people in your childrenslives to help guide them inways or which the mentoris particularly well suited.For instance, the person youchoose or trustee may also be a good inancial mentor or your children.Or you may want to designate a spiritual mentor, particularly i the guard-ians you choose have religious philosophies that dier rom yours. You canalso name in your estate planning documents people who you simply wantto have ongoing involvement in your childrens lives. This can be a goodway to include both sides o the amily.


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Protecting Your Children with Asset Protection

Trusts Built into Your Revocable Trust

When leaving property to your children, you can choose exactly howyou want to leave it to them. You can leave property outright, intrust until the beneiciary reaches a certain age or until they achieve

a certain goal. Or the property can be held in trust or lie. These trust provisionscan be included in your living trust to take eect upon your death. There is aspecial technique that allows us to asset protect the money you leave to your

children or as long as you like, including or your childs lietime. I have donethis in my own trust to beneit my children and always discuss this with myclients. Once they see the enormous git this provides outside the actual mon-etary git to their children, they are very surprised and excited by the option.

By drating in provisions or lietime continuing trusts or your children thatspring into existence upon the death o the surviving spouse and by nam-ing an independent trustee, we can protect the money you leave behindor your children rom creditors, predators and uture divorcing spouses.

These trusts, i properly drated, can:

(1) protect your childs inheritance rom his or her spouse in the evento a divorce;

(2) protect your childs inheritance rom his or her creditors in theevent o a inancial hardship; and

(3) on your childs death, direct the unused assets to your grandchil-dren instead o in-laws or others.

During your childs lietime, you can even have provisions that give themthe option to be the sole trustee o their own continuing trust. They stillhave some asset protection by restricting their access to the IRS standard

o Health, Education, Maintenance orSupport (which is actually a very liberalstandard or distribution). But I counselmy clients children that should they runinto a creditor problem, lawsuit or divorc-ing spouse issue, they should resign astrustee o their individual continuing trustand appoint a trustee who is not related tohim or her. By appointing someone who isunrelated (and also not working or them),we can get the highest level o asset pro-


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Brenda Geiger, J.D.

tection. We get this asset protection because the new trustee is consideredto be independent and discretionary. This means that the trustee has thediscretion whether or not to make a distribution to your beneiciary childrom the trust that was set up or their beneit.

This is a great way to give without strings attached or ruling rom thegrave. And when your child passes on, the unused portion o their inheri-tance can be drated to go to your grandchildren with the same asset protec-tion provisions in place. I one o your children dies without leaving childreno their own, then the trust unds go to their surviving brothers and sisters.

This type o continuing trust also makes it easier or your children to keepassets separate rom their spouses when these assets are let to them intrust. Upon your death, all o your assets are re-titled directly rom your

estate to your childrens trusts (your children should consult with an attor-ney to help them with re-titling the assets). This allows your children to telltheir spouse my parents let this money to me in trust: compared to themreceiving the inheritance outright and having to take active steps to keepthose assets separate rom their spouse.

The laws o Caliornia prohibit the creation o sel-settled asset protectiontrusts. So, your children will not be able to protect these assets themselveswithout your help (unless they set up a sel-settled asset protection trust

in another state like Nevada and hire a Nevada Trustee--the cost to do thattype o planning is on average about $12,000 to $15,000. But, you have theability to give them the git o asset protection by including lietime con-tinuing trusts in your revocable trust plan. I you are going to leave assetsto them anyway, why not do some good planning or them today? Not onlywill they greatly appreciate what youve done or them, it will get them onthe right track o planning or themselves and uture generations.

Protecting A Special Needs Child

A Special Needs Trust can supplement support o a special needs benei-ciary while allowing the beneiciary to maintain his or her governmentalbeneits, including Supplemental Security Income (SSI), Social Security,and Medi-Cal. With medical advancements, persons with disabilities areliving longer and public beneits are oten necessary (especially or healthinsurance), yet there is no guarantee that public beneits will provide ad-equate resources over the disabled persons lietime. Nor can you be sure

that existing public agencies will continue to provide acceptable servicesand advocacy over a disabled persons lietime.

I the Special Needs Trust is established by you or someone other than thedisabled person and the disabled person does not have the legal right todemand trust assets, the trust is not considered a countable resource or


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purposes o government beneits.Thereore, the Special Needs Trustbeneiciary can continue to receivebeneits even though he or she is atrust beneiciary. The trust will give

the trustee the discretion to makedistributions or the beneiciarysbeneit to the extent possible with-out reducing government beneits,and trust assets are available i the

beneiciary no longer qualiies or governmental assistance or that assis-tance is no longer available.

I the trust is established on the beneiciarys behal pursuant to court or-der, or example as part o a personal injury settlement, the trust will notimpact the beneiciarys eligibility. However, it may need to include a pay-back provision that reimburses the state or its assistance beore trust as-sets pass to the trusts other beneiciaries.

Common savings vehicles or children, like Uniorm Transer to Minor Acts(UTMA) accounts, typical trusts, or designating a retirement plan, insur-ance policy or annuity directly to an SSI or Medicaid recipient will cause areduction or elimination o public beneits. Recognizing this, some parentsmake the diicult decision to disinherit their special needs children, butthis severe action is unnecessary with proper estate planning by creatinga Special Needs Trust.


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The 25 Most Common Estate Planning Mistakes

T

hese are the most common mistakes I see in my practice every day.There are many myths and misconceptions out there about estate

planning. This section will help you recognize and avoid the mostcommon mistakes amilies make in estate planning, and help your amily savethousands o dollars in unnecessary taxes and probate court ees.

Mistake #1: Not Understanding How Your Assets Will PassUpon Your Death

Many people think their wills control how all o their assets will pass upon their

death. Yet because many people hold much o their wealth in the orm o re-tirement plan accounts or lie insurance, many assets today pass outside o willsor trusts. Wills and trusts control real estate and other property that you own,but there are certain assets, like lie insurance and IRAs, that are not normallysubject to probate.

These assets will pass to the beneiciaries you name in a beneiciary des-ignation orm. However, note that a revocable trustcan be the beneiciary on these types o accounts

with the proper trust provisionsthere are manyadvantages to having your revocable trust as thebeneiciary o which we will discuss later in thisbook.

Example: While still single, Don named his brotheras the beneiciary on his retirement plan and hislie insurance. Don later got married. Ater his mar-riage, Don changed his will to leave everything to his wie. But because

Don never changed his beneiciary designations on his retirement accountand lie insurance, on his death the bulk o his estate passed to his brothernot to his wie.

This problem can be avoided by reviewing your beneiciary designationsor lie insurance policies and retirement plans when major lie changeshappen to make sure they it your current situation and your estate plan-ning goals.

Mistake #2: Trying To Plan Your Estate Around Specific Assets

Unless there are compelling reasons why a speciic asset should go to aspeciic person, I strongly discourage clients rom trying to plan aroundspeciic assets.

Many people

mistakenly think

their wills control

how all of their

assets will pass

upon their death.


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Example: Bill had three children and wanted to treat them all equally. His willeven conirmed this. Several years beore he died, he transerred hal o hishome to his older son, added his daughter as a signer on his savings account,and named his younger son as the beneiciary on his lie insurance policy.When he did this, all three assets were about equal in value. But between

these actions and his death, he sold the home, put the proceeds in the savingsaccount, and let the lie insurance policy lapse. The savings account passed tothe surviving owner and not pursuant to his will. By planning around speciicassets, he actually disinherited two o his children! This is not what he intend-ed and could have easily been avoided with proper planning.

Mistake #3: Failure to Minimize Estate Taxes

The estate tax exemption, which is the maximum amount you can pass toyour beneiciaries estate tax ree, has recently been changed to $5 Millionper person or years 2011 and 2012. Many people tell me things like, Myestate is only about $1,000,000 - I dont think I will even have a taxable es-tate. However, the current tax act signed into law on December 17, 2010 isonly eective or years 2011 and 2012 (and also by retroactive election ordeaths occurring in 2010). You need to plan ahead in case the governmentchanges the exemption amount again in the uture (which they historicallyhave done). It is also important to remember that your estate will grow

over time and you need to plan ahead or that.

Mistake #4: Relying On Co-Ownership of Property to Avoid

Probate

In Caliornia, co-ownership o property does nothing to avoid an eventualprobate. At the death o the surviving owner, a probate must be opened.Adding someone to title simply gives them ownership o hal the property

and can cause unexpected tax problems. For instance,suppose a mom decides to make her daughter a co-owner so that the property will pass to her daughterupon the mothers death (with right o survivorship).Yes, she has accomplished her intention i the prop-erty is in joint tenancy. However, she may have alsocreated a host o tax issues or her daughter. The irsto which is a reduction in the mothers Federal EstateTax Exemption because she gave a lietime git (i the hal o the property

was valued greater than $13,000 in the calendar year o the gitas o 2010).

A second issue is the capital gains tax. Because mom gave hal the prop-erty to her daughter during her lietime, the daughter takes her mothersoriginal basis in the hal given to her. This could mean a capital gains taxwould be due upon the eventual sale o the property on the hal given to

... co-ownership

of property does

nothing to avoid

an eventual

probate.


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her. However, i the mother had given the property to her daughter upondeath (say through a trust), the daughter would have obtained a ull step-up in basis to the air market value o the property at the date o death oher mother. Thus, no capital gains tax would have been due i the propertywas sold shortly ater her mothers death.

A third disadvantage to making her daughter a co-owner is that she opensthe door to any potential creditor claims her daughter might have in theuture. The property could be subject to a claim and taken to satisy thedebt. As you can see, there are numerous tax and legal implications in theart o estate planning that could be missed, costing your amily big time.

Mistake #5: Losing Control by Adding Someone to Your Bank

AccountsWhen you simply add someones name to your account, you are subject-ing that account to his or her creditors. You dont have to be a bad personto be sued these days or to be subject to a tax lien. You may also be inad-vertently giving that person an ownership interest in your account (whichcould aect your git tax exemption). I you need help managing your i-nances, you can appoint an agent using a Durable Power o Attorney andgive them authority to manage your aairs without exposing your assets

to their creditors. You can also use a revocable living trust to achieve thesame result by transerring your bank accounts to your trust. This is ac-complished by listing the person you want to help manage the accounts aseither the current trustee o your trust or as a co-trustee with you.

Mistake #6: Putting Your Children on Title to Your House

When you put your home (or any other asset) in co-ownership with your chil-dren, your children become co-owners o the property with you. This causes

several problems.

First Problem: Putting your home in joint tenancy with your children is ataxable git under the IRS regulations. This means you have to ile a git taxreturn (orm 709) or the year in which you made the transer i the valueo the interest transerred to each person is more than $13,000 (as o 2010).

Second Problem: I your child has any lawsuits against him or her, is goingthrough a divorce, or has a tax lien iled against them, you may ind out

that you no longer own the house with your child, but with your childscreditors. In many jurisdictions, creditors can actually oreclose on (orcethe sale o) your home to get at your childs ractional share.

Third Problem: When you decide to sell the home, you can use your pri-mary residence capital gains exclusion ($250,000 or individuals and up to


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$500,000 or married couples) only on your ractional share. Each o yourchildren may have a LARGE long-term capital gains tax bill to be paid thatcould have been totally avoided i the house had still been titled in the nameo your revocable trust and given to them at death.

Mistake #7: Failure to Protect a Disabled Beneficiary

I you have a disabled beneiciary, perhaps a handicapped child, you shouldconsider leaving them their inheritance in a specially-drated trust. Thisprotects your child and keeps them eligible or public assistance. Withoutpublic assistance, many such children would have to spend their entire in-heritance within a ew years on medical and other needs. I you leave theinheritance to them outright, they may be ineligible or public assistance

until they spend the inheritance down to the statutory limit ($2,000 limitin Caliornia). I you leave the disabled childs inheritance to another childwith the understanding that that child would help the disabled child, thatchild may die, divorce, or be sued. This could result in the inheritance notbeing available to the special needs beneiciary.

Mistake #8: Failure to Make Special Provisions for a

Problem Child

Ater you are gone, will your beneiciaries use their inheritance in a con-structive manner? Or will they waste it oolishly? How are they today atmanaging their money? That may give you some idea how their inheri-tance will be spent ater you are gone. Will it be available or the educationo your grandchildren, or will it all be gone in just a ew years?

Many o my clients like the idea o holding an inheritance in trust untiltheir beneiciary reaches a certain age, such as 30 years o age. Others like

giving their children one-third ater both parents are gone, with anotherone-third in ive years, and the last third ive years ater that. This gives thebeneiciary three chances to blow it! Ive even had some clients who areso disillusioned with a child that they have required that the childs sharebe distributed in monthly payments over 20 years or have decided to as-

set protect that childs share until that childs death.This could be as strict as not allowing him or her todemand money rom the trustee (in this situation, the

trustee is in complete charge o giving the beneiciarymoney or his or her needs).

Other clients have required that their children be drug-tested or alcohol ree monthly or three years beorereceiving an inheritance outright. Remember, as long

After you are

gone, will your

beneficiaries usetheir inheritance

in a constructive

manner?


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Brenda Geiger, J.D.

as an inheritance is being held in trust, it can be protected rom the ben-eiciarys spending habits, rom creditors, and even rom a childs divorcingspouse. Also, your trust can control where the inheritance goes upon thedeath o the beneiciary. Many o my clients would preer to see a deceasedchilds inheritance go to their other children or grandchildren rather than

their deceased childs spouse.

Mistake #9: Sloppy Drafting

Example: John had three children. His will let his estate to my survivingchildren. Sounds good, but is that what John really meant? I his daughterwere deceased, did he really want his estate divided between his other twochildren, or would he have wanted his deceased daughters share to pass to

her children (his grandchildren)?

Example: Janets will let her estate equally to her descendants. At thetime she drated her will, she had two children and nograndchildren. But by the time she died, her son hadour children and her daughter none. Under somestate laws the term descendants includes children,grandchildren, great grandchildren, etc. Thus, by laweach descendant gets one-sixth o her estate. Is this

what Janet wanted, or do you think she wanted her estate to go hal to herson and hal to her daughter?

A properly drated estate plan could have made this clear. For instance, I leavemy estate equally to my living descendants, per stirpes is probably whatboth John and Janet meant. This language makes it clear that i there are twochildren, the property is split between the two children. I the daughter is de-ceased, then her hal o the estate will be split equally between her children.

Mistake #10: Trying To Do It Yourself

Although the previous example shows how easy it is to botch simple plan-ning, there are many other examples available. John and Mary didnt wantto pay an attorney to drat their estate plan, so they bought a living trust kitunder which they or the survivor would serve as trustee. In modiying thetrust to meet their personal situation, they decided to change the languagein the Family Trust which allowed distributions to the surviving spouse or

health, education, maintenance, or support by adding the words comortand welare. This addition seemed harmless enough to them.

But the IRS regulations make it very clear that this addition results in theFamily Trust being included in the survivors taxable estate, which was ex-actly what they were trying to avoid.

Use a competent

estate-planning

attorney....


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Your estate, even i it is modest, still represents big bucks to your spouseand children. Use a competent estate-planning attorney to make sure thatyour estate plan and any changes are properly drated.

Mistake #11: Failing To Realize That Wills Can Be Changed Bythe Maker

Je and Sara had been married or over 25 years. Each o them had twochildren by a prior marriage. They wanted to provide or each other irst,and then leave the assets equally to all our children. Although their willsstated this intention, the survivor could always change his or her will toleave everything to his or her children only. Or i the survivors will cannotbe ound (perhaps destroyed by one o the survivors children), then all as-sets would pass to the survivors children.

The use o trusts can help protect children rom a prior marriage by eitherhaving separate trusts or by having a joint trust listing the assets o eachspouse on a separate property schedule. There are also special provisionsor sub-trust unding at the death o the irst spouse that can be crated toprotect children o a previous marriage. Second marriage planning is otencomplex and doesnt get the attention it usually deserves, even rom manyattorneys who supposedly specialize in estate planning.

Mistake #12: Relying On Beneficiary Designations

A beneiciary designation is a very simple orm o estate planning which

does not handle contingencies very well. For instance, i you name your

son and your daughter as the beneiciary on your lie insurance policy, and

your daughter predeceases you, do you think the insurance company will

pay the proceeds all to your son? Or do you think the insurance company

will pay your daughters hal o the proceeds to your daughters children?I to her children, what happens i they are minors?

Most o us would like to think the money would go to her daughters children

out o airness, but most o the beneiciary orms weve

seen say just the opposite. The orms usually say, Un-

less otherwise indicated, we, the insurance company,

will pay to the surviving named beneiciaries.

By naming a trust as the beneiciary o your lie insur-ance, your trust controls exactly how the proceeds will

be distributed, including such contingencies. The trust

can also name a person who will manage and distribute

the money or minor children or grandchildren.

By naming a trustas the beneficiaryof your lifeinsurance, yourtrust can controlexactly how theproceeds will bedistributed


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Brenda Geiger, J.D.

Mistake #13: Trying To Leave Property to A Minor Child Or

Grandchild

No insurance company will knowingly pay $500,000 to a twelve year old. Theywill only pay it to a court-appointed inancial guardian or that child, who may

not be the person you would choose. Also, the cost o obtaining such a courtorder can be substantial.

Example: Your will or beneiciary designation indicates that your deceaseddaughters share is to go to her children. I they are minors, a guardian willneed to be appointed by the court. The court would give priority to thechildrens ather, who may be your ex-son-in-law.

Generally, in a guardianship, the money is required to

be turned over to the minor once he or she reaches 18years o age. That age is perhaps one o the worst agesto turn over a signiicant inheritance to a child or grand-child. An inheritance let in trust or such a beneiciarycan speciically indicate who is going to manage theunds and make distributions or college and the like.It can also indicate the age at which the unds will beturned over to the beneiciary or give the beneiciary the opportunity to be-come his or her own trustee while continuing on with the trust or his or her

lietime.

Remember, as long as the inheritance is held in trust, it can be protected rom:

the childs spending habits

a childs divorcing spouse

the childs creditors or

rom lawsuits

It can also indicate who receives the inheritance in the event o the childsdeath, and with proper investment, the inheritance can grow, providingmore inancial support over time.

Mistake #14: Failure to Consider Who Pays Estate Taxes

John drated his trust to leave his home to go to his companion o manyyears and the remainder o his estate to go to his children. But he and his

attorney never discussed who would pay the estate taxes, and his trustsaid (as many trusts do) that taxes and expenses would be paid out o theresiduary estate. That is, paid rom the remainder distribution ater spe-ciic distributions. Thereore, on Johns death, the estate taxes will be paidsolely out o assets which pass pursuant to the residuary clause o his trust,and thereore, out o his childrens inheritance.


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In this extreme example, the home was worth $5 million and the remainingassets were worth $5 million. The estate taxes were $4,430,000 (in 2003)and the expenses were $70,000. So, the kids received only $500,000, whilethe companion walked away with the $5 million palatial home estate taxree. We doubt that is what John would have wanted i he had considered

who pays the estate taxes.

Many trusts say pay all taxes out o the residuary estate. Phrases like thatsound good, but may not be what you intend unless you ully understandthe consequences.

Mistake #15: Failure to Consider the Income Tax Aspects

of Your Assets

Marlenes two major assets were her lie insurance and her (traditional) IRA;and they were o equal value. So she named her son as the beneiciary onthe lie insurance and named her daughter as the beneiciary on her IRA.The proceeds o lie insurance are income tax ree, but the proceeds roman IRA are generally all subject to income tax. Thedaughter lost approximately one-third o the pro-ceeds to income taxes.

This is one o the reasons we discourage our clientsrom leaving speciic assets to speciic persons.

Consider naming all children as beneiciaries orleaving all assets to your trust, with the trust dividing them equally andproviding who will receive each share in the event a child should prede-cease you.

Mistake #16: Failure to Consider All the Tax Consequences

of a Gift

Mary was diagnosed with terminal cancer. She had heard that probatecould cost her children tens o thousands o dollars. She heard that pro-bate could be avoided by deeding her home to her kids while she wasalive. Luckily, none o the problems we previously discussed developed,such as a childs divorce, lawsuits, tax liens, etc. But when the kids soldMarys home ater her death or $180,000, they discovered that their basis

(cost or determining taxable gain) was Moms cost 30 years ago, which was$20,000. The taxable gain was $160,000 and at 25% (the ederal and statetax on the capital gain at the time), the tax was $40,000.

Their accountant correctly inormed them that i Mary had owned theproperty on her death (or i it were owned by her Living Trust), then the

... we discourage

our clients from

leaving specific

assets to specific

persons.


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Brenda Geiger, J.D.

children would have inherited it with a step up in basis. That means thattheir basis (or cost or determining taxable gain) would have been the airmarket value o the home on Marys date o death. There would have beenno capital gains tax payable on the sale shortly ater Marys death. Marysgit to avoid probate cost her children $40,000! I the children had acquired

the home on Marys death (and not by git) they would have had the optionto rent it out and not sell. Doing so, they also could have taken deprecia-tion based upon its air market value on their mothers date o death.

Mistake #17: Using the Wrong Assets to Fund a Gift toCharity

Mark wanted to leave $100,000 to his church upon his death, and the rest

to his children. Marks attorney was inexperienced in estate planning, butdrated Marks trust or a very reasonable ee as instructed: $100,000 to mychurch and the balance equally to my children. Marks large IRA passed tohis children, who had to pay income tax on it.

Had Mark unded the charitable bequest with a portion o his IRA, therewould have been $100,000 less taxable income to his children. This wouldhave increased the amount that passed to them ater income taxes per-haps by $30,000 (at a 30% rate or both ederal and state income taxes).

Charities dont care i they receive taxable income property because theydont pay income taxes anyway.

Michael saved a ew dollars on the drating side which later, in eect, costhis children around $30,000.

Mistake #18: Failure to Fund Your Living Trust

Bob and Carol had a Living Trust, but neglected to re-title their assets as

instructed by their attorney. The attorney even deeded their home to theirtrust, but they later sold the home and purchased another home in theirpersonal names and not in the name o the trust. Bob died a ew years ago,and on Carols death, all assets were subject to probate and were parto her taxable estate. By not titling their assets in the name o their trust,they deeated two o their planning goals: avoiding probate and reducingestate taxes.

Moral: I you have a living trust, be sure to und it with your assets by chang-

ing record title or beneiciary designations as instructed by your attorney.Or better yet, hire an attorney that oers to do this or you as an option intheir legal services.


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Mistake #19: Not Contacting an Attorney after the Death of

the First Spouse

Time and time again, I ve seen instances where a surviving spouse has notcontacted an attorney to help with the trust administration ater the deatho their spouse. The most common situation where this spells big trouble isi the couple had an A/B type trust. Upon the death o the irst spouse, thetrust property is to be split (according to the ormula laid out in the trustdocument) into an A trust or the surviving spouse (which remains revo-cable by the surviving spouse) and a B trust which holds the decedentshal o the estate. This is usually in an irrevocable trust or the beneit o thechildren, passed to them at the death o the surviving spouse.

Many times however, the surviving spouse subsequently becomes inca-pacitated and the baton is passed to the successor trustee. The succes-sor trustee steps in and tries to understand how to deal with the trust. Ithey are smart they end up talking to an experienced estate planning andtrust administration attorney. What they oten ind out is that the survivingspouse did not do what they should have. This creates a legal and account-ing nightmare or the successor trustee. We then have to try to ix theproblems that have arisen rom the improper or lack o trust administrationby the surviving spouse. This ends up costing the amily a lot more money

than i the surviving spouse had simply contacted an experienced trustadministration attorney to set up the trust split when the irst spouse died.

The moral o the story is to seek help and never assume that a trust admin-istration will be simple (it might be, but you always want to check with anattorney to ensure things are being properly administered).

Mistake #20: Missing A Disclaimer Deadline

A disclaimer is a reusal to accept an inheritance. A qualiied disclaimeris one that complies with IRS and state law requirements, one o whichrequires that the disclaimer be made in writing within nine months o thedecedents death.

So why would someone want to disclaim an inheritance? Lets say a couplehas a taxable estate and holds considerable property. The wie dies. I thehusband disclaims his wies hal, her hal will pass to their children. Or,i the couple has a properly drated Living Trust, it could pass to a Credit

Shelter Trust (aka; B or Bypass trust) or the beneit o the survivingspouse and then later pass to the children. I the disclaimer is made pursu-ant to IRS regulations, the disclaimer is not treated as a taxable git.

Example: Michael was in poor health when his wie died in 2006. Theircombined estate was $4 million. They each had a simple will leaving every-


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Brenda Geiger, J.D.

thing to the other, a sound plan so they thought. However, i Michael hadexecuted a qualiied disclaimer within nine months o his wies death, herhal o the estate would have passed to their children instead o him, andwould not have been treated as a taxable git by Michael. When Michael

then died in 2008, no estate taxes would have been due.

This could also have been accomplished by having atrust with optional disclaimer provisions built in. Butbecause Michael missed the deadline, his wies hal otheir assets were included in his taxable estate, and onhis death in 2008, the estate taxes were $900,000 - all owhich could have been avoided i Michael had made aqualiied disclaimer.

Qualiied disclaimers are an important planning tool in many estates. Inact, many estate plans are designed to anticipate the use o disclaimers orsaving on estate taxes. Disclaimers are just one o the many reasons whyit is important to see an experienced and knowledgeable estate planningattorney to plan ahead to minimize or eliminate your estate taxes.

Mistake #21: Not Doing an Estate Plan While Divorce Is

Pending

I you get a divorce, in most states your ex-spouse is automatically disin-herited rom your will. But what i you die beore the divorce is inal? In thatcase your soon-to-be ex-spouse will still inherit under your will or trust.Thereore, it is very important to change or amend your estate plan as soonas a divorce is iled.

Many people will usually wait until the divorce is inal, which, by then, isoten ar less important. Also keep in mind that a divorce decree does not

automatically change beneiciary designations, such as on lie insuranceand qualiied retirement plans. You must ile a change o beneiciary des-ignation orm.

Mistake #22: Failure to Have Proper Beneficiary Designationson Your IRA

Ater his wie died, Fred was advised to name his three children as the ben-eiciaries on his IRA. He assured us that he had already done so (or that they

were the contingent beneiciaries.)

On Freds death, it was discovered that he had never made the change andthat the original beneiciary orm had only named his (predeceased) wie asthe beneiciary. His IRA agreement with the custodian stated that i therewas no surviving beneiciary designated, the IRA would be paid to his estate.

Qualified

disclaimers are

an important

planning

tool in many

estates.


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Although that provision still gets the IRA to his children through a probate,it means that they have to liquidate the IRA in a very short period o time,within only ive years. This creates a greater tax liability because incometax will be due on the IRA.

Had he named the children on the IRA beneiciary orm, the children couldhave pulled it out over perhaps 40 years, allowing it to compound tax de-erred. Freds small IRA could have actually unded his kids education orretirement had he named them as beneiciaries.

Thereore, it is very important to VERIFY your beneiciary designations (orile a new orm) and NOT depend on your memory.

Mistake #23: Failure to Have Gifting Powers in Your Power Of

Attorney Document

Harold was on his deathbed. His son knew Harold had a taxable estate,so Harolds son, acting under a Durable Power o Attorney, made gits o$13,000 (the annual git exclusion amount in 2010) each rom Harold to his 5children and their spouses.

This giting had the potential o removing $130,000 rom Harolds taxableestate, saving at least $53,000 in estate taxes.

But the IRS ruled that because Harolds Power o Attorney did not specii-cally grant his son the power to make those gits, his son operated in viola-tion o the law, and the IRS deemed the gits incomplete.

A Power o Attorney generally does not give the agent the authority togive away your assets. The agent is supposed to operate in your best inter-ests. Because Harold had a legal right to recover the gits, the IRS includedthem in Harolds taxable estate. The omission o giting provisions in the

Power o Attorney cost this amily over $53,000.

The moral: I appropriate, be sure your power o attorney contains speciicgiting provisions.

Mistake #24: Assuming That All Estate Plans Are Equal

I have seen many poorly drated estate plans drated by inexperienced at-

torneys and even some drated by inancial planners and CPAs.

Some revocable living trusts will not even avoid probate, as such trusts sayUpon my death my trust shall be paid to my estate. Many trusts dratedor married couples dont even have estate tax planning provisions or theyinclude the wrong ones or the situation.


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Brenda Geiger, J.D.

A trust can be as short or as long asyou want to make it. There is no suchthing as a standard living trust. Aone-page trust might technically bea valid trust, but it probably does not

do most o the things it should do asdiscussed in this book.

Assuming that all estate plans are ba-sically the same can be a costly error. Iyou have any doubts, we suggest get-ting your estate plan reviewed by anexperienced attorney that specializesin Estate Planning.

Mistake #25: Not Having an Estate Plan At All!

I you dont have an estate plan, most states have one or you, and it may notbe what you would want. Not many people would purposely let their statelegislature drat their estate plan or them, yet that is what you get i youdont plan yoursel.

For instance, under Caliornia law, i you are married with children, yourassets could go to your children and your spouse i you have no plan. Weind that is rarely what our married clients want. Most couples want to givemore control over their assets to their surviving spouse, and see their kidsget an inheritance only ater they are both gone.


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How to Create a Sound Estate Plan

Now that you have read about the most common estate planning mis-takes amilies make, I will tell you how to avoid them. The good newsis that they can all be avoided by engaging in comprehensive estate

planning. The irst step is creating your Foundational Estate Plan and by un-covering speciic acts about you and your amily.

Will or Living Trust?

The initial step in the process is to determine i you should have a will-

based or revocable trust-based plan. This includes your will or revocable

trust, a Durable Power o Attorney or you and your spouse, an Advance

Health Care Directive or you and your spouse, and your HIPPA Authoriza-

tions (as well as a Guardianship Nomination i you have minor children).

The primary dierence between a will and a trust is that with a revocable

trust, you create a bucket in which you place all o your assets during

your lie, whereas with a will, the assets do not go into the bucket until

ater your death, (and only ater a probate proceeding is iled).

At this level, its Important to determine who you would like to beneit

rom your estate and how they should inherit your assets. Next, youll also

want to consider who should be appointed to manage your aairs i you

become incapacitated.

A living trust avoids the probate process. Here the

term living trust is synonymous with revocable

trust. The living trust acts as a substitute or a will,providing instructions or the management o your

assets on your death and during your lie (i.e., at in-

capacity). You accomplish this by transerring assets

during your lie to a trust that you set up or your own

beneit. You can serve as trustee o your own trust. In

act, that is what most people do. I you transer all o

your assets to the trust while you are alive, you can

completely avoid probate in any states in which you own property.

Since you control the living trust, you have the same control over your prop-erty as you would have without the trust. You retain the right to change orrevoke the trust and the right to appoint and remove trustees. The trustalso does not have to ile a separate tax return while you are alive.

The living

trust acts as a

substitute for awill, providing

instructions for

the management

of your assets on

your death


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Brenda Geiger, J.D.

The living trust oers certain other beneits as well. Unlike a will, your as-sets are not exposed in the public record. Unlike a will, which must be iledin the probate court, the trust document does not have to be iled with thecourt. Also, the trust can be a very eective way to appoint a successor tomanage your assets i you become incapacitated or any reason. This oers

greater protection and control than a Durable Power o Attorney becausethe trustee can manage assets on your behal as the owner o the assets.

I you choose a will, your assets have to go through probate. Probate is acourt-supervised process to protect the rights o creditors and beneicia-ries and to ensure the orderly transer o assets. The executor o the estateis required to notiy heirs and potential beneiciaries o the estate and astandard court procedure is ollowed to transer the property in your es-tate to your heirs (which typically takes 12 to 24 months in Caliornia).

Is Probate Something to be Avoided?

In Caliornia, probate is expensive and quite time-consuming due to thecurrent court docket. You can expect to pay more than $8,000 or a verysmall estate administration (i.e., where the gross value o the estate is$100,000). For larger estates, say $1,000,000, the statutory ee is at least$46,000 (the ees could be much higher i any additional work is required

by the attorney).

A revocable trust can ensure that any legal ees ater death are kept to aminimum (on average the ees are about one-ith that o a probate). Sinceyour assets and the trust will not be a part o the public record, as in thecase o using a will, it is more diicult or anyone to challenge the disposi-tion o your estate.

Disability Planning With Advance Health Care Directives andDurable Power of Attorney Documents

When a person becomes disabled, he or she is oten unable to make per-sonal and/or inancial decisions. I you cannot make these decisions, some-one must have the legal authority to do so or you. Otherwise, your amilymust apply to the court to appoint a conservator or either your person oryour property, or both.

At a minimum, you need a broad Durable Power o Attorney that will allowagents to handle all o your property i you become incapacitated, as well asthe appointment o a decision-maker or health care decisions via an AdvanceHealth Care Directive. Alternatively, with regard to your property, a ully und-ed living trust can ensure that your property will be properly managed, pursu-ant to the highest duty under the law - that o a trustee. It is important that you


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choose your trustees and agents careully. They should be people you trustwho are capable o handling your aairs the way you would.

You will also want to make sure you address the release o your medicalinormation to your loved ones. Under the Health Insurance Portability and

Accountability Act o 1996 (HIPAA), absent a written authorization romthe patient, a health care provider cannot disclose medical inormation toanyone other than the patient or the person appointed under state law tomake health care decisions or the patient. The penalty or ailure to com-ply with these rules is severe: civil penalties plus a criminal ine o $50,000and up to one year o imprisonment per occurrence. Its even worse i thedisclosure involves the intent to use the inormation or commercial advan-tage, personal gain, or malicious harm. Make sure to also list your successortrustees in your HIPAA authorization to ensure they can get a declarationo incapacity rom your primary care physician i the need arises.

Since these HIPAA rules became eective, most doctors, hospitals andother health care providers now reuse to release any inormation absent arelease rom the patient or HIPAA Authorization.

For example, hospital sta could go so ar as to reuse to disclose whetherones spouse or parent has been admitted to the hospital. The inability toreceive inormation about a loved one could become very troubling when

the inormation concerns treatment as part o long-term care. The regu-lations promulgated under HIPAA speciically authorize a HIPAA Authori-zation or release o this inormation to persons other than you or yourpersonal representative. Thus, you need to create such an Authorization sothat people you designate can access this inormation.


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Brenda Geiger, J.D.

New Federal Estate Tax Law for 2011

On December 16, 2010, Congress passed the Tax Relief, Unemployment In-surance Reauthorization and Job Creation Act of 2010. President Obama

signed the Bill the ollowing day. This legislation, negotiated by the WhiteHouse and select members o the House and Senate, provides or a short-term extension o Bush era tax cuts made in 2001. It also addresses the Alter-native Minimum Tax (AMT) and Estate, Git and Generation-skipping Trans-er taxes. This Act is TEMPORARY (ending December 31, 2012). Congress willneed to enact new and more permanent legislation prior to December 31,2012.

The ollowing will provide a summary o the income tax, estate tax and git

tax changes that will be in eect or the years 2010, 2011 and 2012.

Income Tax Rates

There is a two-year extension o the 2010 income tax rates to carry throughuntil December 31, 2012. Those rates are: 10%, 25%, 28%, 33%, and a top in-come tax rate o 35% or those in the top income tax bracket. There is also a2-year extension o reduced 0 or 15 percent rate or capital gains & dividends.

Estate, Gift and Generation-Skipping Transfer Taxes

The estate tax and git tax rates are reuniied (made the same). Prior tothe 2001 tax act, estate and git taxes were uniied, which created a singlegraduated exemption rate schedule or both. That single lietime exemp-tion could be used or gits and/or bequests. The new law reuniies estateand git taxes with a top tax rate o 35%. The law applies or gits made a-ter December 31, 2010. The Federal exemption or estate, git and genera-tion-skipping transer tax is $5,000,000 per person or 2010, 2011 and 2012.What this means is that each U.S. citizen may transer up to $5,000,000throughout his or her lietime or at death (or some combination thereo)and not be subject to estate or git taxes.

However, note that the Executor or Trustee o an estate will be able tochoose the modiied carryover basis rules in eect or 2010 deaths or electthe $5,000,000 exemption. The new law sets a top tax rate o 35% or estate,git, and generation skipping transer taxes or two years, through 2012.

Further, any unused exemption o a deceased spouse may be transerred

to the surviving spouse. What this means is that in the past couples had todo complicated estate planning to claim their entire exemption. The newlaw allows the Executor o a deceased spouses estate to transer any un-used exemption to the surviving spouse without such planning. This por-tion o the law is eective or deaths occurring ater December 31, 2010.


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Putting The Pieces Together:

The Foundational Estate Plan

AFoundational Estate Plan should include a Revocable Living Trust,Pour-Over Wills, Durable Powers o Attorney (or inancial matters), Ad-vance Health Care Directives, and HIPAA authorizations, as well as a

Guardianship Nomination (i you have minor children). There are other ancillarydocuments that in most cases should accompany the above-listed documents(i.e., Certiication o Trust, Memorandum o Personal Property, Assignment oPersonal Property to Trust, Deed to transer the amily home to your trust, etc.).

Protecting Your SpouseNow that we have covered some basics, the next decision you need tomake concerns your wishes regarding your surviving spouses rights toyour property. We ind that most clients want to leave all o their propertyto their spouse in ull ownership, with the property then going to the chil-dren ater the spouses death.

However, or many amilies, particularly those with children rom a priormarriage, this is not ideal. When you leave assets outright to a survivingspouse, those assets are exposed to the claims o a second spouse, credi-tors, or lawsuits. Further, your spouse could amend his or her estate plan atany time, possibly disinheriting your children.

There is a way to provide or the support o your surviving spouse while atthe same time making sure that whatever assets go to him or her ultimate-ly go to your children ater the surviving spouse dies. A marital deduction(B or Bypass trust) or the beneit o your surviving spouse can achievethis goal. The surviving spouse can receive all o the net income and alsomay have rights to the principal or health, education, maintenance or sup-port. However, the assets remaining at the surviving spouses death will goto the beneiciaries you choose, usually your children.

The beneits o leaving your assets in a Bypass Trust or your spouse are: assetprotection or the surviving spouse, protection o your childrens inheritance,and ease o planning or maximum use o the Federal Estate Tax Exemption.

Why Retirement Accounts Are a Ticking Time Bomb inYour Estate

I you are like most people, a large portion o your wealth is held in indi-vidual retirement accounts. Many people go into retirement with substan-


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tial assets in these accounts. While the security o having these unds iswonderul, there is a dark side to them.

Retirement accounts (traditional IRAs) were designed to allow you to savemoney on a tax-deerred basis to und your retirement. However, i you do

not spend these accounts during your lie, when you die they are subjectto both income taxes and estate taxes. The combined tax hit o both taxescould result in a loss o 60 to 70% o your wealth to the IRS.

For this reason, it is very important that retirement accounts be addressedas part o your overall estate plan. A will is not enough to accomplish this as a will has no eect on these accounts. Upon your death, a retirementaccount is paid out to the persons you designated on your BeneiciaryDesignation Form, and it is critical that you keep your beneiciary orm up

to date. Planning or tax-qualiied plans - which include IRAs, 401(k)s andqualiied retirement plans - requires a careul examination o the potentialtaxes that impact these assets.

I recently got a call rom a named executor about her uncles IRA. Since thebeneiciaries on the account have all died, this $157K account now must beprobated. Statutory ees in Caliornia or probating this asset are $11,420plus court ees.

Further, most other assets receive a basis step up to current air marketvalue upon the owners death, IRAs, 401(k)s and other qualiied retirementplans do not step-up to the date-o-death FMV value. Thereore, beneicia-ries who receive these assets do so subject to income taxes. I your estateis subject to the Federal Estate Tax, the value o these assets may be urtherreduced by that tax as well. And i you name your grandchildren or young-er generations as beneiciaries, these assets may additionally be reducedby the generation-skipping-transer tax. Taken together, these assets canbe reduced by 70% or more. However, there are several strategies available

to help reduce the impact o these taxes:

Structure accounts to provide the longest term payout possible.

Take the money out during lietime and pay the income tax, then git theremaining cash through an Irrevocable Lie Insurance Trust or Giting Trust.

Take the money out during lietime and buy an immediate annuity toprovide a guaranteed annual income stream, to pay the income tax,

and to pay or insurance owned by a Wealth Replacement Trust (alsoknown as an Irrevocable Lie Insurance Trust).

Give all or a portion o the accounts to charity at death.

Structuring the accounts to provide the longest term payout possible is thesimplest and thereore the most common option. With this strategy you


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name beneiciaries in a way

that requires them to withdraw

the least amount possible as re-

quired minimum distributions,

or those distributions that must

be made in order to avoid sig-

niicant penalties. This can be

accomplished by naming the

beneiciaries individually or by

directly naming their shares o

a special type o trust called a

Retirement Plan Trust (discussed below). Frequently, the surviving spouse is

named as the primary beneiciary so that he or she may roll over the account

into the surviving spouses name and treat it as his or her own account. Alter-natively, i you are concerned about the loss o creditor or divorce protection

by naming the surviving spouse individually, you can name a Retirement

Plan Trust or the survivors beneit.

Another option is to take the money out during lietime and pay the in-

come tax, then git the remaining cash through an Irrevocable Lie Insur-

ance Trust (ILIT). I you use an Irrevocable Lie Insurance Trust (ILIT), this

strategy makes the most sense i you are in good health and able to ob-

tain lie insurance at reasonable rates. Unlike the IRA or retirement plan,the beneiciaries will receive the lie insurance proceeds free of income and

estate tax and, under certain circumstances, ree o the generation-skip-

ping transer tax.

A third option is to withdraw your IRA or qualiied plan and purchase an imme-

diate annuity, which will generate a guaranteed income stream during your lie.

You can use this income stream to pay the income tax caused by the withdraw-

al, and also pay the premiums on lie insurance owned by an Irrevocable Lie

Insurance Trust (ILIT). Again, this strategy makes the most sense when you are

in good health and able to obtain lie insurance at reasonable rates. Unlike the

IRA or retirement plan, the beneiciaries will receive the lie insurance proceeds

rom the ILIT free of income and estate taxand, under certain circumstances, ree

o the generation-skipping transer tax.

Alternatively, it may make sense to use other assets to purchase the im-

mediate annuity, saving the IRA or amily members. This strategy makes

the most sense when you can deer the income tax on the IRA or qualiiedplan or many years by naming a very young beneiciary in a RetirementPlan Trust.

A ourth option is giving the accounts to charity at your death. This strategyis particularly attractive i you intend to make gits to charity at your death


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Brenda Geiger, J.D.

and the question is simply what assets should you select. As a tax-exemptentity, a qualiied charity does not pay income tax and thereore receivesqualiied retirement plans ree o income tax. In other words, i your ben-eiciary is in a 35% tax bracket, a $100,000 IRA is worth only $65,000 in hisor her hands, but worth the ull $100,000 i given to charity. Thereore, it

makes economic sense to give the IRA to charity and give your children as-sets that are not subject to income tax and which receive a step-up in basisto their date-o-death value at your death.

The Retirement Plan Trust

A ith and very popular option to help reduce the tax impact is to struc-ture these accounts to provide the longest term payout possible. Deerring

income tax as long as possible minimizes the overall tax impact and allowsthe account to grow tax-ree.

To achieve this maximum stretch-out, you should name individuals whoare young (e.g., children or grandchildren) as the designated beneiciaries

o your tax-qualiied plans. It is important that thebeneiciary should take only those minimum distri-butions that are required by law. The younger thebeneiciary, the smaller these required minimum dis-

tributions and the longer the money can compound.

However, naming a beneiciary outright to accom-plish this deerral has several disadvantages. First, ithe beneiciary is very young, the distributions mustbe paid to a guardian; i the beneiciary has no guard-ian, the court must appoint one and some custodiansrequire a court approved guardian even i the mi-nor has living parents. Another disadvantage is the

potential loss o creditor protection. A third, practicaldisadvantage is that many beneiciaries take distributions much larger thanthe required minimum distributions (RMDs), oten consuming this oundmoney in only a couple o years (blowing the potential or a stretch-outo the IRA and thus suer a large income tax impact). I allowed to stretchin a Retirement Plan Trust, the result is on average 5 times greater than thevalue o the account at the death o the original owner.

By naming a properly structured trust as the beneiciary o your tax-qual-iied plans, you can ensure that the beneiciary deers the income taxand that these assets remain protected rom creditors or a ormer son ordaughter-in-law. We recommend that this trust be a stand-alone Retire-ment Plan Trust (separate rom your revocable living trust and other truststo ensure that it accomplishes your objectives while also ensuring the max-

A fifth and very

popular option

to help reducethe tax impact

is to structure

these accounts

to provide the

longest term

payout possible...


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imum tax deerral permitted under the law). This trust can either pay outthe required minimum distribution to the beneiciary or it can accumulatethese distributions i a divorce or creditor issue arises in your child or otherbeneiciarys lie.

By designating a Retirement Plan Trust as beneiciary o your IRA, you canensure that your beneiciaries maximize the tax deerral available underthese accounts. This allows your beneiciaries to withdraw only the smallestamount required by the IRS each year. Thus, the account remains investedand grows over the lietime o your beneiciaries. I your beneiciaries areyoung, need asset protection, or i you want to ensure the stretch-out oyoure account, a Retirement Plan Trust can typically generate over 5 timesthe account value at the death o the original owner, and is a great strategyto include in your planning.


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exceed the annual exclusion amount (in 2010 and 2011, $13,000 per recipient

per year), you will not have to ile a git tax return (IRS orm 709) on the gits.

This means that you can give away up to $13,000 to each o your children

and/or grandchildren each year without any git tax consequences.

An annual exclusion lietime giting program allows you to avoid git, es-tate and generation-skipping transer tax on transerred assets. Under the

Internal Revenue Code, you can transer up to $13,000 (2010 and 2011) per

year, per person, to anyone without incurring git tax or the generation-

skipping transer tax. With a lietime giving program, you can transer

this amount annually to the individuals o your choice, typically children,

grandchildren, other close amily members, or anyone really.

For example, i you give $13,000 per year to two beneiciaries or ive years,

you will have removed $130,000 rom your estate or estate tax purpos-es. Ater 10 years, you will have removed more than $260,000 and nearly

$650,000 ater 25 years. We have many clients who would like to make an-

nual gits, but who dont want to lose control o the assets that they give

away. For these clients, we recommend the Family Bank Trust.

A Family Bank Trust is a type o irrevocable trust that provides complete

asset protection or your spouse, children and/or grandchildren and it re-

moves the trust assets rom your estate and the estates o your spouse,

children and/or grandchildren or estate tax purposes. This type o trust is

very similar to a bypass trust (one that bypasses the Federal Estate Tax) at

death. You dont lose access to the assets because your spouse can with-

draw rom the trust or health, education, maintenance or support.

Annual exclusion gits are used to shield transers to the Family Bank Trust

rom git and generation-skipping transer taxes. The beneiciary must

have the right to withdraw up to $13,000 o the transerred unds, but i

that right is not exercised, the gited unds can then be us

Safeguarding the Nest

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