As a CERTIFIED FINANCIAL PLANNER™, my brief with many clients goes way beyond just investment management. One of the most critical issues is estate planning, one that is often disregarded by those who may not have white hair, tens of millions of dollars in the bank, four homes and a strong sense of their own mortality.
I sat down recently with Laura Cowan, recent founder and owner of The Law Office of Laura E. Cowan and posed to her some of the questions that I often get asked in the preliminary stages of a discussion with younger professional clients about estate planning. Laura blew away some of the myths surrounding estate planning and gave insightful answers to my questions.
Thanks for sitting down with me, Laura. On behalf of some of my clients and prospects I wanted to ask you some of the questions that are put to me by mostly younger professionals when we get around to discussing estate planning. First off, the most common one of all .. "What happens to my stuff if I die without a Will in New York?"
If you die without a Will, the state of New York has one for you. Your property will be distributed according to state succession laws, even if it’s the exact opposite of what you would have wanted. This applies even if you think you don’t have enough “wealth” for it to matter. The truth is, while you may not be Bill Gates or Warren Buffett, what you do have means something to somebody. It’s best to have a Will in place so your assets can be passed on based on your wishes, not your state’s laws.
A scenario for you, which is a fake composite of a number of ones I have come across .. "My girlfriend Lesley and I live in New York and we have a five-year old son, Eddie. We live in a rented apartment and don't have a great deal in the way of assets, just some savings and some money in our 401ks and IRAs and a $100,000 life insurance policy on my life where I have named Lesley as the beneficiary. If something happens to me, then Lesley will bring up Eddie, living off the money from the life insurance, 401ks and IRAs. If something happens to Lesley, I'll raise Eddie myself. We've got it all worked out, why should we pay an estate planning attorney for a Will?"
You and Lesley absolutely need to have Wills in place naming guardians for Eddie. This is especially important because you and Lesley are not married. If Lesley were to die without nominating you as Eddie’s guardian, it might open the door to a custody challenge. A judge would ultimately be the one to decide who would raise Eddie, even if it were the last person you or Lesley would ever want!
If you have children, you need to have a plan in place that names both short-term and long-term guardians. I also suggest having an ID card in your wallet that states that you have kids at home and lists the number of a guardian – just in case. You can craft a plan for free at www.KidsProtectionPlan.com, where you can name short term legal guardians for your children. This should be done regardless of your finances. Do it now – it’s free!
This one often spices up the debate! .. "What happens to my money if I die and then my husband remarries later on? I love him and everything, but what protections are there for my kids?"
You have reason to be concerned. If your husband currently has a Will, it would automatically be revoked if he remarried. And if he died after remarrying without making up a new Will, your children’s inheritance would be decided by state succession laws rather than what you had originally intended. In New York, your husband’s new wife would be entitled to $50,000 + one-half of his remaining estate. She would also get $25,000 of cash (if available) and your husband’s car (up to a value of $25,000). The remaining portion of the estate would be split among your husband’s children, including any children born after you died.
There is a solution to this dilemma. With proper estate planning, you can provide for your spouse upon your death and still ensure your children will receive the inheritance you intend for them to receive. This solution is called a Qualified Terminable Interest Property Trust, commonly referred to as a QTIP Trust. A QTIP Trust allows you to separate your property into two portions: one portion is the income the trust property can generate; the other portion is the trust property itself. The QTIP Trust can be drafted to give your husband access to the income portion of your assets during his lifetime. At his death, however, the corpus of the trust property will pass to whoever you had named before your death – in this case, your children. This is a complex area, so it’s best to speak to a qualified estate planning attorney to fully understand your options.
"I read somewhere that I won't pay any estate tax unless I have $5m or $6m or more in the bank. I don't have that much. Since a Will is just a way to avoid taxes, I don't need one, right?"
A Will in and of itself does nothing to avoid estate taxes. So, even if your estate did fall above the current federal exemption amounts of $5.49mm for a single person, or $10.98mm for a married couple, you would need more than just a Will to minimize your estate tax bill. And even though estate taxes are not an issue for you, it’s important to realize the full implications of what would happen if you died without an estate plan. First, if you have no plan, your next of kin will be called upon to manage your estate. If you are young and single, this will likely be your parents, who will have access to everything on your phone and social media accounts as well as all your personal belongings. If the thought of this makes you uncomfortable, you can solve it by drafting a Will naming someone else as the executor of your estate – perhaps a sibling or close friend would be a better choice than defaulting to your parents.
If you have children, you absolutely must have a Will to nominate guardians. Selecting someone to care for your children in the event something happens to you is not what anyone wants to consider, but it’s imperative. If you don’t nominate guardians in a Will, a judge will decide who should take care of your kids after you die – even if it’s the last person you would have ever wanted!
It is also important to plan for incapacity. It’s not pleasant to think about, but we all have ideas about what we would want and not want if we were in an accident and were not able to make decisions for ourselves. A Health Care Proxy is a vital document for everyone over the age of 18. This document allows you to appoint someone you trust – a Health Care Agent - to make health care decisions for you in the event of your incapacity. For example, if you are in a car accident and unconscious for a few days, or you have a stroke and are incapacitated for a longer time, your Health Care Agent would make decisions on your behalf.
You need a Health Care Proxy even if you are married. You can, of course, appoint your spouse as your Health Care Agent, but you should also appoint an alternate in case you and your spouse are both incapacitated. Without a Health Care Proxy, your doctors will turn to your family to make decisions, probably your spouse first. But if your parents and spouse disagree about your care, this can cause real problems (see Terri Shiavo). The best thing to do is execute a Health Care Proxy appointing the person you choose as your Health Care Agent, and then talk to that person and your other family members about your wishes.
You should create a Durable Power of Attorney for the same reasons. This document names someone you trust to manage the financial tasks that will arise if you become incapacitated. For example, bills must be paid, bank deposits must be made, and someone must handle insurance and benefits paperwork. If you don't have a Durable Power of Attorney and you become incapacitated, a judge must name someone to manage your financial affairs. These proceedings can be expensive and embarrassing -- a public airing of a very private matter.
If you are married, your spouse does have some authority over property you own together -- for example, to pay bills from a joint bank account or sell stock in a joint brokerage account. There are significant limits, however, on your spouse's right to sell property owned by both of you. And when it comes to property that belongs only to you, your spouse has no legal authority without a power of attorney. Finally, the people you name as agents in your Health Care Proxy and Durable Power of Attorney do NOT have to be the same people.
Gently tiptoeing into highly emotional territory .. "If I tell my mom that I do not want to be kept artificially alive if two doctors agree that I won't recover, can she tell simply the doctors that if I become incapacitated, and will they do whatever she tells them?"
While a Health Care Proxy is important for naming who you would want to make decisions for you in the event of your incapacity, a Living Will is important for setting out the actual instructions you would want followed. A Living Will is a written statement that expresses your desires regarding health care treatment if you become mentally or physically incapable of expressing those desires yourself. It can include, but need not be limited to, instructions concerning the termination of life support.
Living Wills have some disadvantages. There is no statute in New York that governs Living Wills. The highest court in New York has held that a Living Will is valid as long as it constitutes “clear and convincing evidence” of your wishes. But because there is no standard form for a Living Will that is interpreted in a uniform way, even a well drafted Living Will is ultimately subject to interpretation by those who need to determine your wishes.
It is also hard to draft a Living Will that provides specific instructions regarding all possible future events. This means that inevitably, a Living Will will require those responsible for your care to interpret general instructions in your Living Will in the context of specific circumstances.
And finally, a very practical one .. "Once I have a Will, where should I keep the original copy?"