Probate Avoidance on a Budget. December 2016.
[As published in Frederick’s Child]
We shook hands and sat down. “Now, if I understood you correctly when you called to set the appointment, you are here to talk about wills.”
“Well,” ventured the husband, “wills or trusts – I’m not sure what we need. We hear a lot about trusts.”
The wife nodded. “My brother has a trust and says everybody should have one.”
The lawyer pondered. “Trusts are a good tool, but not everyone needs one. Do you mind if I ask a few questions so I understand your situation?”
The clients indicated assent.
“Now I count two of you. Do you have children?”
“Yes,” answered the wife, “two daughters, both grown.”
“And have you been blessed with that singular benison of grandchildren?”
The husband nodded. “Our youngest daughter has two children.”
The lawyer smiled. “My father says that grandchildren almost make up for the grief of raising children.”
The wife enthusiastically agreed. “More than. It’s better than we could have expected. You can play with them, spoil them, and then give them back and watch your daughter figure out what you meant when she was little and you told her to behave.”
The lawyer quipped, “They say insanity is hereditary. You get it from your teenage children. It looks like you’ve recovered completely. Is everyone mentally and physically healthy?”
The husband grinned and nodded.
“If you sold everything, paid your debts, took all your money out of your IRAs and 401(k)s but DIDN’T pay the taxes, collected on your life insurance … would you have more than two million dollars?”
The clients ponder briefly. “Just over,” ventures the wife. The husband nods, “maybe two and a half million with life insurance.”
“Well, in 2017,” explains the lawyer, “the Maryland estate tax exemption – the amount of money you can pass without paying estate tax – is three million dollars. In 2018, the exemption rises to four million. In 2019, the Maryland exemption is scheduled to equal the federal exemption, which right now is $5.49 million. So, unless the exemptions go the wrong way – down! – or you win the lottery, you won’t have an estate tax problem.
“That would be a nice problem to have – it would mean you have so much that the government wants a second dip into your wallet as you journey to the grave – but it won’t be your problem. I’m sorry,” the lawyer quipped and grinned, an expression reflected by the clients.
“So if we’re no worried about avoiding estate tax, the other big question is – if you both died tomorrow, would it be okay if your daughters each just received half of your $2.5 million in a check? Would they be responsible with it?”
“Absolutely,” said the wife. “They’re both very responsible.” The husband nodded concurrence.
“One more question,” continued the lawyer, “and forgive me, but I have to ask. Are all of the children of either of you the children of both of you?”
The husband looked quizzical, then grinned. “Yeah,” he said, “both of them are both of ours.”
The lawyer nodded. “That makes things easier … more straightforward.
“So … the usual ‘happy family everybody healthy’ estate plan is something like ‘all to my spouse, and if my spouse hasn’t survived me, all to the kids in equal shares; and if one of my kids hasn’t survived, to her children or, if she doesn’t have any, to the other one of my kids or her children.’ Is that what you have in mind?”
“Then I see no need for a trust,” concluded the lawyer. “You don’t need a trust to avoid estate tax, to provide for a special needs beneficiary or protect a spendthrift. So unless you just want a trust, let’s not spend money creating one.”
“What about avoiding probate?” queried the wife. “I always hear that probate is a nightmare.”
“It’s a tedious process,” agreed the lawyer, “but there are other ways to avoid probate. They don’t work in every situation, but they might work well for you. You have adult, healthy children who belong to both of you and who aren’t wastrels, and you aren’t worried about estate tax.
“What if I showed you a way to avoid probate without paying the fee for a trust. Would that be helpful?”
They both nodded and leaned forward.
“Remember that nothing that has a joint owner or beneficiary goes through probate. So when the first one of you dies, there’s usually nothing to probate because everything just passes to the spouse. But when the second one of you dies, sometimes there’s a lot that has to pass through probate to get to your kids.
“I don’t like to add children as joint owners on their parents’ assets, because then if they have a financial problem, so do you. Your money is their money, and even if they would never take your money, their creditors will.
“But I can help you make your children beneficiary of your assets. Then there’s no probate, and nobody except you has a right to your stuff until the second one of you passes away. Is that interesting?”
They nod again.
“You can make your children the ‘paid on death’ or ‘POD’ beneficiary of your bank accounts, so that when the second one of you dies, the money just belongs to them equally. You can make the kids the ‘transfer on death’ or ‘TOD’ beneficiary of your stocks and mutual funds. When you are both gone, the account would just be divided between them.
“You would make your children the contingent or secondary beneficiaries of your life insurance and retirement plans. When the first spouse dies, the survivor would make the children the primary beneficiary.
“That takes care of everything but the house and the cars. If you want to, you can put a beneficiary on your car using MVA form VR-471 so the car transfers on death to one of your children.
“Finally, for the house, we can create a new deed called a ‘life estate deed.’ That means you could live in the house for the rest of your life, and the survivor could live in the house until he or she died or couldn’t live in the house anymore. You could keep the ‘power of sale’ – you or the survivor could sell the house, mortgage it, lease it, give it away, or change the deed, without anybody’s authorization.
“Your daughters would have the ‘remainder’ interest – the right to receive the house when the second of you died. Until that point, you or the survivor of you could do whatever you wanted with the house, without their permission.
“So we’ve just taken everything out of probate without a trust. You would still need a will just in case something changed or we missed something. But the main assets would pass outside probate.
“This is what you need to do … “
Attorney Tim Barkley
The Tim Barkley Law Offices
One Park Avenue
P.O. Box 1136
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