An estate plan is not a living trust or a will. A lot of clients think their living trust is their estate plan. An estate plan includes several legal tools: wills, powers of attorney, health care documents, living trusts, beneficiary designations and more. All of them are tools in your legal toolbox. A living trust or a will is just one component of it. Here is a pop quiz, with the answers.
1. What is the California health care document called?
Question: In California, what do we call the document people use to designate a person to make health care decisions for them?
Answer: An "advance health care directive." Many people think it is a living will, and many states still use that term, but in California it is an advance health care directive. There is no "d" at the end of "advance."
2. Is the mortgage still due during probate?
Question: Jimmy and Sue own a home and have no estate plan. They die in a car accident. The home has to go through probate court, and the lawyer says the process could take a year or more. Does the mortgage still have to be paid during probate?
Answer: Yes. Just because you died does not mean the mortgage company stops wanting its monthly payment. If your family is stuck in court for two years, that is not much fun for them.
3. A joint account and a will that says "equally"
Question: Charlie has five siblings. Their mother has $500,000 and put Charlie on all her accounts as a joint owner so he can help her pay the bills. She also wrote a will saying "All my children shall share my estate equally," and even videotaped herself saying the same thing. When she dies, how much does each child get?
Answer: Charlie gets all the money, because he is a joint owner on all of the accounts. It does not matter what the will or the videotape says.
4. When is a will effective?
Question: A will is generally effective upon your death. True or false?
Answer: True. A lot of clients have a will and think they are all set, but a will generally goes into effect only after you die. It does not do you much good while you are alive. A will is simply a letter to the judge telling the judge where you want your assets to go.
5. An inheritance and a divorce
Question: Mary is in a troubled marriage and is contemplating divorce from her husband Todd. Her parents died and left her $750,000. She files for divorce five years later. Does Todd get any of the $750,000?
Answer: It depends on what Mary does with the money when she inherits it. Inheritance from your family is your separate property unless you choose to treat it as community property. If Mary deposits it into a joint account or a trust account with Todd on it, that becomes a problem in the divorce, because Todd will probably want a piece of it.
6. Joint tenants and a new spouse
Question: Bob and Sally have two kids and own their home as joint tenants. Sally dies. Years later Bob remarries and puts his new wife, Susan, on title as a joint tenant. Bob dies a few years later. Who gets the house?
Answer: Susan. You would hope Bob's kids get the house, but because Bob made Susan a joint owner, she gets it and the kids get nothing. Susan might choose to give the property to the kids, but that is a whole other discussion.
7. Tenants in common and an old will
Question: John and Mary own their home as tenants in common. Mary has an old will that gives everything she owns to her former boyfriend, Jimmy. When Mary dies, who owns the home?
Answer: John owns it with Jimmy, because Mary's will gives her share to Jimmy. The deed says "tenants in common," not joint tenants, and that is the trick. The wording on the deed is critical.
8. Life insurance payable to a trust
Question: Laurie has two minor children, ages 10 and 16, and a $500,000 life insurance policy. She names her living trust as the beneficiary. Why would she do that?
Answer: Laurie does not want that money going to a 10-year-old and a 16-year-old. Once they turn 18 they would have full access to it, and they would probably blow it. With the policy payable to her living trust, the trustee she chose is in charge of the money and distributes it to the children responsibly.
9. A child on the deed who becomes incapacitated
Question: Kenneth added his son Mark to the deed of his home to make sure Mark inherits it. Neither has any estate planning documents. Mark is in a car accident and becomes incapacitated. Kenneth now needs to sell the house to pay health care bills. Can he?
Answer: It will be tough. Mark is on the deed but is incapacitated and cannot sign anything. The title company will be looking for two signatures, so Kenneth cannot sell.
10. A "springing" power of attorney
Question: Bob's sister Ann is in a car accident and cannot handle her affairs. Bob takes Ann's durable power of attorney to her bank to withdraw money for her medical expenses. The bank says it cannot honor the power of attorney because it is "springing." What does that mean?
Answer: Ann's power of attorney probably requires her to be declared incompetent before Bob can do anything. I sometimes see documents requiring two or even three physicians to declare the principal incompetent before the named person can act. Bob now has to cart Ann around town looking for doctors to declare her incompetent.
11. A life insurance beneficiary and a new will
Question: Mary is the named beneficiary on her boyfriend John's life insurance policy. They broke up a year ago. Last month John wrote a will giving all his assets to his siblings in equal shares. When John dies, who gets the life insurance money?
Answer: Mary. He listed her as the beneficiary of the policy, and it does not matter what the will says.
12. Guardianship without nominated guardians
Question: John and Mary die leaving minor children and no estate plan. The children will inherit $500,000. Mary's estranged brother suddenly takes an interest in the kids and petitions the court for guardianship and control over their inheritance. Can he?
Answer: Yes. Anyone can petition the court for guardianship of the children. What matters is whether John and Mary took the time to nominate guardians. If they did not, generally the first person to the courthouse who impresses the judge may end up with the kids and with control of the money.
13. A child on the house who gets sued
Question: Sharon is 65 and adds her son Brian to her house as a joint owner so he gets the home when she dies. Brian is later sued for causing a bad car accident. Can they get to Sharon's home?
Answer: Yes, because Brian's name is on the house. Any time you add a name to property or a bank account, you add a massive bull's-eye to that asset, and any trouble the other person gets into becomes your problem. That is another reason to think two or three times about adding your kids or anyone else to your assets.
14. A divorce and a life insurance policy
Question: James and Cheryl divorced because James was verbally abusive and financially irresponsible. They have minor children, and Cheryl took out a $1 million life insurance policy so the children would have enough money when she dies. If she dies, who will likely end up with the kids and control of their money?
Answer: James, because he is the natural father. He would probably petition the court for guardianship, or he might get automatic guardianship depending on the divorce. If Cheryl does not want James to control anything, she should create a living trust that names someone else to be responsible for the $1 million. Be very careful when it comes to divorce and things of that nature.