Rebecca Robins, a tax and financial services business owner (Robins Financial), interviewed me on the Santa Clarita Valley Local Leaders Show. She asked what estate planning is, who needs it, what happens if you do nothing, and what the process looks like. Below are her questions and my answers.
How did you come to focus on estate planning?
I have been a lawyer since 1993. For a good portion of my career I was a litigation attorney defending personal injury cases for insurance companies, in front of juries, taking depositions and fighting with people in adversarial settings. After about ten years I got tired of the fighting and looked for a more constructive area of law. Estate planning had always appealed to me: sitting across the table from a husband and wife and working out wills, living trusts, powers of attorney and health care directives that reflect their values. I also help families with post-death matters such as probate, and trustees who do not know what to do next.
What is estate planning?
The word "estate" turns many people off because they picture a mansion and someone who plays polo on weekends. Think of "estate" as meaning "stuff." Everybody has stuff. You might have $50 or $50 million. It includes real estate, bank and investment accounts, jewelry, clothing and everything else you own. Estate planning is planning what to do with it, and it has two parts.
Who is in charge if something happens to you.
It is about more than death. It is about giving people the legal tools to help you after a car accident, dementia, Alzheimer's disease or a coma.
Where your stuff goes after you die.
You control who gets it, and in what manner, instead of leaving it to chance.
Isn't estate planning what wealthy people do?
Yes, and they know how to stay wealthy. Average folks, and I count myself among them, should learn from them. Wealthy people use the same legal tools available to everyone. I read an article saying that most middle-class wealth is lost within one to two generations because people do not know how to transfer it or protect it against problems.
And a loss hurts an average family far more than a rich one. If Bill Gates lost a million dollars from his estate he would probably be fine. If an average family loses a good part of its estate to legal fees, the court system or hospital bills, it hurts a lot.
Why is estate planning important if you have minor children?
Minor children cannot really own anything. If my wife and I died with no planning, our home would eventually go to our two children, but children under 18 cannot own real estate. A life insurance company will not write a check to a 10-year-old. It will tell the child to wait until age 18.
I have a million-dollar policy, so if my wife and I died together, each of my children would get a check for $500,000 at 18, free and clear. Given my own youth, I doubt they would handle it well. A child may also need a guardian appointed by a court, which can be lengthy and expensive.
There is also the question of who raises them. In an estate plan you name guardians, so that you choose, not the state or a judge. Anybody can get in line to be your children's guardian, which can lead to family infighting. You can be specific about where you want your children to grow up, whether they should stay together, their faith and their education.
What happens if someone does nothing?
Doing nothing is probably the most popular estate plan, and it is free. But it deserves a few minutes. A client named Tim came in after a divorce. If he did nothing and stayed unmarried, everything would go to his daughter. He liked that, until I asked how old she was.
She was eight. No insurance company will write a check to an eight-year-old, and a house will not go to an eight-year-old. It goes to the child's guardian, who was his ex-wife. So all his work and money would end up under his ex-wife's control.
A wealthy client asked the same question. With no kids, the assets would go to her parents, who had passed away, and then to her siblings. She had one brother, with whom she did not get along, and she did not want everything she and her husband worked for to go to him. They came in right away. By doing nothing, everything can end up in the wrong hands, because state law decides.
You could also end up in probate, where the court supervises the transfer of your assets. It is costly. For example, the statutory fee for the attorney on a $700,000 estate is about $17,000, and the executor is entitled to the same amount, so you could be looking at roughly $34,000 in fees just to transfer assets that a living trust can transfer without court.
Is it worth meeting with an attorney even if you plan to do nothing?
Yes. If someone has no documents, we map out what happens if they do nothing and ask whether they are comfortable with that. Nine times out of ten they are not, and we create a plan. If you do not, it happens the way California law dictates.
What are your thoughts about joint ownership of assets?
Many married couples own everything jointly by default. I caution people, because in my opinion joint ownership is one of the leading causes of people losing their wealth. The dangers include:
Last man standing.
The last person alive controls the entire asset. If my wife and I own real estate together and I die, she controls where it goes. If I own with my brother and die, he does. I have no say. When two siblings inherit a house together and one dies, the survivor gets the whole house and the other sibling's family gets nothing. That is unintentional disinheritance.
It only postpones probate.
Putting someone on title avoids probate on the first death, but eventually one person is left and then the house goes through court.
It adds a bullseye.
If an elderly mother puts her son Bobby on her home and Bobby hits a child with his car, anything with Bobby's name on it is fair game, including Mom's home and accounts.
Remarriage.
Suppose my wife and I are on title and she dies. I remarry and put my new wife on everything, as most people do. If I die, my new wife owns everything my first wife and I worked for and my children get zero.
There are also tax reasons that are too complicated to get into here.
What is a living trust?
A living trust is nothing more than a contract, and nothing mysterious. It says who you are and what you own. It says that if anything happens to you, you have chosen certain people to take care of your things. And it says where your things go after you die, to whom and in what manner.
In our family, my wife and I do not own anything. The Mansour Family Trust owns everything: our house, bank accounts and investment accounts. If either of us dies, the trust continues to own and govern the assets. There are three major benefits:
- Anything in the name of the trust avoids the court system.
- Anything in the trust can be controlled by the trustees you chose in advance.
- Anything in the trust is governed by its rules. For example, my children will not receive their inheritance right away but one-third at 25, one-third at 30 and the balance at 35, so they do not squander it.
Does a living trust help if you become incapacitated?
Yes. The chance of incapacity is sometimes greater than the chance of death, and a good trust sets out the mechanism of succession: how and when the next trustee steps in. There are many nuances, and many kinds of living trusts, just as there are many kinds of cars. Anything in the trust can be managed by the successor trustees you chose.
What other documents are part of a typical estate plan?
A living trust is one part of a larger plan. The big four are:
The living trust.
A pour-over will.
It is a backup to the trust. If something has to go through court, the will directs all of the assets back to the trust.
An advance health care directive.
You select people to make health care decisions for you if you cannot.
A durable power of attorney.
In my opinion perhaps the most important. You select someone to act for you in virtually every other circumstance: talking to credit card companies, your former employer, your lawyer, your CPA and the IRS.
Other documents include nominations of guardians for your kids, business agreements and community property agreements, especially for married couples with separate property issues.
What if someone creates a living trust but never puts assets in it?
That is probably the biggest reason living trusts fail. People do not take the time to change title to their assets. They say, "But the trust says this." It doesn't matter, because title trumps. If you own everything jointly with your brother and you die, your brother gets everything, no matter how many trusts or wills you have. You must transfer your assets into the trust, and put assets you acquire later into its name as well.
What if nobody knows the documents exist?
That happens, which is why you must tell the people on your team that they are on the team. If you pick trustees, agents and guardians, let them know, and tell them where your binder is. They do not have to read the documents, which can stay private, but they need to know where they are. I keep copies for my clients, but I do not always know when a client passes away or becomes ill.
Should the documents go in a safe deposit box?
I am against it. It usually leads to an inability to get at the documents, and the family stands outside the box unable to open it. My own estate plan sits in a binder on a bookcase at home, and everyone who needs to know knows where it is. A copy is also kept on a disk at my office. These documents may need to work on a moment's notice, so they must be accessible.
A trick for the health care directive: give a copy to the person you chose as your agent and have them keep it in the glove compartment of their car, so it is with them if they need to drive to the hospital. You can also put it on your refrigerator, because paramedics and other health care professionals are trained to look there. I know it sounds silly.
What are the steps to getting an estate plan?
- 1Call the lawyer.
- 2Fill out the questionnaire.
- 3Attend the initial meeting.
- 4Review the drafts.
- 5Sign the documents.
Call the lawyer.
The hardest step is making the call. Once you have the appointment, everything is downhill. The appointment is usually about three or four weeks out.
Fill out the questionnaire.
I have clients fill out a questionnaire on my website, or we mail it. It walks you through who you want as trustee, who makes health care decisions, who the guardians for your children should be, and so on. Send it back with copies of your asset information so the lawyer can analyze estate tax and title issues.
Attend the initial meeting.
Mine usually lasts about an hour and a half. We come up with a plan, address your concerns and everyone leaves with a direction.
Review the drafts.
About three weeks later clients receive drafts by mail, with a summary and highlighted passages that deserve special attention.
Sign the documents.
We scan everything, and give clients the originals in an organized binder with instructions for them and for their successor trustees.
Any final advice?
Take five or ten minutes to look at your situation and ask whether you are okay with it. Talk to a lawyer. Sometimes I tell clients, "You don't need to do all of this, only part of it." Even a good health care directive is better than nothing. Just be proactive.
How can people reach you?
Call 661-414-7100 or visit mansourlaw.com (Mansour is spelled M-A-N-S-O-U-R).