Recorded Webinar from Wednesday, September 30, 2020.
Part of the Gilfix Law at Home series presented by Michael and Mark Gilfix of Gilfix and LaPoll Associates, LLP.
As we all go through the coronavirus together, it is critical to understand the steps we must take to ensure that we and our families are legally covered.
There are really three core documents that virtually everyone in America over the age of 18 needs.
- Revocable living trust.
- Durable power of attorney for finances
- Advance health care directive
If you have these three documents it’s a way of making sure that if you become incapacitated if you become sick and after you’re gone your affairs are in order and your family’s not exposed to court actions or the need to go to court
Revocable Living Trust
Talk to somebody who knows what they’re doing and make sure that the trust is appropriate for you. You can’t just fill out a form and expect your assets to be protected. The trust determines the extent to which your assets are protected for the benefit of your family and how they ultimately inherit
If I have a will, why would I need a trust?
- If you own any property or if you have over about $150,000 in total assets, your estate is exposed to probate meaning everything has to go through the California court system.
- A will is only effective at death, so your executor can’t help you while you’re alive.
- A trust is faster than probate and costs less.
- You can name a backup trustee who can help you if you become incapacitated.
Durable Power of Attorney
A durable power of attorney for finances gives someone the authority to manage your finances if you become incapacitated. Why do you need one in addition to your trust?
- Retirement assets are not titled in your trust. If a document needs some signature regarding your IRA and you’re incapacitated, only someone with power of attorney can sign for you.
- It can empower someone to do protective tax planning for you—if it contains the appropriate language.
- It can enable somebody to take asset protection planning steps for you—if it contains the appropriate language.
We have seen durable powers of attorney abused, so don’t name your new “best friend” in your durable power of attorney. Name somebody you know and deeply trust.
Why is it so important to keep your durable power of attorney updated?
If the document is old, banks and other institutions often won’t accept it even if it’s valid, or they’ll cause all sorts of issues. The more recent the document is, the less likely it is you’ll have problems.
Advance Health Care Directives
With an advance health care directive, you’re doing two things:
- Naming a trusted individual who has authority to make health care decisions for you if you can’t.
- Describing how you want critical decisions made.
You can be as detailed about that as you like about end-of-life decisions and what you want done. You can talk about organ donations, burial, and worries that you have. You can also add a letter of guidance for your loved ones to add some additional details about what you want.
Again, it’s important to keep this document updated. We’ve had some clients come in to add language stating they don’t want to be put on a ventilator if they are hospitalized for COVID-19.
Communicating with Your Family
You have to decide what to share with your family based on your own family dynamics, but we’ve found that the more families communicate ahead of time, the less conflict there is. Make sure you bring whoever you are naming as either trustees or beneficiaries into the process of creating these documents.
Special Kinds of Trusts
What if you want to protect your assets from your children—or from their spouses? What if you have a large estate and want to avoid estate tax? What if you have a child who is disabled and unable to work, or unable to make decisions? There’s a trust for that.
Family Protection Trust (“Dynasty Trust”)
Instead of leaving money to your children directly, you create a family protection trust for each of them and leave your assets to their trust. These assets are not commingled with your child’s own assets and will not be lost in a divorce settlement. They are not at risk from creditors or lawsuits. And there is zero estate tax exposure.
Wealthy families have been doing versions of these trusts for years, but there’s no reason why this tool should be reserved for billionaires. It’s almost like magic from a legal standpoint.
Special Needs Trusts
If you have an adult child with a disability or with special needs who is not able to work, he’ll lose eligibility for programs like SSI and Medi-Cal if he inherits your money directly. The solution is something called the special needs trust.
It’s there as kind of a lifelong safety net for your child to pay for anything he needs that is not adequately covered by government programs for which he qualifies. You leave money not to the child with a disability but to the special needs trust.
Michael and Mark Gilfix wrote the book on special needs trusts: Special Needs Trust Creation and Management Guide.
Side note: the ABLE Act also lets you set money aside for a child who qualifies for government benefits and yet not interfere with eligibility.
Choosing a Trustee
One of the most important decisions you will make is who to name as trustee. It’s not the person you love the most or the one who lives closest to you. You need someone who is responsible and will do the job.
If you don’t have a child or a close family member who can do this for you, there are professional fiduciaries who are in the business of being trustees.
You can name different trustees for your finances and your health care.
Your plan is only as strong as its weakest link. That’s why you need to talk to your family about these documents even if you already have a plan. They come into play when you get a doctor’s certification that you’re incapacitated. These documents don’t work if no one knows they exist.
- Make extra copies of your advance directive and give them to your healthcare providers. Make sure your doctor has a copy on file.
- The person you’ve named as backup trustee should have a copy of your power of attorney.
- Give a copy of a certification trust (a quick summary of your trust) and of your power of attorney to your financial advisors, so they know who they’ll be dealing with if something happens to you.
- Give your financial institutions a copy of your certification of trust.
- Let your loved ones know where you keep your own copies of all these documents.
- Give copies of documents to anyone who is named in them.
Avoiding Estate Tax
40 cents of every dollar above the estate tax exemption goes to the IRS. In 2020, you can leave up to $11.58 million to your heirs without a penny of estate tax exposure. (The receipt of an inheritance is not taxable.)
The exemption is set to go down by 50% by 2026—and given that state governments are running a massive deficit, they may choose to impose their own estate taxes.
Most of us have estates that are larger than we think. Our clients typically have estates that are twenty times bigger than what their rough estimate is.
In addition to the family protection trust we mentioned earlier, there are some simple things that you can do to reduce your tax:
- The annual exclusion: you can give away up to fifteen thousand dollars per person to as many people as you like year after year.
- A Grantor-Retained Trust lets you transfer assets into a trust but retain income from them. The assets are excluded from your estate for tax purposes.
For more information, read Beat Estate Tax Forever (Second Edition) by Michael Gilfix.
What You Can Do Now to Protect Your Family
- Overcome the danger of denial.
- Overcome the danger of delay.
- Call our office 650-493-8070 To set things up.
If you’re a married couple who did your trust about six years ago and your attorney is retiring, should you go back to that person or choose a new attorney?
- If the attorney is just one person and not a firm, you should look for a law firm that will be around for many years
- If you’re a married couple and you have an A-B trust, you need to look at the pros and cons of the A-B trust and whether you should change it to an alternative arguably simpler approach.
Is a low-income family going to need a trust? Do they need a legal advisor in setting one up?
- If you don’t own any property and you really have very few assets, you might not need a trust. Maybe a will would be enough.
How often do you need to update these documents to avoid being stale?
- Every five years realistically is a good time to update your power of attorney your advance directive.
If my mom names me in her power of attorney document, can she still make her own decisions and manage her finances?
- Giving someone power of attorney now doesn’t mean you can’t sign for yourself. You can also revoke power of attorney.
How can a family protection trust avoid estate tax exposure that much?
- These trusts are why wealth gets concentrated in families.