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Buckle up and Beware of Cheap Estate Plans

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Why are some estate plans more expensive than others?

If this is your first time doing an estate plan, one question you are probably asking yourself is, “How much is a trust going to cost?”

This is a reasonable question to ask. But it should not be the only question you ask.

Instead, you should also be asking, “What kind of trust should I get?”

By understanding what separates one trust from the other, you will then quickly understand why one trust costs only $699 (with unlimited lifetime changes) while the other trust costs over $5,000 (with no amendments covered).

Believe me when I say this: you will get what you pay for.

Many people think, “But my situation is very simple. I only have a house and a bank account.” Or they will say “I don’t need anything fancy” or “My friend got a trust and paid only $1,500.”

The problem with buying estate planning documents is that – unlike other things you purchase – the trust is something that gets used only when you die. You will not be here to know whether it worked. You will not be here when your family relies on the documents you purchased. You will not be here when your family is told that the trust you created was not adequate. You will not be here when they wished you had paid a little more to avoid this from happening.

This happens all the time in our line of work.

And here’s another thing you won’t believe: Lawyers actually make more money because of things like Legalzoom or DIY planning, because in those situations, clients end up having to go back to a lawyer to fix the mess.

Again, I see this happen all the time.

In this article, I will educate you on what you need to know when purchasing a trust, so that you will know the right questions to ask your lawyer.

1. Not all trusts are the same.

Warren Buffet wisely said, “Price is what you pay. Value is what you get.”

People do a good job of asking for the price. But when a lawyer says it’s $3,500, how do you know the value of what you are receiving? Is $3,500 good or is it bad? If the only thing you are comparing is price, it’s obviously bad compared to someone who did theirs for $2,500. But what are you getting and what did your friend get?

Let’s use an analogy. Are all cars the same? Are they all the same price? Are all cars built and maintained the same?

Of course not.

But trusts and cars are very similar. Both of them are complex mechanisms made by human beings. Both have pretty complicated engines underneath the surface. After you die, your successor trustee is going to get behind the steering wheel of your Trust vehicle, and with your assets packed in there, is going to drive them to the people that you want to have them.

So, is a Lincoln Towncar the same as a Yugo? Because if you want the cheapest cars built, you will pick the Yugo. But there’s only one problem: you can’t buy a new one in this country anymore because they were banned from import. Consumer Reports Magazine called them the deadliest car ever built!

When you buy any of these cars, and you drive them off the lot, they each have four wheels and an engine. They drive like a car. But, are they the same?

Of course not.

What if you found out that the car you bought had no air conditioning, no heater, and that a steering wheel would cost extra? Did the low price justify the value you got?

And unlike cars, here’s the problem with trusts. When will you know which trust you bought? When are you going to find out for the first time whether you got the Lincoln Towncar or the Yugo?

When you’re gone. And this is the problem.

2. Who will administer your trust?

If someone were to ask me, “What is the one question that clients don’t ask that they should be asking?” the answer is an easy one: Trust administration!

People just assume that by having a trust, somehow magically when you die, everything is immediately sorted. They think there’s no fees and no work to be done. After all, what is the point of doing a trust then, they think?

Newsflash!

After you die, your trust needs to be administered. What does this mean? Each state has laws and rules after you die that require your successor trustee to follow. If they do not, your trustee can get sued personally.

For example, your trustee should follow Probate Code section 16061.7 and send a copy of the trust, along with a notice, to all beneficiaries and heirs of the decedent. This starts a 120-day clock for these individuals to contest the trust.

Your trustee should also lodge the decedent’s will with the court, pull a tax ID number with the IRS, file a timely claim for reassessment exclusion with the County Assessor if applicable, file a Certification of Trust, complete an Affidavit of Death of Trustee, compile an accurate trust accounting, file tax forms 1040 and 1041, settle all the decedent’s outstanding debts and legal obligations, open an interest-bearing account and manage according to the Prudent Investor Rules, and conduct an appraisal of all decedent’s assets and file for portability, if eligible. For a good article on what Trust Administration entails, read here.

Question — do you think Legalzoom handles any of this after you buy a trust from them?

Another point. Most estate planning lawyers do not know how to administer a trust. They are simply drafting a document but have never been to court in their lives. So when problems occur, they will refer you out.

Can you imagine if BMW told you, “We don’t know how to fix a BMW. We just make them.” Does that sound right to you?

I hope you’re starting to see the differences in cars now.

But we’re just getting started…

3. Does your trust address the issue of taxes?

I have reviewed thousands of trust documents in my career. One area which I find most lacking deals in the area of taxes.

Here’s a true story of a client who created a trust with another lawyer. We’ll call her Cindy. Cindy’s trust left everything to 10 people and 2 charities. Cindy’s retirement account left everything to her trust.

Only a lawyer who has administered a trust and knows a thing or two about IRD (income in respect of a decedent) sees a big problem here.

Because of the taxation of retirement accounts (IRD), and the fact that a trust (after you die) pays taxes at a 37% tax rate, bad things happen very fast if you don’t know what you’re doing!

Cindy’s lawyer should never have written the trust this way. Instead, the charities should have been the beneficiaries of the retirement accounts, with the individuals being listed as the beneficiaries of her trust. That difference could have saved Cindy’s beneficiaries over $10,000 in taxes!

So, when you are dealing with an estate planning lawyer (I hope I’ve convinced you by this point to move far away from any online company by this point!), ask about their knowledge of taxes. Because when you die, taxation is vital.

Here are some questions to ask about your trust:

  • Are there tax apportionment clauses in my trust? Generally, state law determines who has the ultimate burden for the taxes, not federal tax law. And if a decedent’s will or trust is silent on the payment of taxes and expenses, state law provides default rules ordering payment. But you can draft the decedent’s will or trust to override the state’s default apportionment rules. Consequently, every decedent has the ability to direct how taxes and expenses will be paid and apportioned.
  • Will death taxes be apportioned to the beneficiaries of your retirement accounts? Or will they be paid by the beneficiaries of your trust? This is important especially when you have different beneficiaries named for different assets.
  • Will I have a bypass trust? If so, are there strategies to preserve the step-up in basis (which is normally lost in a bypass trust)? Otherwise, the beneficiaries of my bypass trust will owe more in capital gains taxes at some point.
  • How will your properties be titled? Is there a plan to preserve IRC 1014(b)(6)? Note that many practitioners assume that just because you live in California, you qualify for double step-up in basis. This is not true. How the property is characterized matters significantly.
    Does your attorney file final tax returns, including Forms 1040, 1041, and 706? If not, is there someone who is going to handle your trust accounting and is familiar with fiduciary trust accounting?
  • How does the trust define “principal” vs “income,” for purposes of fiduciary tax accounting? For example, if your retirement account pays out $50,000 in RMDs to your trust, how does this get distributed to your beneficiary? Note that some state rules only permit 10% of this money to pass to your beneficiary if your trust distributes income to the beneficiary.
  • Are there general powers of appointments listed in the trust to help preserve estate tax inclusion?
  • Does your trust allocate for GSTT exemptions such that your trust is maximizing use of the GST Exemption by creating generation-skipping transfer tax exempt and nonexempt shares?
  • Is there a provision that all charitable gifts and bequests be made, to the extent possible, from property that constitutes “income in respect of a decedent?”
  • Do you have a disclaimer option at the first death? Or does your trust include a Clayton election? Or neither? (These strategies allow for estate tax reduction at the death of the first spouse.)

Question — do you feel comfortable making these decisions yourself using an online software?

4. What measures do you have in place for incapacity planning?

Estate planning is not only for when we die. Statistically, it’s more likely that we will become incapacitated at some point in our lives — and your documents need to reflect that.

Unfortunately, many people say, “I already have a power of attorney and a healthcare directive. What more do I need?”

Again, it’s not about having it or not having it — it’s about the quality of what you have.

Here are some important things to look for when examining your documents:

  • Are your successor trustees and your agents for power of attorney the same people or different people?
  • Do you have backup agents in case your primary agent cannot perform the role?
  • Are your financial agents non-citizens? (If so, that may cause your trust to become a foreign trust, which will lead to a large withholding in taxes).
  • Does your power of attorney have the power to make gifts for educational expenses on behalf of your beneficiaries? Can they pay for their medical expenses if you are incapacitated? If there’s an estate tax, can your power of attorney gift assets in excess of the annual exclusions or are they limited in dollar value?
  • Most trusts state that while you are alive, only you can make changes to the trust. What happens if you are incapacitated though? How can your agent make changes to your trust? (California law only permits this if both the trust and the power of attorney allow for such a power to be stated explicitly. Unfortunately most plans, by the way, do not include such powers).

Many banks and financial institutions do not accept powers of attorney and reject them for a number of reasons. One of the most common reasons is that the power of attorney either does not comply with state law, or does not include all the possible provisions that are needed. Here are examples of just some of the powers that are often missing from documents:

  • Power to provide support for dependents
  • Power to manage digital assets
  • Power to amend a trust
  • Power to fund a trust
  • Power to create a testamentary trust
  • Power to purchase/maintain insurance
  • Power to gift assets
  • Power to have custody over minor children in case of incapacity
  • Power to trade on margin
  • Power to hold S-corporation shares
  • Power to manage professional businesses

One of the areas most lacking in documents I’ve reviewed is the inability for a trustee to offer any form of special need planning for a surviving spouse after the death of the first spouse. What happens if you become in need of services like Medi-Cal or Social Security Disability? I had a client pass away and his spouse could not inherit all the assets otherwise it would have disqualified her from governmental benefits. Is there a contingent plan (usually through a testamentary trust) for this possibility, or does your trust require that everything gets paid to the surviving spouse no matter what? In the right situations, I will include a special provision that requires the Trustee to transfer assets from the Living Trust to the deceased spouse’s pour-over Will to create a testamentary trust or trusts for the surviving spouse that will not count as disqualifying assets for Medi-Cal purposes.

5. Does your trust come with seatbelts?

What if you found out that the car you bought did not come with any seat belts? What if it did not come with power steering? No anti-lock brakes. No air bags.

Would you still feel good that you got a good deal?

There’s a saying: “The bitterness of poor quality remains long after the sweetness of low price is forgotten.”

Similarly, the $1,500 trust that you paid for is not going to include any safety features that your beneficiaries will need. What type of safety features can you include in a trust?

Protection against divorce, lawsuits, and creditors. If my child gets divorced, I don’t want the inheritance I leave to them to go to some other family that is not my own. If my child gets sued, I don’t want the money I leave to them to be used to pay that lawsuit.

Many trusts leave assets to your children at an arbitrary age – 18 or 25 or 30. We call this “ages or stages” distribution. The problem with this is that once the child gets the money, it’s not protected from any of the above threats. Instead, a smarter strategy is to leave assets to your children, but protected in a trust for their benefit, which they can still manage and use according to an ascertainable standard.

Furthermore, what if your child is a spendthrift? What if they have a drug addiction? What if they have a gambling problem? What if they have special needs and can’t inherit such money in their name, otherwise they will be disqualified from governmental benefits?

A robust trust will protect distributions in these situations, so that the assets in the trust are kept safe and secure — until it is safe and advisable for your child to inherit.

If you don’t include such safety features in your trust, then the money you leave to your children can easily be taken away from them. Unfortunately, this happens everyday.

6. Fund your trust and keep your schedule of assets updated.

There are two big problems people make here. And the problem is that online document preparation companies don’t help you with funding your trust.

First, some lawyers will give to clients a Schedule of Assets that lists the client’s assets. Clients mistakenly believe, based on this, that “my lawyer put all my assets in my trust.” They say this because, quite literally, they see the assets listed in their trust document. So they believe that nothing needs to be done further.

Unfortunately, when they die, there is a probate. But why? “I thought the lawyer put everything in the trust.”

In order to “put it in the trust,” the asset itself needs to be retitled. This means, if it’s a bank account, you need to go to the bank and instruct them to retitle your bank accounts in the name of the trust. If it’s a property, you need to file a grant deed changing the name from your name to the name of the trust (but don’t do this yourself, because you will trigger a taxable event, likely). If it’s a life insurance policy, you will change the beneficiaries. If it’s a business (LLC, S-Corp, C-Corp), you will assign your ownership interest to your trust. We call this “funding your trust.” If your trust is not funded, there will be a probate.

The DIY packages do not include instructions on making sure to do beneficiary designations — that would be giving legal advice, God forbid!

The second problem is that people do the funding but they don’t leave an updated Schedule of Assets for their trustee. So what happens is that when they die, the trustee does not know what all the assets are or where to go. By leaving an updated Schedule of Assets, it’s very much like leaving a treasure map behind — your assets will be listed on this, and your trustee will know where to go to get control over those assets.

7. Make sure your lawyer is updated.

Many estate planning lawyers – and all the online companies – create your documents and then after you sign them, that’s the end of your relationship with them. You move on and they move on.

But what happens when your assets change? What happens if you lose your documents? What happens if the people you named as guardians or trustee move or their phone numbers change? What happens when you die, will your trustee know who to call or what to do?

Legalzoom does not take such calls. In fact, that is when they will tell your trustee, “I’m sorry, but we don’t go to court. We don’t administer trusts. Go talk to a lawyer.”

It is at that point when your family realizes that the trust you bought won’t do much. It is then that you realize the value of what you got.

We recommend that you keep a lifetime relationship with the lawyer who drafted your documents. This becomes especially useful when your assets change, or when your family has questions after you pass away, or if someone needs a copy of the documents because they are lost. More importantly, you should be updating your trust document, and getting advice from your lawyer as the law changes.

Again, ask yourself — what type of trust are you buying? What type of service are you getting?

8. Your trust should plan for all possible contingencies.

Does your trust have a Titanic clause? Is there a survivorship provision? How does it deal with state anti-lapse statutes? Read here for more information on what these issues mean for your trust.

What happens when a beneficiary files a challenge to your trust? Do you have an enforceable no-contest provision?

How does the trust leave for beneficiaries who are minors?

9. Pack for all seasons.

Creating an estate plan for your family is like packing for a trip. You expect the weather will be a certain way, so you pack clothes based on that. But what happens if the weather suddenly changes? What happens if your trip lasts longer? What happens if you end up somewhere else? You want to make sure you pack for all seasons, because we don’t know what the future holds. So these provisions and scenarios above is the sweater you take on a trip that you hope you’ll never need. But, it is better to have it and not need it, than to not have it and need it.

10. Penny wish, pound foolish.

Your estate plan is like an insurance policy for everything you own and for everyone you love. If it works, your loved ones are taken care of for their life. If it does not work, your loved ones will be the ones holding the bag.

When you are spending money on your estate plan, keep mindful of these famous words:

“It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot — it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.”

Prop 19: Reduce Property Taxes Before February 16th!

Proposition 19 will affect each and every person who owns a property, whether it’s a primary residence, a vacation home, a rental property, or a commercial property.

According to the new law, we have a limited window to take action in order to lock in our property taxes under the old rules. 

Bridge Law will be hosting a free webinar on Saturday, November 28 discussing Prop. 19 and what you need to know. There are strategies available to us if we plan now!

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We want you to feel comfortable discussing your legal issue with us, so we offer a free consultation to learn about your problem. Contact us today to setup a time to come in and talk with our team.