Estate Planning During COVID-19

The COVID-19 crisis offers us a reminder to be prepared – and provides an opportunity to take control in these uncertain times. “A lot of people put off estate planning, but now is the time to take care of some of the things you have been putting off,” says Dan Ruttenberg. Now is an ideal time to protect yourself and your loved ones by preparing or updating your will and estate plan.

Stay-at-home orders and social distancing guidelines have made meeting with an attorney challenging. This webinar offers guidance for protecting yourself, your family and your finances during this difficult time.

In this Webinar, SmolenPlevy Principal Dan Ruttenberg, reviews key estate planning topics during the coronavirus pandemic:

Avoiding probate;
Protecting children from creditors and themselves;
Avoiding federal and state estate taxes;
Avoiding court involvement in the event of your disability;
Avoiding traps for the unwary associated with asset titles and beneficiary designations; and
Signing the documents.

Dan Ruttenberg, JD, CPA, LLM is a Principal at SmolenPlevy with extensive experience practicing estate planning, probate and general corporate law. He is a member of the Bar in Virginia, Maryland. He has been named in the “Best Lawyers in America” for six consecutive years, and a “Super Lawyer” in Virginia for seven consecutive years.

If you have questions about estate planning, contact DHRuttenberg@smolenplevy.com

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Transcript

Introduction

The topic of today is estate planning during COVID-19. We’re in unprecedented times. We’re dealing with a lot of stress. We’re worried about getting sick ourselves. We’re worried about getting other people sick and that sometimes makes people think about estate planning. The other thing that’s happened is we’ve been on a virtual lockdown and some of us have time on our hands and we can start doing some things that we’ve been putting off and one thing that a lot of people put off is estate planning.

So now is an opportunity to take care of some of the things that you have been putting off such as the yard work and estate planning.

So with that being said, I want to get into estate planning. Now, estate planning, whether we’re dealing with this during a virus or otherwise, this is something everyone should do. If this gets you to do the estate planning, fantastic.

There are several topics I want to cover. Basically, most people have a lot of the same issues. They don’t realize they have all the same issues, but most people have the same issues.

The first one people think of when they’re doing a will is directing where their assets go and that’s one of the topics that we’re going to talk about. That’s actually often the easiest one. We’re also going to talk about issues with your children. We’re gonna cover the estate tax. We’re going to talk about avoiding probate and we’re going to talk about giving the best access to the assets in the event you become disabled.

I’m going to start with directing where you want your assets to go and I’m gonna use a typical married couple. I know there’s a lot of people watching who aren’t married, and maybe you’re divorced or you’ve never been married, but most people who have a spouse and/or children generally want assets to go to each other and then to their children. That actually is not that complicated to do.

Now, sometimes people are looking to have assets go to charities; sometimes people are looking to take care of family members, parents, siblings, other things along those lines; but the most typical situation is at least in large part you’re leaving everything to each other and then to the children, so we don’t need to spend too much time there. If people have questions about specific things like the best ways to leave to charity, we can cover that in the questions section.

Topics we cover

Children and estate planning
Estate taxes
Avoiding probate
Estate planning and COVID-19
Q&A

Children and estate planning

Leaving everything to your children in one lump sum

When you’re leaving assets to children, that raises the first big issue of we’ve got children and you can’t leave a ton of assets to young children. Sudden wealth is challenging for anyone, but the younger you are, the more challenging it is. When it comes to leaving assets to children, there are kind of two extremes. The first extreme is you give it to them outright. Most states have state law protections at least until age 18, but you don’t want significant money going to someone at age 18.

I remember myself – I tell this story often to my clients and this is a true story – when I was 19, I was spending a summer in Ocean City, Maryland. If you know me, you know it’s one of my favorite places and when I was there one of the people in the group had just gotten $50,000 as

part of an injury settlement and I remember thinking that if I had $50,000, I could live at the beach forever. If that had happened to me I might not have ever left Ocean City, so thank God I didn’t get $50,000 at age 19 and the same thing is similar to your children. You hear about it with athletes who blow all their money or lottery winners. It’s very challenging to do.

Leaving everything to your children in a trust for their lifetime

So again, on the one hand you have the extreme of leaving everything to your children outright. On the other hand, you can leave it to them in a trust for their benefit for their lifetime and while assets are in trust children have access to them, but there is a trustee in charge who decides when and how much to give those children. So, they’ve got access to it. They can use it for college and a wedding or buying a house, but again, the children have to go to the trustee and ask the trustee for permission.

Leaving everything to your children in a trust for a period of time

In between those two extremes is what most people do and this is they put assets in trust for a period of time.

Again, while they’re in trust, the trustee can make discretionary distributions at any time, but when children reach certain ages we have the money come out, like mandatory distributions need to come out. It’s very common to do thirds, although you can do any age and any percentage. We often do a third at 25, a third at 30, and the last third at 35.

Determining the appropriate length of time

So, now the question is what are the appropriate ages for you and when determining what are the appropriate ages for you to be setting for your children, there are two main considerations.

When are your children going to be mature enough to handle that kind of financial responsibility?

The first one – the one I think most people think of – is when are the children going to be mature enough to handle that kind of financial responsibility? Some people think ‘my children might be ready, I’ve got a very mature child’. Other people are of the opinion their children will never be ready. Hopefully they won’t have drug issues, but there can be all kinds of reasons why your children may not be able to ever have that type of maturity level. Most people feel that their children reach that age sometime after college.

Creditor protections

There is a second consideration and this is the one that often dictates the ages that we use and that is creditor protection. While assets are held in trust for your children, they are protected from your children’s creditors.

So who are the likely creditors that your children might face? Well, they could enter into a bad business decision. They could get into a car accident with a doctor or a slow-to-school children – they could have all kinds of liability there. The most likely creditor your children are going to face is a future ex-spouse. You can give tremendous divorce protection to your children that they can’t give to themselves by giving assets in trust and keeping it there. When you think about the ages when people have their first divorces, often that will dictate the ages at which we have the money come out. Age 25, 30, or 35 is probably the most common. Age 30, 35, or 40 is the next most common. If you’re going to err on one side or the other, I always recommend erring on the side of keeping it in trust longer. If you’re going to mess up and give it to someone who is too young, you can cause real harm; they can make bad decisions that derail their life and blow all the money. Whereas, if you keep it in trust too long, a truly financially responsible child will appreciate the creditor protection and the asset management.

Those are the decisions you need to make with regard to the rules of the trust and when those assets come out.

Naming a trustee

You also need to decide who’s going to be in charge – you have to appoint a trustee. Your options there are that you can have family members or friends – I typically prefer family and friends, but sometimes people don’t have good candidates for that – and professional trustees. The professionals that do this are banks and trust companies and attorneys and accountants. Those are the people that you have to choose from.

Naming a guardian

The other issue that you have to deal with children, if you’re dealing with minor children, is that you also want to name the guardian. The guardian decides where your child is going to live, go to school, medical decisions, that sort of thing. You can name the same people as guardian that you name as trustee, if you truly trust them.

Remember, the job of trustee is much longer than the job of guardian, so it might be that they’re only guardian for a few years or it might be that they’re a guardian for 18 years, but the trustee is going to be involved until 35 or older, so think about that in the decision making. Some people do like to split the roles, because if you split the roles you have a bit of a check-and-balance. Other people – or like my brother, I’m not worried about him stealing from my kids – they’re happy to name that person in both roles.

Those are the issues that you need to address with children.

Related Content: Estate Planning for Single Parents

A quick note about questions

I know people are asking questions. I don’t get to see what these questions are as we’re going, so what I’m going to do is if there is a question asked related to the topic that I just talked about, I’m going to give Mark an opportunity to ask me those questions. Questions that aren’t related to the topic or any of those topics we will save for the end and if I don’t get to your question, email me.

Mark, do we have any questions related to children?

What specific information should adult children be told about their parents’ estate plan?

Okay, that’s a good question. So when it comes to children and talking to your children about the plan – and it’s a question of whether it’s an adult or how old they are – it’s very child-dependent and it’s very relationship-dependent. You don’t need to tell your children anything and sometimes it’s best not to so you don’t have to deal with the pressure that you might get from children who disagree with you putting their inheritance in trust. If you think about it, children who are pressuring you to not leave their inheritance in a trust are probably children who are most likely the ones that need that money in trust.

So in some situations I recommend not saying anything. In other situations where the family discusses this type of thing freely and you’re very comfortable talking to your children about it, they sometimes even introduce me to them, so they know that when something happens they know where to go. We’ll have a meeting with the children and they’ll introduce those children to me, but that is very specific to your personal situation and there is no one size fits all certainly for that question.

How do you balance the interests of children from prior marriages?

Okay, that’s a good question. Children from prior marriages… that question goes a little deeper. You’re balancing those interests with children from maybe your current marriage or even your new spouse – you’ve got that issue that you’re looking to balance. Really, there are different options that you can do there.

Related Content: Estate Planning for a Blended Family

You can do ‘splitting the baby’, where you leave some assets for those children now and some assets to your current spouse. The much more common scenario is that you leave assets in trust for your spouse now, but because your current spouse might have grown children from a prior marriage or something along those lines, we’re going to say that at your current spouse’s death – so I’m gonna assume it’s a wife, like in my situation if I were married and I left everything to my new wife, I would leave it to her in trust and then at her death, whatever is left in that trust would go to my children or all of the children and I would balance it that way.

That is a very common scenario. Sometimes if you were doing a little splitting of the baby because if you’re… you know my new wife is much younger than I am and now I don’t want my kids to have to wait for someone who’s much younger than me to pass, maybe I leave some amount to my kids right now, cash bequest or something along those lines with everything else in trust for my new spouse and then at her death the bulk of the inheritance goes to the children. That’s one way to deal with that, although again, that’s an issue that is very specific to the family situation that you’re in.

Any other questions on that?

Not on that. We have other questions we can get to later in the webinar.

Estate taxes

Okay, so let’s get into the next topic. The next topic is one that everyone is potentially subject to and that is estate taxes.

How do estate taxes work?

First of all, there are two governing bodies you need to be aware of. There is the federal government that taxes every US citizen and resident alien on everything they own everywhere in the world and there are the states that will tax you based upon where you live and own real estate.

Now, I live in Virginia, but I know a lot of people here will live in DC, live in Maryland… we’re on the Internet so you could be living anywhere. Virginia is a great place to die. They got rid of the estate tax a few years ago, but it doesn’t mean they won’t bring it back, state taxes do come and go. Maryland and DC both have an estate tax, so if you’ve got significant assets you generally want to stay out of those states, but we’re all in this country, pretty much all of us are either resident aliens or US citizens.

The federal estate tax

Let’s talk about the federal estate tax and how that works.

Determining what is taxable

The way that works is the first thing they do is they add everything you own up into a pile. A lot of people think ‘I don’t have this much in the way of assets’, but when you’re looking at it for estate tax purposes – and remember when someone dies, often their assets get liquidated into a big pile, often there’s a big pile of cash when someone dies.

What goes into this pile? Well…

There is your real estate, and if you sell the real estate, that’s a lot of money going into a big pile.
There are your businesses that you might own.
There are your stocks and bonds, including those in retirement accounts.
Your bank accounts.
It’s even the death benefit on your life insurance.

Now, you know if you’re young and you just have young children and you’re relatively healthy, if you don’t have it yet, you should have life insurance, because life insurance for someone in that age group is very inexpensive. Now you’ve got, for purposes of an estate tax, you’ve got a lot of money when that insurance pays off. If you’re older and maybe you don’t have insurance anymore, you’ve got a house with a lot of equity and you got retirement accounts.

So most people have significant assets. Keep that in mind going back to the children, when you’re thinking ‘Hey, I’m not leaving all that much to my children.’ If you do your estate plan properly, you are leaving a significant amount to your children; it’s either coming from the life insurance or from the assets you’ve accumulated over your lifetime.

Deductions

Here we are for estate tax purposes putting together this big pile of money and then before the tax kicks in, you get to take certain things off the top.

First of all, there is an unlimited charitable deduction: you can leave as much as you want to charity. When Bill Gates dies, we know he’s leaving most everything to charity; there won’t be an estate tax on any of those dollars, think billions of dollars to charity.

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Also, there is an unlimited marital deduction if you are a US citizen and your spouse is a US citizen (more important), you can leave as much as you want to your spouse. The government says we’ll wait until we get to the next generation. The reason they say you have to be a US citizen, the rationale there is basically if you leave everything to a spouse who’s just a resident alien and then they pick up and leave the country, they’ve left and the government never got their cut of the estate taxes, so that’s why you have to be a US citizen to take advantage of the marital deduction.

If you are not a US citizen, there are ways to still take advantage of that marital deduction. I’m probably not getting to that in this webinar, but if you’re interested in learning more about that, please reach out to me.

When the federal estate tax kicks in

Then, when it goes to the next generation, there is a dollar amount that you get to leave. Now, this is where the law changes all the time. Right now, we are at a very high number: $11,580,000. You have to have more than that before you have an estate tax.

So, you’ve got that number yourself; also, your spouse if you’re married has that number as well. So between the two of you, you’re leaving over $23 million dollars to your children. Now, the large majority of Americans today do not have that much in assets; some of us do, but most people don’t, so you’re thinking ‘I don’t need to plan for the estate tax’.

A short history of recent federal estate tax changes

Well, here’s the rub. As I said this law changes all the time. To give you a little bit of a sense of that, when I started the number was $600,000; that was all you could leave, and then they started changing it and they were raising it up to a $1 million dollars, but slowly… $625k… $650k. In 1997, they passed an act to raise that up to $1 million and then in 2001, before they could even get there, they passed another law to immediately raise it to $1 million, and then it was going to go up from there. Two and a half… three and a half million dollars… we had an unlimited year where we had no estate tax in the year 2010, but that law was one of these laws that sunset, so it went back down to $1 million and so we have to deal with that planning.

Then, we got to the end of 2010 and they didn’t want to drop to a million, so they agreed to set it at $5 million, but that was only for two years. Then again it was scheduled to drop down to a $1 million and then they get all the way to like December of 2012, because we know how efficient Congress can be, and then they passed it and they just made the $5 million dollar number permanent for awhile, and it’s adjusted for inflation, so that’s where it goes up.

Then they doubled the number, but that doubling of the number, again, is temporary. Come January – and that’s where we are now, we’re in the doubling of that number, that $5 million dollar number adjusted for inflation, really about $5.8 at this point, so that’s where we get this $11 million, $11.6 roughly – that number is scheduled to go back down to the $5.8 million dollar number come January 1, 2026.

That’s still a pretty sizable number, but remember, we’re in an election year. These things are going to change very likely. It depends on who wins. I can’t tell you who is going to win, but during most of my clients’ life expectancies I would say that the Democrats at some point in time will be back in power. I don’t know if they’re going to win this election or not. The current slate has talked about reducing that number to a $3.5 million dollar number, so now we’re getting even lower. We have to potentially plan for a $3.5 million dollar number and these things again they change. So right now people are looking at potentially a $3.5 million dollar number, but that number could easily go lower, depending on the current mood of the political party in control at the time.

So what that means is you can’t just sit back and rely on this $11 million dollar number. So what is the planning that you can do?

How to plan for the federal estate tax

The best way to describe this is let’s pick a number that is a fairly reasonable outlook to have and I’m going to say we’re in an environment where they set the number at $3.5 million dollars, a very likely scenario, so that if you have $4 million dollars, you should be fine, because if you’re married at least – because you’ve got a husband and a wife – you each have this $3.5 million dollar number, so I’m gonna say you have $7 million dollars.

So you can have up to $7 million dollars before you have to worry about an estate tax, correct?

Well, not necessarily, and here’s why. I’m going to kill off the husbands first because I think we want to die or something. So the husband dies and he leaves everything to the wife and she in my example is a US citizen and there’s an unlimited marital deduction. Fine, we like that result, on the husband’s death there is no estate tax, but now the wife’s alive and she has $7 million dollars and she dies and she leaves it to the kids. Well, she can leave $3.5 million tax-free, but the second $3.5 million dollars gets hit with an estate tax.

Now, the current federal rate is 40%. Sounds pretty high, but that’s down from the 55% it was not too long ago, and if you get hit with an estate tax in Maryland or DC or some other state, often those taxes are running 16-17%. Remember, the Maryland or DC thresholds are both $5 million dollars or at $5.8, and some states are much lower than that, so you can be dealing with a state-level estate tax as well, even if you’re only paying 17%. That can still be a significant amount of wealth that we don’t want to pay the government.

So, what happened in my example? Why are we paying millions of dollars in estate taxes when we shouldn’t have to pay anything? What happened was we didn’t use the husband’s exemption amount because he left everything to the wife. So what is some planning we can do to preserve his exemption amount?

The role of a trust in planning for the federal estate tax

Well, the husband’s alive again, we kill him off again, and now instead of leaving everything to the surviving spouse outright, he is going to leave $3.5 million dollars to a trust for her benefit. I call this trust a credit shelter trust because we are sheltering his credit amount.

So what are the taxes at the husband’s death? Well he left $3.5 million dollars to a credit shelter trust, so there’s no taxes there. Anything over and above the $3.5 million dollar amount, we’re giving to the wife. That qualifies for the marital deduction. We still have no taxes at the husband’s death.

Now the wife’s alive and she has $3.5 million dollars in her own name and $3.5 million dollars in his credit shelter trust. She dies. She can leave the $3.5 million dollars in her own name to the children tax-free. $3.5 million in the credit shelter trust also passes to the children, but it’s not included in their estate for estate tax purposes because we dealt with it back at the husband’s estate. So instead of paying millions of dollars in estate taxes, we’re paying zero. Now that is very powerful estate planning and you can save a tremendous amount of money.

Now, when the number was $600,000 dollars, this was basically no-brainer planning for pretty much every married couple. Because between life insurance or your retirement and your house, married couples had over $600,000 dollars, and even if you have less than $7 million but more than $3.5 million dollars, anything over that $3.5 million dollars is actually subject to that estate tax.

So back when this was $600,000 we did this thing called mandatory funding and it was forced funding of the credit shelter trust, it was formulaic, so just put as much in as you can before you trigger the estate tax and then anything over and above that amount you would give to the spouse outright, but then the laws started changing and it started going up and down and this did not become no-brainer planning for every married couple. There are some other elements to the estate tax law which I haven’t gone into, but again make it less compelling to fund a credit shelter trust.

Now, what I do for most of my clients is instead of this forced funding arrangement, I do a flexible funding arrangement, which gives the surviving spouse the ability to pick and choose which assets, if any go, into the credit shelter trust.

The way you do that is the first thing you say is I leave everything to my surviving spouse outright, which is what most people were thinking they were going to do anyways. Then, you give the surviving spouse the option of being able to disclaim assets. Disclaiming means you don’t accept an asset. So you can accept this asset, you disclaim that asset, but anything you disclaim goes into the credit shelter trust for the surviving spouse’s benefit.

Now, the downside to that is you need to be guided through that process. First of all, you need to understand what the laws are at the time of the first spouse’s death and you also need to know what the asset level is at the time of the first spouse’s death. We don’t know either of those questions now, so you can’t decide that the day you set up your documents, so even if you knew what the law was and even if you knew what the asset level was, you still are going to have to go through and be guided through that.

So the downside again is if you don’t see an attorney promptly, and you start administering the estate before you get professional help, you can make mistakes that you can’t later undo. The documents – at least that I prepare say because most people don’t remember this bit ‘why is that in my estate document’ – say go talk to another attorney or me or someone and get an answer to whether or not it makes sense before you start doing it. That’s very important.

But that technique, that one technique, covers a large majority of my clients with regard to the estate tax. It’s a very flexible technique, they can deal with changes in the law, and unless your assets are significantly higher then two times the exemption amount, that’s all the estate tax planning you need to do. Now, if your assets are higher than that, now we have to do the next level of estate tax planning. That’s beyond today’s webinar. We can do that stuff and I’m happy to get into that with you. Just give me a call or email me and we can talk about what the next level of estate tax planning is.

Avoiding probate

The next two topics are avoiding probate and giving the best access to the assets in the event of a disability and I save them for the end because they have a very similar solution. The solution is known as a revocable living trust. So first I’m going to explain what a revocable living trust is and then I’ll explain how it works with these two issues.

What is a trust?

We’ve talked about trusts quite a bit, but I haven’t even said what a trust is. I like to analogize a trust to a corporation since people tend to be more familiar with corporations. A corporation is a fictitious entity that exists because the law says it does. The parties to a corporation are the officers and directors who manage it and the shareholders who own it.

A trust is very similar. A trust is a fictitious entity that exists because the law says it does. The parties to the trust are the trustee who administers it, the beneficiaries for whose benefit it’s administered, and the grantor who sets up the trust.

What are the types of trusts?

Testamentary trusts

There are two types of trusts. You can have one spring into existence upon your death, which is referred to as a testamentary trust. The trust does not exist until somebody dies and then it gets flooded with assets and comes to life. That is really the only type of trust that we’ve talked about up until now; the trust for the kids, the credit shelter trusts, none of those trusts are funded today, but when someone dies they get flooded with assets and come to life.

Living trusts

The other type of trust is a living trust. That is one that you set up today and you put assets in it today while you’re alive. In the living trust world, there are two types: revocable and irrevocable. Like the name sounds, revocable are very flexible: take assets out, put them in, change the rules – nothing you’re doing is set in stone until you’re under a stone. Then, there is the irrevocable type, where you can do the best job you can at the start, but then they’re very difficult to change.

Now, we’re getting into irrevocable trusts often when I’m doing the next level of estate tax planning. There are a lot of different types of irrevocable trusts, but to get the basic concept let’s say you want to make gifts for your kids now because you want to get those assets out of your estate so they’re not in your estate at your desk, so you want to give some assets away to your children now. But your children are young and you don’t want them to want to give it to them outright, so you want to put it in a trust for their benefit. Well look, if you could take those assets back again, the IRA says you didn’t really give them away, you have to irrevocably give those assets away in order to have them outside of your estate for estate tax purposes. That’s a simple example of where you would use an irrevocable trust.

But we’re talking about this revocable trust, so the IRS, they don’t even want to know about it; they consider it your alter ego and in fact the tax ID number for a revocable trust is your social security number. So if you were to take your brokerage account and you put it into your revocable trust and you get a 1099 like you do every year at tax time, it goes right on your tax returns the same way it always did. There is no tax benefit, there is no tax detriment; again, they are tax neutral.

So if there is no tax benefit to setting up a revocable living trust, why are people doing it? Two reasons. Two reasons only.

The first one is avoiding probate, leading into Mark’s question. So, probate, not everyone knows what that is. Most people have heard of it and if you’ve heard of it, you know it’s got a very bad reputation, especially in Virginia. Most people don’t know what it is, so let’s talk about what probate is.

What is probate?

What are non-probate assets?

Basically, when someone dies, their assets are going to get characterized either as a probate asset or a non-probate asset. A non-probate asset is one that has instructions built into it.

So what is that? Something titled jointly with rights of survivorship, like your bank accounts might be or your real estate. Those assets just automatically go to the survivor and don’t need court orders or anything. Or something with a beneficiary designation, like a life insurance policy or a retirement account; again, you have a beneficiary designation, you send in a death certificate, and they pay, no court orders required. Those are non-probate assets.

What are probate assets?

Assets that do not have instructions built into them – these are things titled solely in your name that, again, don’t have a beneficiary designation, those are your probate assets and that is what your will governs. Your will is a set of instructions to the probate court and the probate court makes sure that your probate assets get distributed in accordance with your will.

Realize what that means. Your will could say ‘I want assets held in trust for my children until they reach age 35’, but you name them as the beneficiary on your life insurance policy and on your retirement account – often some of the largest assets people have – those children get at age 18. You have millions of dollars at age 18. Your will can literally say ‘I want the life insurance from Lincoln mutual policy number XYZ to go into trust’, but if you name them as the beneficiary, it’s going to that beneficiary, so it is very, very important that you get guided through the process of reviewing every asset title and every beneficiary designation.

I meet with my clients after we sign documents. We have a meeting where we go through that and then there’s a letter that’s done where literally every asset you have, bullet point by bullet point, talks about how it should be titled. That letter is a very important piece of your plan; it’s not just a will and it’s not just even titling, because the letter:

Gives a very good set of instructions to make sure that things are titled properly;
When you review your plans – which you should do periodically because assets change, situations change, you need to have these things reviewed – you’re not just reviewing your documents, you’re reviewing your asset titles. So you pull out that letter and you go through all those things again and you do a new letter; and
If ever anyone needs to step into your shoes to deal with your affairs, they have a recent snapshot in time as to where assets are. That’s a very important piece to the process.

But I have digressed away from probate. Remember, we were talking about probate here and we were saying how your will is a set of instructions to the probate court to make sure that your probate assets get distributed in accordance with your will. Why is that a bad thing?

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Why do people want to avoid probate?

Well, people generally want to avoid probate because it has a lot of delays. There are a lot of additional expenses. There’s always expenses when someone dies, but there’s a lot of additional expenses. You’ve got to hire people like me to prepare all kinds of filings for the courts. There’s the fact that it is public record and there are people that go down to the courthouse and look at the recent probate filings and target the beneficiaries. Most people want to keep that information private.

If you own real estate in other states, you have to open up what’s called an ancillary probate and that real estate can add to the time and the expense. So you live in Virginia, but you have an Ocean City condo and you have a Florida timeshare and you have oil rights in Texas – we’ve got to open up probate in all those different jurisdictions and that really adds to the cost and the hassle. So most people want to avoid that and keep that information private.

How can I avoid probate?

How do you do that? You can transform all your probate assets into non-probate assets if, while you’re still alive, we put them into a revocable living trust. Think of the revocable trust as like a complex beneficiary designation, so if your assets are in that trust and you die, your successor trustee steps in and they have full legal authority to distribute those assets in accordance with the trust. You have to follow the rules of trust, but you don’t need court orders to do it and you don’t need to have it all be public and all of that stuff.

Becoming disabled

That is the main reason that people get these things. There is a second benefit as well and this one relates to disability. When I say disability, I mean you’re mentally incapable of handling your own financial affairs; we’re not talking about you’re in a wheelchair, but you can’t handle your own financial affairs.

We’ve talked about death and taxes; now we get to talk about lingering… good stuff. So here you are lingering and again we’re gonna pick on the husband and let’s say the husband, he could have had a stroke, he could have Alzheimer’s, he could be on a ventilator, and you’ve got this married couple, or you could be single, but let’s again stick with this married couple example. The kids, maybe they’re out of the house at this point and the spouse doesn’t want to deal with taking care of a house all by themselves anymore. Maybe they want to access some of the equity in the house and pay bills, those sorts of things. Maybe they want to move closer to the facility that the husband has been put in; maybe she wants to move further away – you know it depends on your relationship, these things can go either way.

But here is the problem: the problem is the wife can’t do anything right now without any planning and the reason is they’re both on that deed and they both need to be legally competent to sign that deed in order to sell that property and in my example the husband wasn’t competent. So what has to occur? Now this can also be if you’re single – you know someone wants to access your house, same thing, you’re the only one that can sign the deed on.

So what has to occur if there’s no planning in place? Well, in Virginia what happens is this thing called a conservatorship gets opened up; some jurisdictions call them guardianships, Virginia calls them conservatorship. Basically every penny that you have gets reported into the courts; every penny in gets reported, every penny out gets reported, courts get to say over what you spend your money on and if they disagree, you have to pay it back. It is public record.

It is basically a living probate. It goes on for the rest of your life. It is expensive and invasive and you want to avoid that situation.

Power of attorney

So what is your first level of protection? Your first level of protection is this thing called a power of attorney. Most of you have probably heard of a power of attorney. That is where you appoint an agent, often referred to as an attorney-in-fact – so power of attorney doesn’t refer to me, it refers to your attorney-in-fact or your agent – and you give your agent a list of powers and the name power of attorney. If a power of attorney is honored, fantastic. Your agent can access the account, sign the deed, do whatever it is you’re trying to do.

Reasons why power of attorney might not be honored

Here is the problem: there is no guarantee that your power of attorney would be honored. Why would a power of attorney not be honored? Basically the third party who you’re trying to get to rely on doesn’t want to get sued. What are the questions that come up?

Well, if it’s too old, did you ever revoke it? You want to have these things refreshed every few years.
If it’s too new, were you competent when you signed it? If the person you’ve designated doesn’t serve, it’s only as good as the person you designate.
If it doesn’t have the magic language they want to see in there, they’re going to be reluctant to honor it.
If there’s a question about motivations, they’re not going to want to honor it.

If it’s not honored and you want to get it done, you’re back at this conservatorship. I don’t want you to think powers of attorney are worthless, because they are not. They are certainly honored more often than they’re not honored and if you have experience with the power of attorney, it’s probably with real estate where someone was out of town and you know the husband’s out of town, the wife’s signing on the closing.

If you think about it, every one of my questions is answered in that case. We’re not worried about you having revoked it, or you being competent, or the person naming serving, or that we put the language in that we wanted for that transaction, no one’s questioning motivations, and if there’s a problem, we can fix it, but this is a different situation. This is one where we don’t know what we’re trying to use it for and you can’t fix it after the fact. So while they are certainly honored more than they’re not honored, they are not honored enough that it’s a concern.

Revocable trusts as a solution for when you become disabled

So what is a better level of protection than just the power of attorney? This same revocable trust.

If your assets are in that revocable trust and the husband becomes disabled, the wife steps in as his successor trustee, and she’s now the legal owner of those assets, and if someone doesn’t want to give her access to an account, she can get a court order saying ‘no, you’re going to give me access to this account’, and because it’s this legally enforceable right, everyone knows it’s a legally enforceable right. You never actually have to do that, it just goes through much more smoothly.

So those are the upsides of a revocable living trust. You should be aware of the downsides, because there are some. They’re not significant, there used to be more than there are now. People are very familiar with these now so you don’t run into the issues too much.

The biggest issue you have is one, it’s more of a hassle to set up because you have to move all your assets and do deeds now to get your assets into those trusts. But it’s way easier doing it now while you’re alive and competent than for someone to try to deal with it after you’re no longer alive and competent.

The other issue that people run into is refinancing. You want to refinance your house and your house is owned by the trust. You can always do it, but it’s going to be more of a challenge. You’re going to have more hurdles. You’re going to have to give them a copy of the trust instrument. You might need a letter from a lawyer saying that you have the legal authority to do it. You can always do it, but again, there are just more challenges, and in today’s day and age right now, because of the situation that we’re in, interest rates are incredibly low. There is a ton of refinancing going on right now and if you were doing your estate plan right now and you were in the middle or thinking about refinancing, I’d probably have you do the refinance and then move your house.

So, that’s revocable trust and that covers the probate and the disability issue. Mark, do we have any questions on either of those topics?

Mark: We have some great questions, but we’ll handle them when we get towards the end here.

Estate planning and COVID-19

Dan: The last thing I want to talk about and then we can get into some of the questions that are there are some issues associated with COVID-19 and how planning has changed and how we’re doing things.

What I now recommend

First of all, when it comes to revocable trust in determining whether or not one of those is right for you, traditionally the decision was age-based as opposed to asset-based, because while everyone’s going to die at some point in time, the odds of death or disability happening in the next few years for someone who’s 20 or 30 and just had their first child and that’s what’s bringing them in to me to do estate planning, the odds of something happening to them is much less likely than for someone in their 70s or 80s or 90s. Someone in that age group, they’re much more likely to use my documents. So these kids doing this stuff, you’re helping them sleep better at night for a very unlikely scenario, but as we get older at some point we’re going to be using these documents.

So I used to for younger people just recommend wills and for older people I was insisting upon trusts. We’re in a more dangerous world now and younger people are more susceptible. For most of my clients I’m now recommending trusts – I’m just doing trusts across the board, so that’s one area where my advice has changed because of the changing situation and the fact that we now live in a more dangerous world than we used to.

How I do estate planning remotely

Also, we’re remote. This is not my normal office – this is my home office which I just set up and so how do you work remotely? How do you do estate planning remotely?

There are several things that you need to do. You need to have meetings first of all, and doing the stuff over the phone is challenging. When communicating you need to see facial cues to make sure people are understanding, so we’re doing a lot of Zoom conferences and I’m doing a lot of initial consults over these sorts of video conferences. I think that sort of thing is going to continue even beyond this, because I think the convenience of it and the fact that we’re all now familiar with the technology means I think you’re going to find that people are just doing a lot more video conferences.

Signing documents

You still have the issue of how do we go about signing documents and that’s more challenging and different attorneys are doing different things. Some people have literally a drive-up window where they watch you sign from outside. We’re doing eNotaries. Virginia allows remote notarization. I think Maryland is allowing that now as well, at least temporarily. So we’re doing some signing electronically.

Certain things aren’t allowed to be signed electronically, at least in Virginia there’s a uniform electronic signature code or something along those lines which – wills in particular – are not supposed to be done electronically or at least you can’t notarize them, and so you need wet signatures for those. What I’m doing with my clients is I’m watching them sign and walking them through the signature or giving them very detailed instructions.

Some of my clients, I send the documents to them and they are going to a bank where there’s a notary and they just do that whole process right then and there. Others are doing a mix of wet signatures and electronic signing. Still others are just doing signing without any kind of notaries at all and we’re gonna resign these things when we can and they’re comfortable coming out and interacting with people again.

So those are some of the challenges that we’re dealing with and some of the solutions that we’re implementing to get people signing. So that’s what I have for today other than some questions. Let me know if there any questions are there; I’ll be happy to answer them and then if there’s something you want to just ask privately, feel free again to call or email me and that’ll be it for today.

So Mark, what do you got for me?

Q&A

Are trusts only for assets in the United States?

Marc: All right. We’ve got this question a couple times: what about global assets as many US citizens have real estate abroad? Trusts are only for US assets, correct?

Dan: Trusts are not only for US assets, it does depend on the country, but many countries do not recognize trusts. They also do not recognize US wills. There can be a lot of laws that are very specific as to how assets go and what we do when we have someone with international assets is we’re often working with the lawyer from that country to do a will specifically for the assets in that country and that’s how we govern to make sure that those assets go the way you want them to.

Do I need to update my trust each time I buy or sell an asset?

Marc: Each time I buy or sell an asset, do I need to update my trust?

Dan: Good question. So the answer to that is no. The trust it’s, again, think of the corporation analogy. If you have a corporation and the corporation buys computers or equipment or different things, those assets are owned by the corporation. There can be a car titled in the name of the corporation; there can be a building titled in the name of the corporation. Corporations don’t have to keep a list on their bylaws of every single asset that they own. It’s governed assets are governed by their titles, so if you just put a car in the name of a corporation, that car is owned by the corporation. If you buy a house and the title on the house or the deed of the house says it’s owned by the corporation, that’s it.

Same thing with a trust. So your house might be owned by your trust, that’s governed by the deed. If you have a brokerage account, it’s governed by how that account is titled. If you have a car, it’s governed by the title on the car.

Now remember that how are people supposed to find these things? That can be one of the biggest challenges someone has in stepping into a situation where somebody has died or is disabled and you don’t know where the assets are because there isn’t this list of assets. So, where does that list of assets come from? Remember that letter that we’re doing where we do it bullet point by bullet point how every asset should be titled? That is where we go to help keep track of that and help find those.

Do you need to register a revocable trust?

Marc: Do you need to register a revocable trust? Can I create contingent trustees if my first choice isn’t available or chooses not to help?

Dan: Okay, so those are two questions. One, you don’t need to register a trust. Remember, the tax ID number is your social security number; the IRS doesn’t want to know about it; there’s nothing to tell the IRS; you don’t have to do anything with the state; they’re just recognized by state law.

The second part to that question – what was the second part again?

Can I create contingent trustees if my first choice is unable or unwilling?

Marc: Can I create contingent trustees if my first choice isn’t available?

Dan: With contingent trustees, yes, you can. So in fact, you can do that with trustees and guardians and agents on your powers of attorney and executors in your will – you can do all those things. So you name your first son, he doesn’t serve, then you can name your second son or your daughter or do them in order of age. You can name two people to serve as cos if you want. I’m not a big fan of co-trustees because that often just sort of creates more work than less because you need two people to sign everything all the time. So often I’ve just got the one trustee and successor trustees.

So yes, you can.

Are there preventable regrets by surviving spouses that thoughtful planning can help avoid or reduce?

Marc: Other than loss and grief, are there preventable regrets by surviving spouses that thoughtful planning can avoid or reduce?

Dan: Yeah, there certainly are. You want to make this as easy as possible upon your children and your surviving spouse. When somebody dies, it’s a challenge enough and you don’t want to make it harder, so the best thing you can do is plan and when you plan, do complete planning.

One of the biggest mistakes people make is they’ll do a will and think they’re done. One of the reasons I’m very verbally and vocally against things like these online law LegalZoom type things is because people get a false sense of security and don’t do proper planning. My US Supreme Court case was an example of that where they had a will and a trust, they did all of those things, but on the life insurance they didn’t update the beneficiary designation. Instead of the money going to the widow, it went to an ex-spouse; it wasn’t even the mother of the children, it was like a second wife who just got the money and ran. That grief came about because of not donning those i’s and crossing those t’s.

Related Content: A Divorce Necessitates an Estate Plan Review

So the best thing that you can do for your next of kin, your loved ones, is to do planning. Do proper planning – don’t try and do this yourself, this is not designed for do-it-yourself people – and keep it updated. I’ll tell you I have a very profitable estate administration element to my practice and those are all people who never did planning with me; it’s always people that come after.

If my clients – and eventually they do pass away, I’ve had many clients over the years pass – there’s not a tremendous amount of stuff to do for those clients because their planning is in order. While there’s some, it’s not a lot. It makes the process so much easier compared to the ones that can have issues where it goes on for years and it can cost an incredibly large sum of money. So that would be the answer there.

Should you include your home in a trust?

Marc: You have a question from Facebook. Do we want to put our home in the trust?

Dan: So whether or not you put a specific asset in the trust is going to depend on your situation. So when you have a trust, it doesn’t mean you have to put every asset in there. Now real estate in particular tends to be the most illiquid asset people have. So when you’re dealing with a bank account, for example, a husband and wife, either one of them can fully access that account, so at death that just will automatically go to the surviving spouse if there is and if someone becomes disabled the competent spouse can fully access all the money. So bank accounts, you might might not put into a trust for a husband or wife. Now if you’re single, you probably would because you don’t have that joint situation.

But in either case when you’re dealing with real estate because it’s so illiquid, it is one of the most common assets that you do want to put into trust. But you’ve got to be careful because some jurisdictions will have tax benefits if you own your property in your individual name. Florida is a classic example: they have homestead exemptions which can affect your real estate taxes, and depending on the county – not even statewide, county-to-county – some counties, if you put your house into the trust, won’t give you the homestead exemption. So there are issues like that.

You certainly can put real estate in. I’d say it’s one the most common assets that I do put in, but it needs to be looked at on a case-by-case basis.

With proper planning, you can pass on assets, but without proper planning, can you pass on debt?

Marc: With proper planning you can pass down assets, but without proper planning can you pass on debt?

Dan: Well, generally speaking, your debts are going to die with you. If you have an insolvent estate – that’s where your debts are higher than your assets – you’re not passing that on to your kids or your spouse unless they guaranteed the asset. For husbands and wives, if they both sign on a personal guarantee, potentially that debt is going to continue, but that would not continue to your children. Now your children may not inherit anything, but if you’re negative, if your upside down, your kids are not going to be required to deal with that debt.

If you have a revocable living trust, how long will it remain after your death to distribute your assets?

Marc: If you have a revocable living trust, how long will it remain after your death to distribute your assets? Is there a maximum amount of time?

Dan: There is not a maximum amount of time. There are certainly questions that come about if it starts taking multiple years. If you’re dealing with a probate situation, that’s where you generally don’t have a trust, they want that done in a certain amount of time, but you might have litigation going on. Same kind of thing with a revocable living trust: you might have a litigation going on or some other reason as to why it’s open and it can stay open for a long period of time until those issues are resolved.

If you have a revocable trust and let’s say you have beneficiaries fighting, good example, it’s designed to stay out of court. It doesn’t mean that it always will stay out of court. People can always bring things into court. If you’ve got a trustee that’s stealing or you think that somebody was coerced or it was forged or any of these things, these things that are designed to stay out of court can ultimately end up in court if you get into big fights. So what you’re doing with a trust is you’re enabling people and your heirs to stay out of court, but that is not a definite that it’s going to end up that way.

Can you walk people through this step by step?

Marc: The last one is from Facebook. It’s a nice question to end on. Dan, can you walk people through this step-by-step?

Dan: Well, yes, that’s a loaded question. I absolutely can walk you through my steps, what I do, and I’ll sort of I guess do a little bit of a pitch here.

If you’re interested in doing estate planning, what is the process? With me, basically the first thing we do is a planning meeting and in that planning meeting we go over what is your plan. We talk about the issues with your kids and the taxes and avoiding probate and all that stuff.

The first step as we go through all those things – we’ll talk about the things that we just talked about now, but more customized to you – is we come up with the plan and then the next step would be for me to draft that plan and I will prepare those documents and from there I will send you those documents.

Now, some of my clients read every single word and ask me all kinds of questions. The majority of my clients skim them, check for names and addresses, and then what we do regardless as to whether or not you read them in detail or skim them is we have a meeting where we go through them in detail together article by article, explain what everything means, and then we get you signed.

After that happens we have a meeting where we go through every single asset title and every beneficiary designation and that letter we talked about, and if there’s more advanced planning to do, normally we talk about it in that meeting as well, so if you need to do the next level estate tax planning that comes about in that meeting. If you have a rental property, we want to do things to protect your liability associated with that. Those types of things would come out of that meeting. If you’ve got a business and we want to talk about succession planning for your business, that would start in that meeting as well. So that’s the process.

I hope you enjoyed my first webinar. I hope it wasn’t too boring for you and who knows, maybe we’ll do more of these, but given the challenges of COVID and being able to go out and reach people and talk to people, you have to change with the time, so this is my attempt to do so. I hope you enjoyed it. I hope to see you around and take care. That’s it.

Marc: Of course, I want to thank everybody for joining us today and if you want to get in touch with Dan if you have more questions or any questions, he can be reached at dhruttenberg@smolenplevy.com or at 703-790-1900. Thank you and stay safe.

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About the Author

Daniel H. Ruttenberg

Daniel H. Ruttenberg, JD, CPA, LLM is a principal with the firm. Mr. Ruttenberg received his Bachelor of Science degree with a double major in Accounting and Finance from the University of Maryland. He earned his Juris Doctor with Honors from George Mason University School of Law and his Master of Laws in Taxation with Distinction from Georgetown University Law Center. Mr. Ruttenberg also served as the Director of the Fairfax Bar Association (FBA) for seven years. During this period, he was also elected president – the youngest in FBA history and served as a member of the Board of Directors for the Fairfax Law Foundation.