What Can I Do if my Parents Do Not have an Estate Plan?

Begin a Conversation with your Parents

Discussing your parents' estate plan can be an emotionally difficult conversation because money, health, and control are all sensitive subjects.  Consider bringing up estate planning with your parents by telling them you are working on your estate plan, and ask if they have done their own.

You may be able to encourage your parents to plan their estate by discussing how they can use a trust to avoid exposure to taxes, avoid probate, and control how or when their beneficiaries receive certain assets. In addition, you may want to point out that an estate plan can make your parents’ intentions clear, which may help avoid conflicts among family members after they have passed away.

Image credits belong to HelenOnline

If they do not have an estate plan, you can refer them to an estate planner.  You can also use the checklist below, to help discuss estate planning with your parents.  A checklist can help with the estate planning conversation because it is acts as a step-by-step guide that can direct your conversation and help minimize emotions.  The checklist conversation may also help motivate your parents to plan their estate.

Estate Planning Checklist

I. Make a List of Key Contacts for Financial Matters

Write down the names and contact information for any professionals involved in your parents’ financial care. This list should include any financial planners, investment advisors, brokers, lawyers, and accountants.

II. Make a List of Medical Professionals and Resources

Since you may be called on to help with medical decisions for your parents, make a list of their doctors, other health care professionals, and health insurance policies.  In addition, you may consider including member ID numbers, long-term care policies, and any medications they may be taking.

III. Make a list of Assets, Account Numbers, Account Locations, Personal Identification Numbers (PINs,) and User IDs

If you ever need to step in and help manage their finances, you need to know your parents’ assets, including bank accounts, brokerage and mutual fund accounts, life insurance policies, and real estate.

IV. Identify a Suitable Location for Sensitive Information

If for some reason your parents do not want to give the above details to you, ask them to make a list on their own and store it in a secure location that you can access.

V. Decide on How Financial and Medical Affairs will be Handled with Legal Documents

Your parents will need legal documents to give an agent or trustee the authority to manage their financial and medical affairs if they are unable to do so for themselves.

A Trust - A trust is a legal arrangement in which your parents appoint a person to act as a trustee to manage their assets for their benefit if they are unable to manage the trust assets for themselves. The trust provides their trustee with a set of rules that must be followed when managing their assets.  It also creates a fiduciary relationship between them and their trustee, so that their trustee is personally liable for the mismanagement of trust assets.  After their death, their property will be distributed according to the directions in the trust.

A Pour Over Will – A Pour Over Will acts as a safety net for their estate. At the time of your parents’ death, it collects assets that were not made property of their trust and moves those assets into their trust. In addition, conservators may also be nominated in a Pour Over Will.

A Durable Power Of Attorney - appoints agents to make financial decisions for your parents regarding non-trust assets in the event they are not able to make financial decisions for themselves.

An Advanced Health Directive - appoints agents to make medical decisions for your parents in the event they are unable to make medical decisions for themselves.

Summary

Consider recommending Timothy Follett at Santa Barbara Estate Planner for your parents' estate planning needs. We are experienced at helping first time estate planners navigate the complicated estate planning process in a stress free environment.  We will take the time to provide counseling so your parents are comfortable and help them make informed decisions about their estate plan.

For more information visit our website:  https://santabarbaraestateplanner.com/    

(805) 669-7009 or tim@santabarbaraestateplanner.com

Do I Still Need an AB Trust?

It depends. . .

This article is for educational purposes only.  Your attorney should help you decide whether you need an AB Trust.  The decision on whether to keep or replace an AB Trust is highly fact specific and subject to your personal goals and risk tolerance.

AB Trusts are very common estate plans, because prior to 2012, the only sure way for a married couple to both use their Federal Estate Tax Exemptions, through a trust, was by the use of an AB Trust.  However, a major change in the Federal Estate Tax Law in 2012 gave married couples more options for their estate plan.  Estate plans that have an AB Trust should be reviewed by an estate planner to determine if an AB Trust is still the best option.

How Does an AB Trust Work?

In general, upon the death of the first spouse in an AB Trust, two subtrusts are created: Trust A (the Survivor’s Trust, holding the surviving spouse’s property); and Trust B (the Bypass Trust, holding the deceased spouse’s property). The deceased spouse’s Federal Estate Tax Exemption is used to fund Trust B, the Bypass Trust.  The reason Trust B had to be created to hold the deceased spouse’s property was because the Federal Estate Tax Exemption was like a use-it-or-lose-it coupon.  The coupon had to be used at the time of death or it could not be used at all.  As a result, the AB Trust used the first deceased spouse’s Federal Estate Tax Exemption when the first spouse died, and the surviving spouse’s Estate Tax Exemption was used later when the surviving spouse died.

What Changed?

In 2012, a major change in the law now allows a surviving spouse to claim the deceased spouse’s Estate Tax Exemption (referred to as portability).  Now, the tax coupon is not a use-it-or-lose-it coupon.  The surviving spouse can now use his or her coupon and their Deceased Spouse’s Unused Exemption (“DSUE”).  This change in the law makes Bypass Trusts optional because the surviving spouse can use both of the couple’s Federal Estate Tax Exemptions.

Why Does This Change Matter?

The change in the law can help couples avoid passing capital gains taxes onto their beneficiaries. Inclusion of an asset in a decedent’s estate allows for a step up in the basis of that asset.  The step up in basis can eliminate or reduce the beneficiary’s capital gains taxes.  This example is specific to California, a community property state with no estate taxes:

When Husband dies, his share of the community property and his separate property are passed to Wife.  As a result, all of Husband’s and all of Wife’s community property get a step up in basis to the current fair market value.  Husband’s separate property given to Wife also receives a step up in basis to the current fair market value.  When Wife dies, all of Husband’s property is included in her taxable estate, so all of the property gets a second step up to the current fair market value before it is passed to the beneficiaries.

The beneficiaries can avoid paying capital gains taxes when they sell the property, and Wife can avoid Federal Estate Taxes by using her Federal Estate Tax Exemption and her Deceased Spouse’s Unused Exemption.

How is the AB Trust Unable to Avoid Capital Gains Taxes?

The AB Trust uses the first deceased spouse’s Estate Tax Exemption to fund the Bypass Trust.  The assets that are placed into the Bypass Trust are not included in the surviving spouse’s taxable estate. As a result of the non-inclusion of the assets in the surviving spouse’s taxable estate, the assets in the Bypass Trust only get one step up in basis when the first spouse dies.  When the assets come out of the Bypass Trust upon the death of the surviving spouse, the beneficiaries may pay a capital gains tax on the growth in value of the assets during the period of time that they were in the Bypass Trust.  If the Bypass Trust is not funded carefully and if the spouses die many years apart, the assets in the Bypass Trust could grow significantly and create a large capital gains tax that the beneficiaries would be responsible to pay.  

So, Should I get rid of my AB Trust?

It depends, talk to an attorney.  An AB Trust has its benefits and drawbacks and there are still many good reasons to have an AB Trust.  In addition, capital gains taxes are just a possible product of an AB Trust, not a certainty.  An alternative to an AB Trust can eliminate capital gains taxes, but the alternative has its benefits and drawbacks as well.  As a result, the decision to keep or get rid of an AB Trust is highly personal and fact dependent.  The best way to determine if an AB Trust is still the best option for you is to meet with your estate planner.

If you are unable to meet with your estate planner, Timothy Follett at Santa Barbara Estate Planner will review your existing estate plan and counsel you on your options so you can make an informed decision about the future of your AB Trust.   

tim@santabarbaraestateplanner.com    https://santabarbaraestateplanner.com/    (805) 669-7009

Emergency Contact Authorization Forms Help Financial Firms Prevent Financial Elder Abuse

Proactive Financial Firms Use Emergency Contact Authorization Forms To Help Prevent Financial Elder Abuse 

An Emergency Contact Authorization Form allows a client to list trusted persons who shall be contacted if their financial advisor suspects diminishing capacity, financial abuse, or a financial predator.  The goal of the Emergency Contact Authorization Form is to permit your financial advisor to make your designated emergency contacts aware of the issues, and then, your emergency contact persons can reach out to you personally to determine if the advisor’s concerns are legitimate.

Financial advisors are in a unique position to know your financial history.  As a result, your advisor is also in a unique position to spot unusual activity and requests.  As you fill out an Emergency Contact Authorization Form with your financial advisor: 1) carefully consider who you should name; 2) discuss your choice with your advisor; 3) let the person you have chosen know that they have been designated as an emergency contact; and 4) and give your emergency contact your advisor’s contact information.

Please be aware that the Emergency Contact Authorization Form does not take the place of a Durable Power of Attorney (a legal document in which you give a person you trust the authority to make financial decisions on your behalf).  The Emergency Contact Authorization Form only allows you to designate individuals your advisor can contact to discuss their concerns.  The designated emergency contact individual could be the same person as the agent named in your Durable Power of Attorney, or you could designate another person as a way to provide some checks and balances. 

An Emergency Contact Authorization Form is an important part of a comprehensive estate plan.  The form will only work at the institution where it is on record.  You will still need to execute a Durable Power of Attorney to insure that all of your financial accounts will continue to be managed and your bills will get paid if you become mentally incapacitated.   

Please contact our office if you have any questions about Emergency Contact Authorization Forms, Durable Powers of Attorney, or if you suspect a family member or friend is being financially exploited or abused.

For more information visit our website:  https://santabarbaraestateplanner.com/    

(805) 669-7009 or tim@santabarbaraestateplanner.com

Amazing photo courtesy of Candida Performa http://flickr.com/photos/40006794@N02/3937474049