I’ve written before about the risks of do-it-yourself estate planning and document drafting.  Since then, as I’ve given more presentations and had more conversations with those who have either tried drafting their own documents or considered using a “document service” (such as Legalzoom or Rocket Lawyer), I’ve noticed a pattern of errors and misunderstandings when it comes to the basics.  Since these issues come up so often, I thought I would address them directly; this is part one of a five-part blog series on the risks of creating these complex documents without the assistance of an estate planning attorney.  The first problem on my list for do-it-yourselfers:

There Are No Do-Overs

Re-Do Red Button Redo Change Revision ImprovementI admit it, I’m a do-it-yourselfer when it comes to certain things.  As I’ve gotten a little older, I’ve learned some unfortunate truths about my handiwork.  I know, for example, that I don’t know how to put a new roof on my house.  I know that if I were to try, it would probably look ok, and it would probably mostly keep the water out.  But after one or two rains, I know I would grow frustrated and I would end up hiring someone who knows what they are doing to just re-do the whole project.  This means I would likely pay for this project twice . . . once on the cheap, and once for quality work after I realize it my own roof job didn’t turn out how I had hoped.

And who could blame me?  Why would I want to pay someone thousands of dollars to re-roof the house when I could just read a book and do it myself?  Why would I hire someone to build a fence around my yard when I can just rent the tools at Home Depot?  Why have someone sand and stain my floors when I can just do it over a summer on my own time?

The problem with this anecdote as it applies to estate planning is that once you or your family realizes the roof is leaking, it’s too late.  If you thought your health care directive would help someone make health care decisions for you, but it wasn’t executed properly, it’s too late to fix it by the time you need it.  If you draft a will and you leave money to your minor children, it’s too late to fix it once the will is probated and it’s pointed out that minors can’t own property, or that your IRA and 401K beneficiaries aren’t drafted to match the rest of your plan.  It’s too late when the probate court sets aside your documents because they had the wrong signatures (in Minnesota, if you don’t have two witnesses to your signature, your will becomes someone’s scrap paper).  It’s too late when your family realizes you didn’t update your will after your divorce, or after the birth of your new child, or after you had grandchildren.  It’s too late once it’s realized that your distribution plan has an ambiguity, and your family will be spending thousands of dollars on a formal probate proceeding, or that the person you appointed as a guardian for your children is unable to act, and you didn’t appoint a backup.

There are ways to make your estate planning goals a reality, but there is no getting around the fact that this area of law is highly technical and is fraught with ways to make things very, very difficult for your family.  Your family doesn’t need the added dose of confusion and heartache that bad legal documents will bring.  Consider carefully the benefits of having your estate planning “house” roofed properly the first time; your family will know the difference.

Stay tuned for Part Two of my blog series, where I’ll talk about the next big misunderstanding about do-it-yourself planning: Kids Can’t Own Property.  If you have any questions about your plan, I’m here to help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Medical directive document in a clipboardMy earlier post on powers of attorney forms touched heavily on the issue of incapacity.  The specific question addressed by a power of attorney form is, “who will make my financial decisions and handle my financial affairs if I am unable to do so on my own?”  If a person becomes incapacitated and does not have a power of attorney form on file, it is possible that a conservatorship will have to be created to manage the finances of that person.  This is incredibly expensive and creates much unnecessary heartache for those who wish to care for their loved one; this mess can be prevented for a fraction of the cost and trouble by appointing an attorney-if-fact with a properly executed power of attorney form.

Not all decisions that must be made for an incapacitated person are financial, of course. Though care for finances is certainly important, who will decide which medications can be administered?  Who will have access to health care documents and records?  Who will get to decide if the you should be cared for in a hospital or in an assisted living facility?  Should you be visited by clergy?  What decisions should be made about life support?  Importantly, once you appoint someone to make these decisions for you, how will they understand your beliefs and values so he or she makes the right decisions?  All of these questions can be addressed by creating a valid health care directive (sometimes called a living will or an advanced directive).

Your Health Care Agent

Your health care directive is where you can appoint a person whom you trust to make the right decisions about your health care.  This person can be a spouse, family member, a close friend, or even a professional fiduciary.  It’s usually best that the person be local; if you are in Minnesota and your health care agent is in California, that person may have a tough time meeting and talking with the professionals who are providing your care.  You can (and should) also name a back-up health care agent who can act if your first choice is unable or unwilling to accept the appointment.  Married couples often (but not always) name each other as their primary health care agents, then selected a trusted sibling or parent to be the back-up.

Your Values in Print

Your health care agent will be empowered to make health care decisions on your behalf.  But what do you want them to do?  Fortunately, you can outline your wishes in your directive.  Your health care directive can specify your thoughts on life support — perhaps you wish to be kept on life support indefinitely.  Perhaps you wish that your medical professionals exhaust all reasonable means to help you recover, but you don’t want to be kept alive artificially if in their professional opinion you will not regain consciousness.  Maybe you do not want certain pain medications; perhaps you have specific wishes for clergy or other individuals to be present.  Maybe you want to have a therapy animal present when possible.  Your health care directive can provide as much information to your health care agent as you wish.

More Important Than a Will?   

I often tell my clients that a power of attorney document and a health care directive — together — are oftentimes even more important than a will because we are more likely to need these documents.  Most people have a better chance of becoming incapacitated temporarily at some point in their lives than they do of dying prematurely.  Many people recall the case of Terry Schiavo, a very sad story of a young woman whose family could not agree on whether she should be pulled from life support.  A properly executed health care directive can put your wishes in writing and avoid much family tension and heartache.

Your Plan

I often call a power of attorney form and a health care directive “everybody documents,” since really, everyone over the age of eighteen should have one.  And of course, any estate plan is not complete without incapacity planning.  A health care directive and a power of attorney form, when properly drafted and executed, can ensure you’ll receive the care you deserve in a manner that is controlled by you and is easier on your family.  Many attorneys will include these documents automatically when they draft a will or trust plan.  Please contact me if I can help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

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Before my grandfather passed away, he suffered for years from severe dementia;  during his last few years he rarely understood where he was or who was around him. He wasn’t a rare case in this regard . . . worldwide, over thirty-five million people have dementia, and there are over seven million new cases each year. Alzheimer’s is the most common cause of dementia, and was certainly a cause of my grandfather’s.

When most people think of estate planning, the first document that comes to mind is usually a will. A will is a document that expresses your wishes about the property you own in your own name at the time of your death. If properly written and properly executed, your will is used to guide the court proceedings — collectively called probate — which allow your executor to distribute your things to your beneficiaries. But estate planning isn’t just about distributing your things . . . it’s also about minimizing the problems and complications that affect your family. This includes planning for incapacity, which is any period where you are physically unable to make decisions for yourself.

What happens if you don’t have a valid power of attorney form?  he answer is “nothing good.” If there is no one authorized to sign documents for you, then the court will have to appoint a conservator to act on your behalf. This is incredibly expensive; a conservatorship proceeding will run into the thousands of dollars. A power of attorney form will cost a small fraction of that amount.

There are two documents most commonly associated with incapacity planning.  The first, which will be covered by my next blog post, is a health care directive. A health care directive appoints someone (called your health care agent) to make health care decisions on your behalf when you are unable to do so. The other incapacity planning form is a power of attorney form, which is a form you sign to authorize another person (called your attorney in fact) to make financial decisions for you.

There are a number of types of power of attorney forms; the most common is a durable power of attorney, which allows your attorney in fact to make decisions for you now and after you become incapacitated. In Minnesota, there are two types of durable power of attorney forms: a statutory form and a common law form. The biggest difference between the two if someone refuses to accepts a properly drafted and executed statutory form, that person or organization can be subject to criminal and civil penalties. This is the reason most estate planners use the statutory form as their default power of attorney form.

A word of caution: once you have signed your durable power of attorney form, your attorney in fact is able to begin signing on your behalf immediately. This can be incredibly convenient if you are travelling or if you and your spouse are living in separate states due to a move or a job change. It can also be great if you have a child who has recently left to go to college and you want to be able to continue to sign their financial documents for them.  But you should make sure you appoint someone you trust, implicitly. A durable power of attorney is sometimes sardonically referred to as a “license to steal,” since appointing someone untrustworthy to manage your affairs gives them the power to do just that.  A springing power of attorney is a document that only takes effect at your incapacity; this form is not available in statutory form.

You should keep all of your estate planning documents in a safe place where people know to find them (your power of attorney form will be of little use if your attorney in fact is unable to locate it). Contact a qualified attorney to talk about incapacity planning; your family will thank you. As always, I’m here to help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

I’d like to think my wife and I are on pleasant enough terms where I am never going to ask
Marriage and money concept of high wedding cost and divorcemyself this question: can I disinherit my spouse?  But the decision to disinherit somebody doesn’t always come about because you don’t like each other; there can be other reasons why it makes sense to leave your assets to someone other than your spouse.

One such reason might be that your spouse simply has enough assets in his or her own name and you have both agreed that your assets are best used somewhere else . . . perhaps in a trust for the education of your grand kids, or maybe for a charity that you support.  Another reason could be estate taxes — by leaving assets to another person (or to a trust), you prevent your spouse’s estate from getting so large that estate taxes will be due on his or her passing.  Yet another reason may be a concern that your spouse will be taken advantage of when you are gone, and you want assets to be held for him or her by a trustee.  So: can I disinherit my spouse?

Spousal Rights

The most important part of this answer is this: in Minnesota, you cannot — ever — disinherit your spouse through your will or trust document (by itself).  In Minnesota your spouse has a guaranteed right to his or her spousal share.  This means that even if your will is drafted to give all of your money goes to charity, and you change all of the beneficiaries of you IRAs and life insurance (your “non-probate” assets) to the names of your children, your spouse still has certain rights including the right to live in the house for his or her life and for some monthly support from the estate.

According to Minnesota law, your spouse also has a right to a percentage of the augmented estate.  The augmented state is (simplified) the value of your stuff plus the value of your spouse’s stuff.  If you and your spouse have been married for only a year, your spouse has a guaranteed right to three percent of the augmented estate.  This percentage increases every year of marriage until year fifteen, in which your spouse has a guaranteed right to fifty percent of the augmented estate — regardless of what you’ve written in your will or other planning documents, and regardless of how you’ve written your beneficiary designation for your non-probate accounts.   It follows that if at the fifteen-year mark the surviving spouse has more than fifty percent of your combined assets in his or her name already, then those assets already exceed half of the augmented estate and there is no additional claim to a spousal share.

Waiver of Rights

So, your spouse has a guaranteed, inalienable right to get a portion of your estate, right?  Not so fast.  There are three ways your spouse can forfeit his or her share.

  1. Pre-nuptial agreement:  Properly drafted, a pre-nuptial agreement can allow you and your spouse to disinherit each other.
  2. Post-nuptial agreement:  Your spouse can agree after you are married to forfeit certain property rights. This includes the right to his or her spousal share.
  3. Consent to will:  Your spouse can sign an acceptance of the terms of your will, including a will that completely disinherits him or her.

You’ll notice that all three of these options involve your spouse affirmatively giving permission to you to give his or her share to someone else.  This makes sense, since the spousal share is at its core a property right, and we can give away our property as we choose.  Your attorney should use extreme caution when drafting any of these three documents: your spouse should have his or her own attorney review the terms of the document to make sure he or she understands what is being given up and any consequences of doing so.

Disinheriting anyone is a big decision that can carry big legal consequences.  Make sure you contact an attorney who is experienced in estate planning before making any major decision that affects your loved ones.  Done properly, there are ways your assets may better serve your family than if they are all left to your husband or wife.  Please contact me so I can help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

When most people think of completing estate planning documents such as a will or trust
agreement, they think of how they would pass their assets to their loved ones. And indeed Rewardthat is the reason we create these documents, to make sure our loved ones are cared-for once we pass. But one of the best estate planning tools (to be used together with your estate planning documents) is to gift your assets to your loved ones while you are still alive. Lifetime giving has a number of benefits, both financially and otherwise.

Enjoyment

Who doesn’t want to see the looks on the faces of those they care about most when their loved ones receive help with their student loans or with the down payment for their first home? Of course your family members would be grateful for receiving this same gift after your passing, but being able to revel in your family’s happiness is part of the reason we accumulate assets in the first place. Spreading the feelings of security and freedom that go with having some extra money is as fulfilling as any reason to share these gifts with your loved ones while you are able to witness their smiles first hand. A friend told me about the time they got a lovely watch for a partner. He found it on men’s watches online. Likewise, the beneficiaries of your gifts will get to share the experience with you. Just only give them this sort of present if this is something that they are in to. For example if you are getting a present for someone who is an avid gamer, then you should get them something like these unranked Smurfs accounts for them to enjoy instead.

Simplicity

As an attorney, I do my best to keep costs under control for my clients. This ensures that the client feels he or she has received value for my services while I am able to maintain an efficient client relationship. Nonetheless, lawyer fees are lawyer fees, and if I am working to transfer property with the help of a probate judge, that is going to cost your beneficiaries money. If you transfer that car, those stock shares, or that cash while you are alive, you’re going to save some attorney fees because it is easier to transfer property while you are still alive. People often want to avoid the probate process specifically because it can be expensive.

Estate Taxes

This applies more to large estates than small or medium estates, but paying federal gift taxes on a transfer of property is cheaper than paying estate taxes for the exact same transfer after death. This is true even though the exclusion amounts and tax rates for these two taxes are identical. This is because gift taxes are exclusive, while estate taxes are inclusive. When I transfer money or assets by making a lifetime gift and owe federal gift taxes, those taxes are going to be paid by me, and will then be out of my estate . . . that tax money I just paid is now out of my estate for good, and will itself not be taxed . . . it will be excluded. If I make these gifts at death via my will or other estate planning vehicle, that tax is assessed on my gross estate. That means the money I will have to use to pay my estate taxes will itself also be taxed: it’s included. Lifetime gifts will therefore be subject to fewer federal estate taxes than those made at death because the money used to pay the estate taxes is also itself subject to taxation. I’ll emphasize that this benefit does not apply to most Americans . . . the current federal and estate tax exemption, as of this writing, is $5,340,000 per person, which means its $10,680,000 for a married couple. That’s some big gifts that you’ll have to make before you owe any federal gift or estate taxes.

Appreciation

When you hold on to an asset that appreciates in value, eventually you may have to deal with estate taxes which will be assessed on the value of that asset at your death. If you have an asset that you believe will appreciation significantly over your lifetime, consider making a lifetime gift to a beneficiary or to a trust for a beneficiary. For example, if you started a small business and you owned closely-held shares of that business, you may consider giving some of these shares to your children today (taking into account possible gift tax issues). That way, as the business appreciates in value, those shares will also appreciate out of your estate.

Proceed with Caution

There are a couple tax rules that will apply to most people. First, gifts of appreciated property made after-death get a huge tax break in the form of a step-up in cost basis. If I were to buy a share of stock for one dollar (which means the stock has a cost basis of one dollar) and it increases in value to $100 and I sell it, I’ll owe capital gains taxes on $99 (the sale price minus the cost basis of one dollar). This is because the sale of the stock realized a capital gain of $99. If buy that same share of stock for one dollar, then it increases to $100 and I give it to my family member, they will keep my same cost basis. Because of this, if my family member subsequently sold it they would again realize that same $99 capital gain, and would owe capital gains taxes. If, however, I gave that same share of stock to that same family member after my death, that capital gain would “reset” . . . the new cost basis would be the value of the stock on the day I died. That means if I buy a share of stock for one dollar, it appreciates and is valued at $100 when I die, the family member who gets that share of stock now has a cost basis of $100. If he or she sells it for $100, it is completely free of capital gains taxes. This step-up in basis is a valuable estate planning tool, and is ideal for property that has appreciated significantly.

Note that this would not apply to assets that do experience capital gains, such as cash. Note also that qualified charities can receive shares of appreciation stock (or other assets) and sell these assets for cash and pay no taxes whatsoever. This is because qualified charities are tax exempt, which includes capital gains taxes. Assets that have appreciated in value are usually best given to charities or to your heirs at your passing.

Another thing to watch out for is the annual gift tax exclusion amount, which is as of this writing $14,000. This means you can give up to $14,000 per year, per person. You could give $14,000 to each of your children, another $14,000 to any of your friends, etcetera. If you exceed this amount to any single person, you will typically have to file a gift tax return (Form 709) with the IRS. This is because any amount you gift to any one person over $14,000 gets subtracted to your lifetime exemption ($5,340,000, as mentioned above). The IRS wants to track how much of your lifetime exemption you have used. You may not owe tax, but you’re still going to have to file the form

Your Plan

Making lifetime gifts is a satisfying and generally straight forward method of estate planning. It helps your family today while possibly saving on taxes. But beware of pitfall — there are rules about how much you can give without running afoul of some complex gift and estate tax rules. Lifetime gifts are to be used in conjunction with — and not instead of — a comprehensive estate plan. A qualified estate planning attorney can guide you through these rules. I’m here to help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning