Welcome back, loyal mailbag readers!
The astute followers will notice we took "Corona Summer" off and let the mail pile up while we spent a little more time with our families.
This week’s question comes to us from Tom in Bad Axe, who writes:
Ed, my cousin passed away and left a mess for my brother and I to clean up with probably 25 or so accounts between banks, credit unions, investment companies and insurance policies. The beneficiary information was often directed to an outdated trust or pre- deceased family member. What are some steps my wife and I should take to avoid a similar situation when we pass?
Hi Tom, and thanks for an ”easy” (hardly) question to kick off the mailbag again. But it’s super important, so we will tackle this in bite size pieces with the disclaimer that each situation is unique. Please review with your legal counsel, as I am not a legal professional and the below is not intended to be viewed as legal advice.
One of the better ways to help avoid a similar situation as your cousin is to work with an attorney versed in estate planning to create a trust. For the sake of simplicity, I am referring to revocable living trusts in this post. A revocable living trust allows the trustee (you while living) to change or amend the trust while you are living.
Think of a trust as a set of instructions for money, investments, and property - both real and personal. Real property is land. Personal property is all the stuff you’ve accumulated that fill the rooms, closets, basements, garages, and pole barns. A trust skips a public legal process called probate, cannot be contested, and provides directions on how you want your stuff and money distributed after you die.
If you already have a trust and the supporting documents listed below, PLEASE, PLEASE, PLEASE, review your trust documents from time to time (every year if in your 70s or older; every few years if younger) to make sure nothing has to be changed or updated if situations have changed. And this is of UTMOST IMPORTANCE: if you have a trust, have you taken the steps to re-title accounts to the trust?
What do I mean by that?
When you finished working with your attorney on the trust paperwork, the attorney likely provided instructions within the trust on how to have checking and savings accounts properly named (directed) to the trust. There are also instructions on how to redo beneficiaries of life insurance policies, IRAs, 401(k)s, etc., so those accounts will also be held by the trust (if appropriate) upon your or spouse’s passing. Often times, people forget to take the step of pointing all their accounts to their trust. That means all the work they just completed (and money spent with attorney) are for naught! TAKE THOSE LAST STEPS, please.
If this is all new to you, below is info on other documents that make up the estate planning documents along with the trust.
A will provides directions of how to deal with property and dependents upon your passing. Having a will is the first line of preparation that really all of us need. With a will you will name the executor - the person responsible for making sure your wishes are carried out.
Your will can also name a guardian and/or conservator of any children age 18 or under. The guardian is the person who will raise the children. The conservator will be the person responsible for the financial needs of the children. The guardian and conservator may be the same person, but do not need to be.
You can list in your will items to be disbursed upon your death. Maybe your brother is going to get the family heirloom grandfather clock, or your oldest daughter is to receive grandma’s fine china set. You get the picture. (Not a literal picture... you get the idea...)
A will differs from a trust in that a will will end up in the public domain and the estate passes through probate where it could also be contested. A trust creates more privacy and allows for the probate process to be skipped. So a trust costs a little more up front but alleviates problems for the survivors as the trust is a legal document specifying what is to take place and cannot be deviated from.
The next legal document you would want an attorney to create for you is called a Power of Attorney (POA). Basically, this document allows a person you name to make decisions and take action on your behalf. The POA could be either ”durable” or “springing” where the durable POA is effective immediately and the springing POA is based on conditions being met, usually related to physical and/or mental health. A POA allows actions like your daughter to take care of withdrawals and deposits for you at the bank, or sell or buy a house, condo, apartment, etc.
A Medical Power of Attorney (Medical POA) is very similar to a POA but deals specifically with somebody making medical decisions for you. Generally, the Medical POA is active only when an individual is not able to make their own decisions because of a health condition. Generally a spouse is the first in-line as the Medical POA. Your attorney will want you to name at least a second person, if not a third.
Quit Claim Deeds or Lady Bird Deeds are used to deal with real property... Home, condo, cottage, hunting land, etc. Your attorney will help you determine best way to make sure your real property ends up controlled by who you want to control it.
HIPAA deals with medical privacy. A HIPAA Authorization form allows the medical providers to share medical info of a person with others listed on the HIPAA Authorization. Generally, the Medical POA and HIPAA Authorization forms should list the same people in the same hierarchy order.
Other considerations include using “TOD” or “POD” designations on bank accounts. TOD stands for Transfer On Death and POD is short for Payable On Death. It’s similar to naming beneficiaries on your IRAs. Investment accounts that are not IRAs or other retirement plans could be titled as TOD to an individual or individuals.
You could also consider having an investment account titles “JTWROS” which is short-hand for Joint Tenants with Rights of Survivorship. JTWROS means the account is held in the names of both spouses (most often) and upon the passing of the first, the surviving spouse automatically has full control of the account.
A step better (depending on situation) than JTWROS is having the account titled to the trust. Within the trust, the couple are each listed as Trustees. On the passing of the second of the couple, the account remains in the trust and is disbursed according to the instructions provided within the trust.
Tom, to help summarize, set up a time to see a qualified attorney that works in the area of estate planning. Let them asses the situation and then make sure to take action with your bank, credit union, insurance professional, financial professional, etc. once the attorney wraps up their piece.
Thank you for the questions and continue to send them to efoltz@rummelwealth.com.