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Wednesday, June 26, 2013

DO I REALLY NEED ESTATE PLANNING IF I’M HAPPY TO LEAVE EVERYTHING TO MY SPOUSE AND CHILDREN?



State law provides a set of rules that apply when someone dies without a Will. In California, when a married person dies without a Will their “community property” (marital assets) will go to their spouse and their “separate property” (assets that belong to only them) will be divided 1/2 to their spouse and 1/2 to the child (2/3 to the children if there are more than one). Sounds great right? Who needs to write up a Will, or even worse, pay a lawyer thousands of dollars to do an “estate plan” when they’re happy enough to have the default apply?


Well, my friends, the devil is in the details with this one and when I mean details, I mean YOUR details. Your details may be pretty today. Let’s say (just for kicks) that you’re the "typical" American family: 2 healthy married adults madly in love, 2.5 cute kids with no disabilities (for now we’re going to say that your son’s unquenchable potty mouth is not early onset tourettes), a house with a white picket fence and no termites, and some big, fluffy, friendly-type dog that doesn’t shed but might lick you to death. Sound like you so far?



Now, lets say that, for now, nobody dies. You think I’m being nice, but wait. There is a terrible accident and you, the primary earning spouse, are seriously injured. You go into a coma and may, or may not survive. Suddenly there are medical bills along with the regular bills and your spouse has to go to court before she can access any of the bank accounts in your name because she doesn’t have a Power of Attorney over your assets. Do you know how quickly she can get on the court’s calendar in your jurisdiction? Think weeks, not days (even if you had died it would take a minimum of 40 days to access the funds). Is she going to have the time to do the appropriate filings with the court while simultaneously caring for your children, spending time at your bedside, and doing everything else you and your spouse normally do? No, she is going to hire an attorney for three or four times the cost of doing estate planning in the first place. “But, wait!” you say, “We have joint accounts so this doesn’t apply.”


Well, then, let’s make it worse. What if both of you are in a coma? Who will step in and pay the bills and take care of your children? Someone is going to have to petition the court to get access to your bank accounts and guardianship of your children until one of you is better. But who? If well meaning relatives fight, it could be a very long time before things are settled. Even if there is only one person it will take a minimum of weeks to process through the court. And meanwhile? In the worst case scenario, without any direction from the right type of estate document, and especially if you do not live near relatives, the children could end up in temporary foster care. Even if it is only for a couple of days, or one night, do you want that for your kids at the same moment they lost their parents? And when the court finally finishes its eni-meni-miney-moe and selects someone to care for your little darlings, do you think that someone will ask the Judge to allow them to dip right into your bank account, your children’s inheritance, to pay for the lawyer they used to fend all the other relatives off? Of course, anything for the kids.


So your children sit at their foster parent’s home or they are flown away from their community to live with Aunti Evil who convinced the court to let her have them “temporarily” until the court has time to make a final decision, lawyer fees are flying out the door, and then things get worse. The doctors determine that you are brain dead. Without estate planning, there is no Health Care Directive to let the doctors know that you would rather them pull the plug then rack up a half million dollars in medical bills for your spouse and children to pay with the equity of that lovely house you left them. The automatic homestead exemption in California (which supposedly protects you from creditors going after your house) maxes out at $175,000 and that is if you are in the highest homestead exemption bracket (over 65 years old). If you’re under 65 and have minor children living with you it is $100,000. Any equity above that amount is considered available and must be paid to creditors. Hmm… I wonder how much a bankruptcy attorney will charge your wife because you were too cheap to hire an estate attorney and have your documents in order? So far you’ve spend a large chunk of your estate on lawyers and you’re not even dead yet.


Moving forward with our fun little exercise, you die, but your spouse lives with life-long debilitations that prevent her from working. Luckily, you had a big life insurance policy, right? Wrong. Because your life insurance policy was not distributed to a properly drafted trust she will have to spend all that money down as well as many other assets before she can apply for certain government programs she may need. So much for any left over funds for the kids. Or maybe your spouse died along side you and one of your kids was permanently disabled, without proper planning any inheritance will have to be spent down before she can apply. Do you know how much an adult with disabilities can have before their eligibility for SSI is affected under current law? $2,000.00 total and, no, that number is not scheduled to change with inflation. With proper planning your life insurance could have acted as a life-long benefit to your child, but you didn’t plan, so it’s gone.


And now we get to the infamous cost of a good ol’ California probate. If you don’t have a properly funded trust, you and your spouse’s assets will have to be probated by the court, which takes about 8-12 months if the matter is fairly simple. (There is a simpler process if only one spouse dies, but, guess what? Eventually you do both die so, without planning, there will be a probate of all the assets.) In California, the attorney and executor’s fees are set by a schedule, but just to give you an idea, a $400,000 estate costs $11,000 in fees to the lawyer (plus another $11k for the executor if he/she takes a fee). A $200,000 estate will cost your heirs $7,000 in fees. Which reminds me, if you know of anyone in Northern California who needs a probate please tell them to call me! I love myself a nice juicy probate.


Oh, and remember that two thirds of your separate assets that went to your kids? Or, if you both die young, all the assets that went to your kids? By default, they get it at 18. Do you want your child to receive all the inheritance they will ever receive at 18 years old? What if your separate property is the family house? Your surviving spouse will have to rely on the good will of a teenager to stay at home. And here’s the final kicker in this little scenario: Because your assets went through probate there are public records of the entire thing. Anyone who decides to pay attention will know the exact day your child receives that inheritance. Someone should do a case study on how many new Facebook friend requests orphans get on their 18th birthday.


I hope you are getting my drift with this little exercise. It is a lot of worst-case scenario stuff, but the point is that your estate plan is basically an insurance policy against higher costs and other calamities. How much do you spend on fire insurance and when was the last time you met someone who’s house burnt down? Compare that to the number of people you know who died.


I could go on and on with different scenarios with blended families, second marriages, unmarried couples, self-employed people, and other types of families, but suffice to say, the more your reality differs from my little dream family above, the more you need estate planning.


(By the way, this area of law is very State specific. Many States have a probate process that is much more streamlined and inexpensive than California’s. Some of those States, though, have estate tax so please talk with a local attorney about an estate plan that works for you where you live.)
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