What if I change my mind!?

Life happens.

Circumstances change.

Today you may be married with small children.

In the blink of an eye, those children may be married with their own babies and you may be looking at funding long-term care.

The estate plan that is 100% aligned with your life as a young family when you are 35 may well need adjusting by the time you retire in your 60s.

THAT IS A-OK!

Before we begin, a bit of a vocabulary lesson:

Codicil: an addition or supplement that explains, modifies, or revokes a will or part of one.

Revoke: put an end to the validity or operation of a previously executed Will or Trust.  

Should you find yourself needing to change your end-of-life wishes you have 3 basic options.  (But as you'll see, only two are very wise).

Option 1:  Revoke your existing Will or Trust.  Period.

Pro: Likely the cheapest option.  

Con: Leaves you at the whims of intestate succession and offers no medicaid planning. Essentially reverts your planning to before you ever executed a will or Trust.  

Option 2: Execute a Codicil or Amend your Trust

Pro: Still cheaper than Option 3.  Aligns your estate plan with your current wishes. 

Con: Since you now have two valid documents, if not done well, this can lead to confusion.  How exactly do these (the initial Will and the new Codicil) work together?  Exactly which portions of the initial will are now valid and which have been overridden?  Confused?  Exactly! 

Option 3: Revoke previous Will or Trust and redraft

Pro: Eliminates confusion inherent in having two operating documents.

Con: Most expensive due to time necessary for complete redrafting - this is mostly at issue with a Trust.  Redrafting a will isn't as significant of an undertaking.  

Conclusion - Option 1 is almost never going to be a wise decision.  The pro v. con calculus between options 2 and three really depends on the specifics of your case and whether we are dealing with a Trust or a Will.  Contact your friendly-neighborhood-attorney to discuss the specifics of your case! 

Is a Trust really for Me?

Often clients approach me expressing an interest in having a will drafted so that they can make plans for the eventual distribution of their assets upon death.  Often one of the first questions I ask is:

"Have you considered moving your assets into a Trust and allowing for their management and eventual distribution though this method?"

To which they reply more often than not ....

"Aren't trusts just for exceptionally wealthy people?"

My answer is simply "NO!"

For the majority of my clients, a Revocable Living Trust is truly the best option when it comes to end of life asset management.

Benefits of a Revocable Living Trust include the following:

1. Avoiding Probate (costs, delays, publicity)
2. Maintaining Privacy of family assets and distribution allocations.  
3. Greater control over the use of family assets
4. Ability to ensure the financial security of dependents that also rely on SSI or other need-based government benefits.
5. Protection of a spend-thrift beneficiary from their own financial mis-management. 
6. Management of grantors assets in the case of incapacity prior to death.

For individuals or couples with high net worth (currently somewhere above 5.3M per person), more complicated tax planning is wise to avoid estate taxation.  This however, is a blog post for another day.

Can't I write my own will?

One of the joys of living in 2015 (and counting) is the easy availability of free information on the internet.  Never before have YOU the consumer had such an ability to do-it-yourself.  Options include:

Form-books, LegalZoom, Software programs, as your friendly local lawyers blog!

And for some people these should work just fine.  For instance, if you are married to your first spouse, have a relatively small estate (no tax concerns), and only joint biological typically developing responsible children (that's quite a few adjectives right!) who you want to inherent everything, the forms are likely for you.

Maybe.

And here's the challenge - I wouldn't know without talking through your assets and family situation with you.  (remember the bottom of my website .... "This is my Blog. This is not my Office. If you need legal advise, come to the latter."  )


And for the cost of a few hours of an attorneys time to discuss your situation and advise you on whether you really NEED them to draft your will the attorney could just as easily have it drafted.

Now, that disclaimer aside here are some situations where you probably should not consider going the do-it-yourself route:

1. You or your spouse have been married more than once.
2. You or your spouse have children from a previous marriage or outside of wedlock
3. You have minor children and don't want them to receive a lump sum payment when they turn 18.
4. You have minor children and don't want their other parent having access to and control of the children's inheritance.
5. You have desired beneficiaries that are in debt.
6. You have natural beneficiaries who might fight to get access to part of your estate.
7. You have desired beneficiaries that are developmentally challenged.
8. You want to disinherit a child/children.
9. You don't know 100% that any of the above situations will not be the case at some point in the future.

Step-Up and Carry-Over What?!

I'm excited you're back to continue our geeking out discussion of Basis and its implications on your estate plan!  If you missed the first post on these topics, please head on over and get the foundation here!

In estate planning we look at two primary methods of gifting property.

1. Life-time Gifts
2. Gifts by operation of death

Each of these is treated differently by the IRS for Basis purposes.  Specifically let's consider any gift from the point of view of the recipient's Basis.  First, what investment does that recipient have in the property?  $0.00, right?  Which would make their presumed basis .... $0.00.  (Spoiler - the recipient's Basis isn't actually going to be zero, but we're not there yet!) 

The IRS who defines Basis for tax purposes hasn't taken quite THAT draconian of a viewpoint however, and at worst allows that recipient of a gift a "Carry-Over" Basis.  At best, the recipient receives a "Step-Up" Basis.  

1. Carry-Over Basis - The recipient takes over the basis that the donor had in the property.  So if Grandma and Grandpa give you the family farm that they purchased in 1940 for $100 an acre? .... your new basis is $100 an acre.
2. Step-Up Basis - The recipient takes as his basis the fair market value (fmv) of the property at the time of the gift.  So if you receive that same family farm and the current fmv is $15,000 an acre, your basis is now the $15,000 an acre.  

I want to now presume that a few years after having received a particular gift the recipient decides to sell the property.  At that point, the US (and likely state) government say .... CAPITAL GAIN ... give me, give me!  Capital Gain taxes are levied on the difference in value of property between the owners basis and the sales price.  

In a situation where Grandma and Grandpa purchased land 75 years ago for $100 an acre, they are at a significant risk of Capital Gain tax liability if they now sell the property for it's fmv of $15,000.  

The gain would be $15,000 - $100 = $14,900 per acre.  

Assuming a 100 acre farm, this means a total taxable gain of $1,490,000!!!!!

OUCH!!!

Well Grandma and Grandpa have no interest in loosing up to 20% of the cash they'd receive from the sale of this property to their friendly neighborhood federal government ... so they come up with a plan .... to GIVE that land to YOU and thus avoid the pesky capital gain.  After all, the appreciation in value occurred while they were the owners.  The government couldn't possibly expect the recipient of gifted property to pay taxes on it's value.

WRONG!

Here is where the recipient's basis becomes critical.  

If the recipient can get a step-up basis ... they're good to go!  Right?  Their basis will be equal to the fmv resulting in no gain and no tax.  

If the recipient is stuck with a carry-over basis ... trouble!  The recipient will be in the exact situation as the donors (Grandma and Grandpa) were.  

So, here is when each applies - 

When a gift is made during the donor's life - (an inter-vivos gift) - the recipient takes a carry-over basis in the property.

When a gift is made a a result of the donor's death - the recipient gets a step-up bases.  

Lesson to be learned for estate planning -

if you own property that has appreciated in value significantly, select those pieces of property to pass via your will or trust.

Use inter-vivos or lifetime gifting to remove assets which have not or do not appreciate in value from your estate (such as cash!).

Remember though, gift wisely and subject to the annual gift tax exclusion! 

Back to Basis

In my prior career-life I was a CPA. Today we are going to indulge a bit of my inner finance-geek in our discussion of Basis and how it can relate to your estate plan.  

I recently asked one of my non-accountant friends to define Basis for me and received the following reply:

Basis is like the foundation – Because the basis of an argument would be the foundation, right!?  

Well ... somewhat.  

In accounting, Basis measures you (the owner)’s investment in a piece of property.  

For example, if I purchase a piece of land (in dream world) for $100; my basis in that property is …

…..

…..

…..

$100.

Now let’s say I purchase a piece of land for $100 and then spend an additional $20 adding a fence around a portion.  Now my basis in the land would be $120.  

If, instead, I purchased land for $120 that already had a fence in place, but that fence was somewhat in disrepair, and I spend $10 to repair the fence … my basis is …. $120.  Repair costs do not get added to your basis.  

Only improvements add to basis.  

There are far more complicated rules for calculating basis in stock that has perhaps split or paid dividends and been reinvested.  Or the basis in a partnership interest where the owner may have contributed both cash and equipment and time to the business, and have removed income or dividends from that business. Your friendly neighborhood CPA can help you sort out these and other unique circumstances.  

For your estate planning purposes, however the general rule is important to know - 

Basis is the value that you have invested in a piece of property (real, investment, or otherwise)

Check back next post for an explanation of the two types of basis in non-purchased assets.  

Common Probate Costs

Here are a few of the expenses you can expect when probating a will or intestate estate:

• Bond - to ensure executor doesn't abscond with the assets
• Publication of Notice - 
• Court Costs - 
• Service of Notice to Heirs of Intestacy
• Attorneys Fees - Hourly, Fixed, or Percentage of Estate
• Accounting and Valuation costs