9 Steps To Financial Freedom - Step 4

 

BEING RESPONSIBLE TO THOSE YOU LOVE

HAVE YOU EVER  arrived at the scene of an accident on the highway and

thought, Uh-oh, I’ve really got to get around to doing my will? Has a friend or colleague ever had a cancer scare that made you think, I have to make arrangements for my children in case anything happens to me? Does turbulence when you’re flying remind you of all the affairs you don’t have in order? But a few minutes later the traffic starts moving, your friend’s scare turns out to be nothing, the turbulence dies down, your thoughts move on to something else, and everything is back to normal.

ALL THE WHAT IF'S

The fourth step to financial freedom is being responsible, which starts with being responsible to those you love.

It is not okay when you get sick, or when you die, to leave financial chaos behind you for everyone else to clean up. It will be hard enough for those around you to bear the grief of your terrible illness or death; imagine, for a minute, their pain. Please don’t also force them to deal with all the matters you could have taken care of while you were alive and healthy.

A big part of financial freedom is having your heart and mind free from worry about the what-if’s of life. Each of us—from those who wish creditors would stop calling to those with millions—has to face the what-if’s. It is not enough to say you’ll “get to it” or to think vaguely that, because you have employee life insurance or a will you wrote years ago, you already “have” gotten to it. It is essential to know you have planned and prepared everything in the best way possible.

In Step 3 you faced the reality of your present financial life.

In Step 4 you face the reality of your death.

What I discovered with my clients was that their state of mind had a direct effect on their finances. Simply knowing that you have taken care of the people you love always, in my experience, frees up major blocks on this path to financial freedom. If you take this step, you will feel freer already—in mind, body, and soul.

If you really love your spouse, your children, your life partner, you must say you love them, think you love them, and act as if you love them

—which means doing, really doing, the things listed in this chapter.

I cannot tell you how many people I have met through my work who have thought they had taken care of everything, only to have their loved ones discover that they had not.

Please take these actions for yourself, for your peace of mind—and most of all for the ones you love.

THE FIRST LAW OF FINANCIAL FREEDOM

-       PEOPLE FIRST THEN MONEY

Can a good stock portfolio comfort you when your heart is broken? No. But a life rich in people you love can.

The emotional foundation of your life is no less important than the financial structure you create. That is why, in building your financial future, you must begin with the people you care about. Each of the following topics is equally important to your future, and all are essential for you to know about in order to be responsible to yourself and those you love.

Wills and Trusts. What are they? How are they different? Do you need one? Do you need both? How old should you be when you get one? How much should they cost? What if you change your mind about what you want to happen to your estate? What happens if something happens to you and you don’t have one? Can a trust benefit you while you’re alive? Can you rely on your attorney for guidance in this matter?

Durable Power of Attorney for Health Care. What is it? Why should you have one? When should you have one? Is it complicated to create? Is it expensive?

Life Insurance. Do you really need it? If so, what kind? How much coverage should you have? What are the cheapest ways to buy it?

Long-Term-Care Insurance. Why is this the most important kind of insurance you can own? What does it insure? Who should and should not buy it? When should you buy it? How much will it cost? How can you tell if the policy is a good one? What if you don’t qualify for it or can’t afford it?

Estate Planning. Isn’t a will or a trust enough? What more do I need?

WILLS

JEFF’S STORY

 

Jeff thought he had lost just about everything when his wife, Nancy, died of breast cancer at age forty-four, leaving him with their two young children to raise. As it turned out, his losses were just beginning.

Before I met Nancy, I had sort of thought I would never get married or have kids, but she was different. She had moved from New York to California six years before and found she just loved it here. About six months before we met, she bought a house for $225,000. It was kind of rundown, but she wanted to fix it up. That’s how we met. I’m a contractor with my own firm, and I came over to give her some estimates. I ended up doing the job for free—because six months later we were living together. We worked on the house together  and  it  was  transformed.  Supposedly  it’s  worth  about $300,000 now.

To our surprise, Nancy got pregnant—she had never thought she could—and soon we were married, with two daughters. After our daughter was born, Nancy’s mother came to visit, and she didn’t like me at all; I know she thought I wasn’t good enough for Nancy. But it didn’t really matter, because she lived in New York and we hardly ever saw her.

Last year, Nancy was diagnosed with breast cancer. She had surgery, radiation, chemo, the entire treatment. The process scared us because we never really knew if Nancy was going to be okay or not. We realized that we never had given much thought to these things and that we didn’t even have a will. It was Nancy who insisted we have one drawn up. The house was still in her name, just as it was when we met, but in the will she left it to me. It was a given that I’d take care of the kids; I love my girls. She knew I’d find a way. In the end things happened so fast. Nancy wanted to die at home, but the health insurance didn’t cover the hospice care. So when the time came, I paid for it with credit cards. It was hard. I wasn’t working very much because I wanted to be with her all the way through this.

When Nancy died three months ago, I went back to the lawyer to see what came next. Maybe I should have just taken the kids and left town. The probate fees on the house are going to be enormous. No way do I have that; all our savings went to the hospice people, and now I have credit card bills, too, plus I gave up a lot of jobs to be with my wife. The lawyer says that unless I pay these probate fees, he will probably force the sale of the house. That’s not all. Now Nancy’s mother has flown out from New York, says she wants the kids, that she can give them private schools, and that I’m not a good father. That’s not true, and the attorney says it will never happen, but now I have attorney’s fees up to here.

Even if I could get the money for the probate fees—which feels like making bail or something—I’ll have to sell the house to pay the attorney’s fees and the credit cards. So the kids and I will lose the house regardless. All that work we put into it. I thought nothing could get worse after I lost my wife. I thought wrong.

What is a will? A will is simply a piece of paper that states who you want to get what when you die. But it’s also a legal document, which is where the trouble can begin. When you’re dealing with a will, you’re dealing with the courts.

When Nancy made up her will, she truly believed that everything—the house, their children—would pass smoothly to Jeff. She thought everything was in order. But a will often takes a circuitous route to get where it’s meant to go, and in many cases it can be a very expensive route as well.

How do you obtain a will?

There are a few ways to get a will. You can have a lawyer draw one up. This should cost from a hundred to a few thousand dollars, depending on where you live and how complex your affairs are. You can get a computer program that will generate a will for you for about $30 to $60. If you use any of these methods, you’ll also need to sign your will and, while you are signing it, to have two or three people witness your signature and sign the will as well. Some states require two signatures, some three, so to be on the safe side, ask three people to witness your signature. When you want to change anything in the will, you simply draw up what is called a codicil, which is an additional paper enumerating your changes. Follow the same procedure as when you signed the will in the first place.

If you want, you can draw up a will yourself on a piece of paper, which will cost you nothing. This is known as a holographic will. Just make sure that the paper you use has no other writing on it or the will will not be considered legal. Make sure, too, that the entire will  is written in your handwriting and is dated and signed by you. If you make a mistake, don’t cross it out. Start over. Anything crossed out is considered an interlineation, making the will null and void. Do not have anyone else witness a holographic will because, again, this will make it null and void. If you want to change a holographic will, it is better just to redo the entire thing.

Your will should specify an executor. This is the person who will make sure that all the legal, financial, and emotional matters are taken care of after you have died and that the wishes expressed in your will  are carried out. Executors deal with the legal system and the accountant and all the beneficiaries. They contact the banks and insurance companies and inform them of your passing and send in the necessary documentation to change the names on all the accounts to the new owners. For tax purposes, all the property will have to be valued and the final tax returns compiled; and if any money is owed to the IRS, the executor must make sure that it has been paid or set aside before any assets are distributed to the beneficiaries of the will. In many states the executor gets a set fee for having done all these tasks, or, depending on where you live, you may just decide to specify a fee in the will.

So preparing a will is relatively simple. Where it can get complicated,

as you saw with Nancy, is in its execution after you have died. All your will says is where you want your property to go. It does not necessarily get it there very easily.

After your death your will has to pass through the court system. Usually the executor has a lawyer handle this.

Once the will gets to the court, two things happen. First, a judge has to authenticate the will, to make sure it is valid. After the judge probates the will, he or she will then sign a court order transferring title to the property covered in the will to the people who are intended to receive it, as reflected in the will. In Jeff’s case, for example, title to Nancy’s house would be transferred to his name once probate was completed.

This sounds easy enough, but can be a nightmare.

In the first place, the process can take anywhere from six months to two years or more, while ownership of the property remains in probate limbo.

Nor does this process come cheap. In the state of California, where Jeff lives, and in many other states, there are statutory probate fees— fees, that is, that are set by law. These are the first fees that have to be paid out for any estate.

What this meant for Jeff was that the court would total the value of Nancy’s estate and then charge a fixed-by-law percentage of that amount for these probate fees. The house was Nancy’s major asset. Now, Nancy had put $50,000 down on the house, and in the few years they’d lived there, she and Jeff had paid off about $15,000 of the $175,000 mortgage she had originally taken out. This left a mortgage of about $160,000. So, since the house is now supposedly worth about $300,000, their equity in the house is $140,000. The bank is owed the rest. One would think that the probate fees would be based on their equity in the house—the

$140,000 they actually have in it. But that’s not how it happens. Probate fees are based on the fair market value of the house at the time of death, which means what the value of the house is on the open market. In this case the fair market value is now $300,000. California probate fees for Jeff would be $15,000, plus another $1,000 or so in court costs—just to claim title to the house that he and his wife already thought of as his.

Probate fees vary from state to state—but you get the idea. Probating a will takes time and money, no matter what state you’re in. If your estate is very small, you might be able to avoid probate with a simple will. Assets valued at $10,000 to less than $100,000 (depending on the state) can be transferred to your heir by a simple process called probate affidavit. That costs very little, doesn’t take much time, and makes it easy for your survivors to receive what you want them to. Probate affidavit forms are available in most banks at no cost. Be careful, though. Your estate could be worth more than you think. See this page for assessing your net worth.

Keep in mind, too, that wills can be contested, which means that anyone who thinks he or she should have something that the deceased willed to someone else has the right to come to the court and ask for it. Then the judge has to decide. Also, although people commonly use wills to specify guardians for their children, this is merely a recommendation and is not binding. It only express one’s wishes. Even though Jeff is the legal father of his children, and even though the will expressed Nancy’s desire that he be their sole guardian, the legal guardianship of children always rests in the hands of the court. Nancy’s mother knew what she was doing when she flew to California to ask the court for the children. Will she get them? It’s unlikely, but the court will make its decisions based on whatever it feels is in the best interest of the children. Meanwhile, Jeff has to hire—and pay—a lawyer.

Could Nancy have arranged her affairs differently, to save all this agony and expense? At least some trouble could have been avoided if Nancy had set up a revocable living trust.

TRUSTS

REVOCABLE LIVING TRUSTS

 

What Is a Revocable Living Trust?

A revocable living trust is a legal document that identifies any assets that will be held in the name of the trust and also designates the person who will manage those assets 1) while you are alive (typically, this is you), 2) in the event of your incapacity, and 3) after your death.

 

How Is a Revocable Living Trust Different from a Will?

A will simply tells your loved ones and the courts how you want to distribute your money and property after your death. It doesn’t actually make the distribution happen. A court must do that. A trust is much more straightforward and flexible, for the simple reason that the court is taken out of the process. A trust lets you transfer legal title of your assets into the care of a trustee—usually yourself, but sometimes another person—and to name a successor trustee and beneficiaries. This way, assets quickly become the property of your beneficiaries upon your death. Most important, they do not pass through probate. The courts are not involved in the transfer of your estate.

Here’s how a trust differs from a will. Let’s say that my mother wants to leave me her home, just as Nancy wanted to leave her home to Jeff. The deed to the home is in my mother’s name. If she has a will, she will have stated her desire that I inherit the house. But when she dies, I have a problem. How is the title of the house going to be changed from her name into my name? That’s where the probate court comes in—a judge must read the will and approve the title transfer. If my mother leaves me the house in a living trust, however, and has signed the deed over to the name of the trust during her lifetime, probate on the house is avoided. The house comes directly to me.

A will states where you want your assets to go after your death; with a revocable living trust, you take the steps while you are alive to sign the title of your property over to the trust.

By the way, anytime you want to you can amend the trust, so you can always change your mind about who gets what. Think of a trust as a suitcase, into which you put the title to your house, your stocks, and your other investments. For each item, you can affix a label, saying who will get it after you die. You carry the suitcase with you while you are alive, and you’re perfectly free to put new things in, take anything out, or change the labels. Then, upon your death, the suitcase gets handed by your successor trustee directly to your beneficiaries, at which time they can take out whatever you’ve labeled as theirs.

In many, many cases—especially in states with statutory probate fees

—trusts are far superior to wills. Clients who came to me for financial advice, whether they were single, married, or living together, ended up with a thorough education on trusts.

As we just said in Nancy’s case, if you die leaving a will, in all states the only way for property valued at more than $100,000 (or at as little as $10,000, in some states) to be transferred from the name of the deceased to the name of the beneficiary is to have a judge do it through the probate courts. With a trust you save time and you avoid probate fees and legal fees. If Nancy had a trust instead of a will, and had specified where she wanted the house to go, the house would have gone directly to Jeff. There would have been no probate fee of $15,000, no courts, and no attorneys. Nancy’s wishes would have been carried out smoothly, and Jeff would at least have been allowed to grieve in his own home in peace.

If you own property or other assets, have children, or care about what happens to the people you love after you’re gone, I urge you to look into a trust. When? As soon as possible. There is a fair bit of paperwork involved in switching assets into a trust, so the sooner you’ve set one up, the easier it will be to accumulate assets in the name of the trust.

 

SARAH AND ANNIE’S STORY

 

Where you want your money to go is one concern. Where you don’t want it to go is just as important.

ANNIE: Ever since Daddy died, it’s been a nightmare.

SARAH: My husband, Harry, fought with Peter, our son, for years, and always said he wouldn’t get another dime. We had to give him money so many times; over the years, that was tens of thousands of dollars. The worst thing was when Harry died, Peter didn’t even come to his funeral, couldn’t be bothered. I will never forgive him for that. I decided then: that was that. I wouldn’t let him have another dime, just like Harry said. Last year I moved here from Florida to live near Annie, my daughter, and my grandson, William. I trust Annie, she never wanted a thing. Peter is living in our house in Florida and wants it put in his name. No way. He can live there, but nothing more. Not one penny.

ANNIE: Mama kept all the money in a brokerage account in Florida.

Daddy liked the person who handled it, so she thought, Why not just leave it there? What did we know? Daddy always took care of everything, so when we would get these statements from Florida, we just filed them away. Mama hardly goes out on her own anymore because she’s afraid she’ll trip and fall. But she loves to cook. Most nights William and I go over, and she makes us a great dinner. One night when we got there she was waving this power of attorney form around that Peter had sent her, and she was having a fit.

SARAH: I’m getting older, yes, but not senile, as you can see. Peter is

trying everything to get his hands on my money. Can you imagine? He sends this note that says, “Mama, just sign here.” Power of attorney. If anyone is going to take over for me, I want it to be Annie. I trust her with my life. I just want him to leave me alone. And when I die, I want the money, what’s left of it, to go to Annie and William. Not a penny to that son of mine who wouldn’t even come to his own father’s funeral.

This story is dramatic—and it gets worse. But I’ve seen many cases like this. Money can tear apart families, even families that were closer to begin with than this one, faster than anything else.

I met Annie and Sarah because they were referred by a friend who thought they needed some financial help, and I was deeply relieved that they came when they did. Time was of the essence. I opened all the Florida statements that they had filed away, and they were stunned to find out that Sarah’s assets added up to more than $3 million. They had no idea. I noticed something else: many, many trades of stocks and bonds had been going on in her account. How could Sarah have known this, when she didn’t even open the statements or mail that came from the brokerage house? A few calls to the broker later and we found out that it was Peter who was trading the account. The broker figured it was okay because Peter was Sarah’s son. This was no excuse and his actions could have cost that broker his job, but Sarah felt that Harry had liked him and that was good enough. Even so, we convinced her to transfer the entire account to a reputable broker here in California, where she lived. She also worked with an estate and trust lawyer, Janet, an associate of mine I have come to trust by watching how she has worked with other clients in the past, to make decisions about how to best protect her estate.

We put together her revocable living trust and began transferring her assets into it. The assets would remain in her name throughout the rest of her life, then would pass directly to Annie. Because of Sarah’s age and frail health, we also gave Annie durable power of attorney for health care, which is covered later in this chapter. Because the estate was large, and because we all felt that Peter would do whatever he could to claim whatever he could, we took an additional precautionary step. We videotaped Sarah talking about the trust, expressing what she wanted to have happen to her estate when she was gone. As we went through the process, Sarah decided in the end that she wanted to leave Peter $10,000. Although frail, Sarah knew exactly what she wanted and what she was doing, and the video reflected that.

Everything went fine for about four years, but as Sarah’s health continued to weaken, she decided she wanted Annie to step in as the new trustee of the trust. This meant that Annie would be the one who could decide what was to happen with the money in the accounts, write checks against them, and generally oversee everything. They came back to my office, and it was an easy process to change the name of the trustee from Sarah to Annie. Janet then wrote all the institutions that held Sarah’s money informing them that Annie was the new trustee.

About two weeks later Peter called to say that he was coming to visit Sarah; this was a first, and it made Annie very nervous. Still, she agreed to join her brother at her mother’s condo for dinner the night he was due to arrive. When she got to Sarah’s condo, however, the locks had been changed. After meeting with the super and calling a locksmith, Annie gained entry and found her mother gone, her suitcase gone, her checkbook gone—and the pills she needed to take every day still on the night table. Five days later the authorities found her in a hospital in Florida. She had collapsed from dehydration and starvation.

Annie and William, in a panic, flew to Florida to bring Sarah home, and her story emerged slowly. Peter had taken his mother to the bank and tried to close out her account—but wasn’t able to, since Annie was now the trustee of her mother’s trust. He was able, however, to clean out her safety-deposit box of quite a lot of cash that Sarah liked to keep there just in case. Then he flew her to Florida, made her sign another power of attorney form he’d drawn up. That was all Sarah would say about the last time she saw her son. As Annie and William were bringing her home, Sarah died.

After Sarah’s death Peter was notified how much he was to get under the trust. He was furious. He claimed that his mother had promised to transfer the deed to the house over to him while she was in Florida. He claimed a lot of other things as well. He threatened to sue. But we sent his attorney a copy of the trust and a copy of the video, and that was that. Even though Peter was actually living in the house, the trust made Sarah’s wishes crystal clear. Her trust overrode Peter’s claims and threats. The trust protected what Sarah wanted to have happen to her money. Had Sarah had a will, not a trust, the probate fee on $3 million would have been $82,000.

One footnote to this story: Because there was a lot of money at stake here, and because Sarah and Annie were afraid that others might find out how much money they had, their privacy was a big concern to both of them. So there was yet another reason why they were better off with the money in a trust rather than in a will. Wills are public documents, and after someone has died and his or her will has been probated, anyone can go down to the courthouse and look up all the assets you  owned and what they are worth. With trusts, only the people entitled to the assets will know what they are and what they are worth.

 

HOW DO I SET UP A REVOCABLE LIVING TRUST?

 

If you want to do it yourself, and if you’re very good about taking care of paperwork, there are books in your bookstore that will show you how

—$20, give or take. Computer programs for setting up trusts are available for less than $40. If you decide to do it yourself, though, I urge you to have a qualified attorney look it over to make sure you did it correctly.

If you decide to work with a qualified estate attorney, depending on the size of the estate and how expensive the attorney is, you should be able to get a simple revocable living trust drawn up for between $500 and $3,000. If you decide you want your attorney to fund the trust—that is, to transfer your assets into it—it may cost you more. Once the trust is set up, making simple changes to it should cost about $100. Obviously these fees will vary, depending on where you live and how complex your requirements are.

The language of trusts may seem daunting, but it isn’t. Here’s a rundown of the terms you need to know:

 

Revocable Living Trust

Trust: It’s called a trust because you are entrusting this entity with your assets, for your benefit while you are alive and to carry out your wishes when you can no longer do so for yourself.

Living: It’s called living because the trust will be set up while you are alive and will also live on after your death to carry out your wishes.

Revocable: Whoever is in charge of the trust—and it will usually be you—can change it at any time, so it is called revocable.

 

Components of a Trust: Trustor, Trustee, Beneficiary

Trustor, or settlor: The person who creates the trust and who owns the property that will be put into the trust. In the case history just presented, Sarah was her own trustor.

Trustee: The person who controls the assets in the trust. Most often the trustor is also the trustee. When you set up a trust, you do not have to give up your power over your assets. Most people continue taking care of everything just as they did before the trust existed. The only difference will be your title. If you and a spouse hold property as joint tenants or in community property, you do the same in the trust, and you can both be trustees. In fact, you can have as many trustees as you want, though having more than two is not usually recommended. Keep in mind that the trustee will have the say over most of what happens in the trust, so choose your trustees carefully, even if you are still going to be a trustee yourself.*

Co-trustee: Another person who has the authority to manage and invest the assets of the trust, although all trustees must agree to financial or investment changes. Parents often choose to make their children co- trustees, upon the deterioration or disability of the parents. Couples usually set up their trusts so that they’re both co-trustees and therefore both must agree to any changes.

Successor trustee: This is the person who steps in to make decisions about the assets in the trust if and only if the trustee or co-trustees cannot or do not want to act in the decision-making process. Annie was Sarah’s successor trustee and became her trustee once Sarah no longer wanted the burden of decision making.

Current beneficiaries: The person or persons for whom all of this is being held in trust. Sarah was the current beneficiary of her own trust.

Remainder beneficiaries: The person or persons who will inherit everything in the trust after the current beneficiary (who is usually the trustor as well) dies. In our case history Annie was a remainder beneficiary. Sarah had wanted William to inherit some assets outright, so he was a remainder beneficiary as well. Peter, to whom Sarah had left the $10,000, was another remainder beneficiary.

 

FUNDING YOUR TRUST

 

What good is an empty suitcase when you leave to go on vacation? Not much. Nor is an empty trust much good. By itself, the document establishing the trust means nothing until the trust assumes ownership of

the things you intend to put into it.

In other words, once the trust has been set up your assets must be transferred into it. This means that if John and Jane Doe owned a house together in their own names, after they established their trust they would have a new deed issued that would list the owner as John and Jane Doe, trustees for the John and Jane Doe Revocable Living Trust. The Does would also change the titles on their stock portfolio, their insurance policies, bank accounts, and so on. Doing this is simply a matter of paperwork.

Computer programs and books about trusts provide sample letters to show you how to fund your trust. If you have a lawyer draw up your trust, he or she will have form letters available to show you. Or the lawyer can handle changing the titles for you; even if the fee is higher than that for simply drawing up the trust, it might be well worth it— different institutions have different requirements for making the change.

Failing to transfer assets into your trust can be costly. Let’s say, for example, that you were lucky enough to have a certificate of deposit at the bank worth $100,000. Put that CD into your trust, and though there might be estate taxes for your beneficiaries to pay, there would be no probate. Forget to put it into the trust? That mistake would cost your beneficiaries up to $5,000. All assets that have a title on them—such as your bank account (both checking and savings), brokerage account, certificates of deposit, Treasury instruments, and all accounts that have your name on them—need to be transferred into the name of the trust. Every institution has a form that it uses to make this transfer easier for them. Make sure, if your lawyer is not doing this for you, that you contact each place, get the correct paperwork, and fill it out immediately to make the transfer.

 

PROVIDING FOR YOUR CHILDREN WITH A TRUST

 

Okay, you’re thinking, this all makes great sense. But I’m only thirty- nine, and I did a will when we had children. The will says to whom the kids would go if something happened. My best friend, Joe, would be the guardian; we’ve already talked about it. Plus I don’t really have that many assets yet, though I have a nice-size life insurance policy, just in case. That trust sounds like a good idea for when I’m older.

Not true. Particularly when you have children, the earlier you set up your revocable living trust the better, even if you don’t have a lot of money. If your children are very young, and if anything were to happen to you, they could be at greater risk than you might imagine. Say you’re killed in an automobile accident. It happens every day. Even if you have a will, your will does not have the power to assure that Joe, your best friend in this world, will be the legal guardian of your children. A will can only express your wishes. The court has the final decision when it comes to who is appointed legal guardian of your children. With a living trust, you can specify who handles the money position for assets in your trust.

This is true in a trust as well—there is no guarantee that the person you name to be your children’s legal guardian will be the one appointed by the court. But with a trust, you can at least exercise control over their financial future. With only a simple will, the judge not only can appoint a guardian but can take charge of the funds you want your children to have (for private schools, camps, music lessons, prom dresses) until the children are eighteen years old. For instance, if your children are underage and all you leave them is a life-insurance policy, a guardianship for the insurance money is created upon your death, naming the executor or someone else as the guardian for this money. Each year the guardian has to go back to court to account for the money spent on behalf of the children during the past year. When each child reaches eighteen, regardless of his or her ability to handle the money, each one’s share will be legally signed over, lock, stock, and barrel. And

by the time he or she gets it, there will not be as much as there could have been, because every year there have been guardian fees and fees to a lawyer to do the guardianship reporting.

If you die with a trust, the courts still have the final say over guardianship. But you can at least make the important decision of how, when, and for what purposes your children will receive the money you are leaving them. You assign a successor trustee (your chosen guardian, for example)—or two or three, or however many you like—and specify when you want your children to receive their money, how you’d like that money to be used until that time, and, poof, it’s done. The successor trustee(s) takes care of your children’s financial lives on your behalf. No yearly reporting, no fees, nothing.

Think trusts are for old people who are likelier to die? Think again. Trusts are for people who are lucky enough to live among people they love. Trusts are for people who are responsible for those they love.

Think revocable living trusts are only for the rich? Not true, as we have seen. Bypass trusts (this page) are for the rich, but that is a different kind of trust. In fact, revocable living trusts are even more important for people with fewer assets than for those with tons of money. Why? Because the less you have, the more probate hurts.

 

WHICH DOCUMENT DO I NEED?

 

If trusts are so great, why do so many people still think they should have a will drawn up and have their lawyers do it for them? Why don’t the lawyers, especially in states where probate fees are statutory, recommend establishing trusts?

Guess who gets the probate fees? The attorneys do. If you were an attorney, would you rather make thousands in probate fees or just a few hundred to set up a trust?

More and more people are going the trust route and for all the reasons we’ve seen, I recommend a trust for most people. However, it is also very important to have a will as a backup, covering any assets you have not put into your trust—things such as furniture, personal items, and items of strictly sentimental value. And remember, if you have underage children, you should designate who is to serve as their guardian in your will, so that your wishes will be clear to the court.

If you have not created a will or a trust, or worry that you  haven’t done it properly, it might be time to see an attorney who specializes in drawing up these documents. Word of mouth is the age-old way of finding an attorney, so ask your friends, but please make certain you find one well versed in estate planning. If you do have friends, however, who think their attorney walks on water even if he or she doesn’t specialize in trusts, you might want to call and ask that attorney to refer you to someone who does.

Another good place to find names of knowledgeable trust attorneys in your area is through your local university, especially if they have a law school. Call and ask one of the professors who specialize in estate planning whom they would recommend.

The Web is also a good resource; you can search for lawyers at www.lawyers.com as well as at www.aaepa.com, the website for the American Academy of Estate Planning Attorneys.

When you do get the names of some attorneys, please make sure that you interview at least three of them. An attorney plays a major role in making sure your estate is set up correctly, and your survivors will need his or her assistance after your death.

Here’s what you should ask and what the answers should be:

How long have you been specializing in estate planning? The answer should be at least ten years.

How many people have you drafted wills and trusts for in the past five years? The answer should be at least two hundred people.

Will you be drafting the documents yourself or will someone else be doing the paperwork? It is okay if someone else draws up the paperwork if they are supervised correctly. This may actually end up costing you less. You just want to know one way or the other.

How much do you charge? You want a lawyer to charge you a flat fee to draw up a will and/or trust. The fee should include drawing up the document and explaining it to you (which could take a few hours, if the document is a trust) and funding the trust, which means doing the paperwork to transfer the titles on all your property and assets into the name of the trust.

If I have other questions, will you charge me if I call and ask? There should be no charge for simple questions over the phone.

 

WHAT IF YOU DON’T HAVE A WILL OR A TRUST?

 

No problem, as long as you don’t die.

If you do die—no, when you do die—your loved ones will soon find that by not taking action, you have left their inheritance up to the state.

Let’s say you own your house, which was part of your divorce settlement, and hold it in your own name. Since divorcing, you’ve remarried and are hopelessly in love with your new hubby. Still, because of the terrible divorce you went through, you feel a little safer keeping the house in just your name. Your two children from your first marriage have never liked the idea that you remarried, and even though they’re grown, they’re extremely possessive of the house they grew up in. If anything were to happen to you, you would want your new husband to be able to stay in the house for as long as he likes, then have the title transferred to your kids. But you haven’t got around to creating a will or a trust.

One day on your way home from work, you’re killed in a car accident. Because you have no will or trust, the laws of the state go into effect—a process called intestate succession. Depending on the laws of your state, your husband may own half the house, and your kids (who do not approve of him at all) could end up owning the other half. If  they wanted to, they could force him to sell the home. If nothing else, they could probably make him buy out their half, if they’re willing to give up their attachment to the house. In any event, they’ll all have to  go through probate and come up with the money to pay the probate fees. Had the children been younger, the state would also have determined guardianship.

A trust specifying what you wanted would have been the best thing. A will would have been second best, even with probate fees. Without either, your loved ones still have the probate fees and your wishes will have gone unheeded.

DURABLE POWER OF ATTORNEY FOR HEALTH CARE

Talking about wills and trusts, I’ve heard people say, “I don’t care about any of this, because I am spending every penny I have while I am alive.” In a way, I understand this. Once you die, it’s not your problem anymore, is it?

But what if you don’t die right away? What if you have a stroke or a skiing accident? What if you are incapacitated to the point  where you are put on life support, with virtually no chance of survival? What would you want to have happen then? If you do not decide now, someone else may decide for you later.

For the sake of every one of you reading this book, I hope that you won’t ever be incapacitated or hospitalized, and that a long healthy life awaits you. But in case it doesn’t, I urge you to make the simple arrangements for durable power of attorney for health care, for yourself and for the people you love. Do it now, while you’re strong and healthy. It might be the most important document you ever sign. Most of the other subjects covered in this chapter concern your death. This one concerns your life

 

DENNIS AND SALLY'S STORY

“I promise you that if anything ever happens, I’ll make sure that you do not have to spend your life on those machines,” Sally told her husband.

That was my promise. I don’t even know why the subject came up. We had just come home from Dennis’s forty-fifth birthday dinner, and I guess he was thinking about getting older, but there was nothing wrong. Nothing. Three months later I came home to find a message on our answering machine, to get down to the hospital as soon as possible. Dennis had been in an accident at work. I was sick when I saw him, tubes in and out of every opening in his body. I loved him so much. I asked the nurses if he was in pain, and they said, “I doubt very much if he can feel anything.” They were acting as if he were already dead. The doctor came in right away and said there was little hope—in fact, in his opinion there was no hope—that Dennis would ever come off those machines. I kind of lost it then, and I kept screaming over and over, “But I promised! No machines.” They had to give me something to calm me down.

Dennis’s family started to arrive one by one. As the days and weeks passed, it became very obvious that even though the wounds were healing, Dennis would never be my Dennis again. He would never come off those machines. The doctor said that in order for us to disconnect them, I needed to have a something or other for health care. I didn’t know what it was then, but I sure know now. I didn’t have it in writing, I just knew about my promise, I kept telling them that. The doctor was starting to see if there was any way around it when Dennis’s sister stepped in. She said it would be over her dead body that they would disconnect these machines. She said she and her brother were like one and there was no way he’d want to disconnect the machines.

That was eight years ago now and nothing much has changed. Dennis is still on the machines. This is still so freaky to me. It was as if Dennis somehow knew something like this would happen, and that is why he made me promise. My promise meant nothing, but I hope he knows somewhere inside him that I’m still trying to keep it.

She’s still trying today. When I asked Sally if it’s sad to see her husband this way after so many years, she said, “Not as sad as the fact that I didn’t keep my word to him.” This disagreement between the sister and Sally went to the court system after seven years and Sally lost—which makes it all the more important to have a written document regarding health care. The sad thing about this is that it did not have to be this way. If Dennis and Sally had that “something or other” for health care— durable power of attorney for health care—in force, none of what has taken place after the accident would have happened.

The first part of putting a durable power of attorney for health care in place is deciding what you would want to have happen to you if you were in a situation like Dennis’s. It requires talking to your loved ones and making your feelings known. You can choose from three basic options.

 

You want to prolong your life as long as possible, without regard to your condition, chance of recovery, or the cost of treatment.

You want life-sustaining treatment to be provided, unless you are in a coma or ongoing vegetative state, which two doctors, one your attending physician, will determine in their best judgment.

You do not want your life to be unnaturally prolonged, unless there is some hope that both your physical and mental health might be restored.

You must also decide in whose hands you want to put your life—that is, who will make the final decision to take you off life support, if the decision ever has to be made. This person is known as the agent. Choose someone who loves you, yet who is strong enough to do what you would want him or her to do—not an easy position to be in.

 

IS THIS THE SAME AS HAVING A LIVING WILL?

 

A living will is not the same thing and, in my opinion, not as complete. A living will does make your wishes about life support known to the doctors, who then take them into consideration. It doesn’t appoint someone you trust to make the final decision. A durable power of attorney for health care not only enables you to put your feelings and wishes into effect, but also specifies who will make the decision if you cannot. A durable power of attorney is also known as a health care proxy. Living trust, living will, durable power of attorney for health care: remember, these are very different documents.

 

HOW DO I SET UP A DURABLE POWER OF ATTORNEY FOR HEALTH CARE?

 

The forms to establish durable power of attorney for health care vary from state to state but are available, free of charge, at every hospital. Just make sure you get the form that is valid in your state. You can also get this form by contacting the National Hospice and Palliative Care Organization at 800-658-8898 or www.caringinfo.org. Please note, the website’s downloadable Advance Directive documents also include the paperwork for a durable power of attorney for health care. If you are arranging for your trust or will, your attorney can take care of this at the same time. Be sure to distribute copies to your doctor.

Don’t put this step off. The moment you need to do this document, it’s too late to create it.

LIFE INSURANCE

Life insurance was never meant to be a permanent need. Its original purpose was to protect people while they were younger, before they had a chance to build up a nest egg, in case the family breadwinner died early and unexpectedly. If the breadwinner lived his or her life according to plan, however, the family would accumulate enough assets to make itself safe and then let the insurance go.

Today, however, a huge industry exists to sell you as much insurance as it can, whether you really need it or not.

I know how the industry works, because I was a licensed insurance agent, and I know the workings of most policies inside out. I also know how the commission's work. If you knew how large those commissions on whole-life policies really are—often 80 to 90 percent of the first year’s premium—you would know why people say, “Life insurance isn’t something you buy. Life insurance is something that’s sold to you.”

If you’re single and have no dependents whatever, you can skip this section, because there’s no need for you to have life insurance at all. However, if you have people who depend on the money you bring in with every paycheck, there is information here that is essential for you to understand. The four questions to ask yourself about life insurance are these:

Do I need it?

If so, how much do I need?

If so, how long will I need it?

If so, what kind of life insurance policy do I need?

 

YOUR EXERCISE

Question 1: Do I Really Need Life Insurance?

You’re a single parent with two kids, and you die unexpectedly. Or you’re married in a two-income household, and your spouse is killed in an accident. Whatever your own family circumstances, would those you left behind be able to carry on financially? Back in Step 3 you compiled a list of all your expenses. Now is the time to review that list and see how much it would change if your children were suddenly parentless or if you or your partner were to die. Fixed expenses would remain the same. Some expenses would decrease. Some would increase—long-distance phone calls to friends for comfort, eating out so you wouldn’t be so lonely, entertainment. Would your child-care situation change? What about the future financial goals you had—paying for the children’s education, for example? Could you still cover that? What if you or your partner had to stop working as well? How would you cope? How much would it really take? How much do you really have?

Now compare the hypothetical money coming in against the hypothetical money going out in this scenario and any other scenarios you can imagine. What impact would a possible death have on the money coming in? If your survivors would have enough, then you do not need insurance. You may still want some for peace of mind, but you don’t need any—and there is a big difference between needing insurance and wanting it.

If your loved ones would not have enough, then you know you need insurance to protect yourself and them.

 

Question 2: How Much Life Insurance Do I Need?

Most people think, “Oh, all I’d need is enough to get my family by for just a little while.” As a result, they usually have the $50,000 or so worth of insurance that’s part of their benefits package at work, and feel that is enough. But since an unexpected tragedy affects people in different ways, you never know for sure what might happen after you are gone. That’s why this is a decision which must take into account every tragic possibility, and must be discussed with the people who would be affected by it. All the questions must be asked. Do they feel comfortable knowing that they have enough money to get by for a year, or two, or eight? Many experts will tell you to purchase six to eight times your annual salary, but experts are not the ones who have to live your loved ones’ lives. Maybe in your situation you would rather know that everyone will be okay no matter what, even if no one is able ever to work again. Maybe you want your children to be provided for more than ten years, rather than just eight. There is no magic formula. Each of us has our own financial what-if comfort level. The final decision is a balance of what makes everyone concerned feel secure and how much you can realistically afford to pay for that security.

As a rule of thumb, figure you need twenty to twenty-five times the annual income your family or dependents rely on you for. Why so much? The goal with life insurance is that your dependents could invest the payout on your life insurance policy—called the death benefit— conservatively and live off the income without having to use the principal. So, for example, if your family relies on your $75,000 income, I would recommend you consider a life insurance policy that has a death benefit of at least $1.5 million ($75,000 × 20). With that sum, your beneficiaries could invest the proceeds in municipal bonds paying 5 percent or so and the interest payments would generate the $75,000 of income they would need. I recommend this conservative approach so you can give your dependents the best sense of security. If your death benefit is small, say just a few years worth of their income needs, they will likely use up all the money very quickly. Giving them the ability to

live off the income generated by a large death benefit is indeed an incredible gift you can bestow.

And as I will soon explain, if you buy the right type of life insurance you can indeed afford a policy with such a large payout.

 

Question 3: How Long Will I Need Life Insurance?

Remember, life insurance was never intended to fill a permanent need. As the years go on, the money that you are putting away in your retirement plan (see Step 5), that you may be accumulating on your own, and that you are accruing in your home as you pay off  the mortgage will continue to change how much insurance you really need, or whether you need it at all. One of the goals of this book is to make sure that by the time you are retired, you’ll have enough coming in from your retirement plans to support you—and support your loved ones after you’re gone. Once you have enough to live on in this way, most likely there will be no need for life insurance. (However, never, never cancel or attempt to change a policy without checking with your doctor and having a thorough physical. If there’s a medical reason, you may want to keep insurance you otherwise would not have needed.) Bottom-line goal: By the time you are sixty-five at the latest, your need for life insurance, and your need to pay the premiums on your life insurance, should be gone.

 

Question 4: What Kind of Life Insurance Do I Need?

In my opinion there is only one kind of life insurance that makes sense for the vast majority of us, and that is term life insurance. When you sign up for term insurance, you’re buying a just-in-case policy for a finite length of time that you need protection. Term policies are not very expensive because the insurance company knows you have relatively little chance of dying while the policy is in force. Most likely they won’t have to pay a death benefit, and the premium is accordingly relatively small.

With a whole life or universal policy, on the other hand, the insurance company knows it will almost certainly have to pay the face amount or the death benefit. You’re expected to die with it. So they price it accordingly. It’s true that whole life and universal policies have cash values, so if you decide not to keep it, or if you suddenly need money while you’re alive, one source would be the cash value of these policies. But commissions on life insurance policies are some of the most lucrative commissions in any business—and you’re paying them. If your goal in buying life insurance is to put money aside, there are far, far better ways to do so without having to pay these kinds of commissions, as we’ll see in the next chapters. With low-cost term insurance, even though you do not accumulate a cash value, you’re paying low commissions on the protection you need, for as long as you signed up for.

When money is an issue, though, as it is for most of us, we don’t always have the luxury of buying enough life insurance to assume the worst. With most people there’s almost always a discrepancy between the maximum of insurance wanted and the minimum of insurance needed. Your needs, comfort level, and what you can afford all have to be taken into account. If you’re using a professional to help you figure this out, make sure he or she has your needs and pocketbook in mind and isn’t just thinking of all that the commissions will buy. I would suggest that you’re better off trying to figure out how much insurance

 you really need and can afford, then calling the following numbers to get quotes to compare the best-priced policies. Here are the numbers and Internet addresses of leading term life insurance quote services:

AccuQuote        Select Quote

800-442-9899   800-963-8688

http://www.accuquote.com http://www.selectquote.com

 

InsWeb

916-853-3300

http://www.insweb.com

 

LINDA'S STORY

 

The agent was so nice, Linda thought, and he was selling something she thought she needed.

I’ve always had it in my head that I want my kids to have insurance when I die, and $1.5 million is the figure I always thought sounded right. I have a comfortable income from my work—in fact, I was the one who paid the settlement in my divorce—but I have no savings, really, and the income will stop when I die. The kids don’t really see their father, and he has children from his second marriage, so this is all they’d get, ever. My father always said life insurance was a great way to save. I always remembered that. I finally got around to it three years ago—I was fifty-three.

The agent was so nice. He came all the way to my house, which is way out of town. On a Saturday! I was so impressed. When he came, I told him what I wanted and he had his computer with him, so he did the figures right there. He said it would be $22,500 a year for twenty years and that was that; the kids would have their money. In my head I added it up. It meant that I’d be putting in $450,000, and they’d get $1.5 million—a good deal, no? So I said fine, and every June 1 since, I’ve sent in my $22,500.

This last year, though, I got a notice that said since interest rates have been so low, I would have to pay the $22,500 for an extra three years to keep the $1.5 million death benefit, and if the rates stayed this low or went lower, I might have to pay longer. I called up the agent, and he said that it is possible, even though it isn’t probable, that if interest rates didn’t pick up, I might have to pay that money for quite a while longer than I was told. The best that could happen is that I’d have to pay it for twenty-three years in total. But I think he was saying that I might just have to go on paying it forever.

Had I known that, I would have thought twice about this. It just doesn’t seem right. I asked him what if I stopped now and cashed in the policy, how much would I get? He said $36,000. But I’ve already paid $67,500! I got so confused. He had told me the same thing my father always said, that this was a great place for saving money, regardless of the insurance, because they were giving a guaranteed seven percent interest rate. So how do I end up with only $36,000? And what do I do now?

This is when I met Linda, now fifty-six, who still had it fixed in her head that she wanted $1.5 million in life insurance for her kids. But think about it: For the insurance company to pay that $1.5 million, plus all the commissions and expenses buried in the policy, don’t they have to earn more than $1.5 million from Linda’s money? Of course they do.

This is why they are having Linda pay that extra $22,500 a year for three years right now. If their performance on how they invest Linda’s money, and the money of everyone else covered by their plans, falls short of what they want, no problem. They’ll just tell Linda she’ll have to keep paying that $22,500 a year for as long as they like. And why does Linda, after putting in $67,500, have only $36,000 in cash value in her policy? Simple. Especially in the first few years of the policy, the bulk of her money goes to pay the agent’s commissions; the insurance company also has to take its share. It is totally possible that the agent received that very first year a commission of $18,000, well worth his time that Saturday when he came out to her house. So, $18,000, give or take, of her first payment of $22,500 went out the window as soon as she paid it. In all likelihood the agent also “earns” around $2,000 every year she

pays her premium from then on. Not bad.

What is also important to remember when buying universal/whole life

or, for that matter, any insurance is to study the chart or illustration your agent will show you of what your premium is going to buy you.

All illustrations have a projected earnings side and a guaranteed earnings side. The projected side shows how this policy is projected to perform if everything goes according to plan. I can still remember seeing projections on certain life insurance policies of what they would be worth if interest rates stayed at 14 percent, which is what they were when these policies were being sold. Policyholders were in for a rude awakening when interest rates came tumbling down and the policies stopped paying the 14 percent. Projected earnings are “in a perfect world” earnings.

If you look at the guaranteed side of the illustration, it will show you the absolute minimum death benefit, given the highest mortality charges (the maximum the company can charge you for the insurance) and the lowest possible interest rate they can pay you. If you look at the guaranteed side and decide that yes, it still feels like a great deal, buy it by all means, but I doubt you will feel this is the case. If Linda had looked at the guaranteed side of her illustration, she would have seen that the $22,500 would go on for the rest of her life in the worst-case scenario. She hadn’t understood that and wouldn’t have taken the policy if she had. Her agent had emphasized only the projected values. A responsible agent will always, even without your asking, point out the worst-case possibilities as well.

This is not how it works with term insurance. With lower-cost term

insurance, the insurance company is taking an actuarial gamble that Linda will still be living when her policy reaches the end of its term and that they won’t have to pay the $1.5 million. Both her children, who were doing just fine, and I tried to talk Linda out of having insurance at all, even term. By taking her money and investing it carefully, Linda could have built up $1.5 million for her children without paying any insurance premiums. Even so, Linda had her heart set on having a $1.5 million insurance policy for her kids. Therefore term insurance was the only sensible answer.

I suggested that we first apply for a $1.5 million twenty-year level term policy, which would guarantee that her premiums would stay level and not go up for twenty years. At the end of the term, that’s it: no cash value, no insurance. At that time, the only way to get more insurance would be to reapply, but Linda would be seventy-six then, and the cost would be prohibitive. However, if she died within the next twenty years, her children would still get the $1.5 million she had dreamed of leaving them.

Our plan was that if she were accepted for this twenty-year level policy, we would cancel the first policy, withdraw the cash value, and invest that plus the difference in good no-load mutual funds (this page) for growth. Then we ran the numbers.

When we priced the twenty-year level term policy with a death benefit of $1.5 million, based on Linda’s age and health, the cost was $5,600 a year for the next twenty years—$16,900 less than she was paying on the whole life policy. Had she been younger, the cost would have been less; it would also be less if the death benefit were lower. This meant that Linda could take the $36,000 cash value from her first policy and add to that the yearly savings of $16,900 for the next twenty years, investing it all for growth.

Her main question was how much her kids would have if she died in the twenty-first year after the term policy ran out. The answer depended on how much those funds returned.

 

AT	5 PERCENT	$682,000
AT	6 PERCENT	$774,000
AT	7 PERCENT	$880,600

With an insurance policy, the death proceeds are income tax-free (though not estate tax-free), and she would have to take that into consideration as well.

Linda then asked me to do another calculation. What if she lived her normal life expectancy and never again put in another penny after twenty years? Assuming a 6 percent interest rate from the start, how much would she have then? Her life expectancy is eighty-seven, according to the charts, which would be eleven years after the twenty- year policy ran out.

At 6 percent the money she invested outside of the insurance policy would have grown to $774,000 by the time she was seventy-six. Then, even if she never put in another penny, that money would grow to $1,470,000 by the time she was eighty-seven. (There are also a number of ways to invest the money and not have to pay taxes on it while it is accumulating; see Step 6.)

In the end Linda agreed. Her insurance agent tried to talk her out of canceling her policy. Until she ran the numbers again, for him.

Happy ending—although if Linda had taken this course from the beginning, she would be in even better shape. At fifty-three her premiums for the exact same $1.5 million term policy would have been only $4,425 rather than $5,620. That alone is a big difference, never mind the fact that she would not have wasted $31,500, the difference between the $67,500 she paid in those three years and the $36,000 she got back.

 

SHORT-TERM? LONG-TERM?

A twenty-year policy felt right for Linda, but you’ll have to decide the term that’s right for you. Term insurance is available in all different term lengths, from yearly renewable term, where every year your premium will go up, to level term for longer terms—five, seven, ten, fifteen, and so on—where the premium is fixed for the term. The longest level term I know of is a thirty-year level, which is not available in all states. (See “Long-Term-Care Insurance,” below, for information about how to choose an insurance company and agencies to call for the best rates.) Insurance companies are always coming up with new concepts, so scan the papers for offers that sound promising.

Linda thought we had finished discussing insurance, but I asked her one more thing. What if she ever had to go into a nursing home? She was so concerned about leaving money to her children. Did she know how fast nursing home costs would eat away at her assets?

LONG TERM CARE INSURANCE

ANNA AND ART’S STORY

 

“I’m only fifty-three,” said Art. “I’m not going into any nursing home, and I’m not spending my money on any nursing home insurance.”

Art can’t tell his story now; his speech is still too slurred from the stroke. I will tell it for him.

When Anna and Art came into my office, I hardly noticed Anna, she was so tiny. Art, on the other hand, was huge, built like Smokey the Bear, with a great booming voice. Though soft-spoken, Anna, a schoolteacher, was not the least bit intimidated by her husband of twenty-seven years. Art had been offered early retirement, and they had come to see me about whether he should take it. After going through all their finances, we decided that although it was going to be close, they should take the offer, which was an excellent package. Only one thing worried me. Anna had a heart condition, which had already necessitated two operations. She was also scheduled for a third operation in four months. The good news was that as a teacher, her health insurance coverage was excellent. But knowing of her condition, and considering Art’s age, I suggested that we look into long-term-care (LTC) insurance for Art.

LTC insurance covers some of to all of the expenses the policyholder will incur if he or she were to enter a nursing home; it’s that simple. As you will soon be able to tell, I love long-term-care insurance. I believe that it’s one of the most important policies you can have. Long-term-care insurance is called into service more than any other kind. Yes, yes, I know, a nursing home would be decades off if you ever even had to enter one, right? Your parents aren’t even in a nursing home. If you’re twenty, thirty, or forty, I agree, this is not a policy to think about right now—for yourself, at least. But as you read this chapter, think about your parents. If you are hitting that magical fifty mark—well, you should read this chapter for you as well. It is when people reach fifty that I start suggesting LTC insurance. At fifty-three Art was about to hear me suggest it.

Like most health or life insurance policies, LTC policies require

that you qualify for them, and I knew that with her weak heart, Anna would never be eligible. But Art would, and such a policy, if he ever needed it, would provide protection for Anna that could make all the difference in the world to her.

You see, what happens all too often with couples is that one of them ends up in a nursing home, and it takes every penny of income they both have coming in just to pay for those nursing home bills. The person who is healthy and at home is left with no money to live on and so has to start using the savings, retirement plans, and the principal that they had spent a lifetime saving. Before you know it, all the savings are used up, and then, when the partner in the nursing home dies, the one who is alive and well is left penniless and perhaps with many years remaining to live. I see this happen all the time, and it’s devastating, which is why I brought up the subject of LTC insurance with Art and Anna. The subject went over like a lead balloon. “Do I look like a man who is ever going to end up in a nursing home?” Art boomed, and I had to admit he had a point. I said okay for now but one day soon we would talk about it again.

That day came just five months later. I received a call from Anna, who sounded very weak. She was slowly recovering from the heart surgery she’d had the month before, but her news this time was about Art. While she was still in the hospital, he had had a massive stroke, leaving his right side paralyzed and slurring his speech. If either of them got worse, how would they manage? They both remembered that I had said good nursing home care in the area in which they lived today cost $3,500 a month—a huge amount, given their financial situation. Did I think there was any way Art could still qualify for LTC insurance? No, I didn’t, not now.

But Anna and Art got a very lucky break. The company that handled Anna’s retirement plan was starting to offer group LTC insurance, and as part of their enrollment campaign they were accepting all employees and spouses, regardless of their current health. I don’t generally like group plans as much as individual insurance, but the plan offered Anna and Art protection that most people in their situation couldn’t get at all.

What if you never use long-term-care insurance? It will be wonderful if that’s the case. The purpose of insurance is to cover catastrophes. You should always hope you’ll never have to use it.

This is the question people ask me all the time about LTC insurance.

Now, let me ask you a few questions.

Do you have fire insurance? If you own a home, you have to have it. If you do, have you ever used it? Only 1 out of every 1,200 people ever uses fire insurance. But that doesn’t mean it isn’t a good idea.

Do you have automobile insurance? If you have a car, you do. If so, have you ever used it? Many of us are afraid to file a claim even when there’s a reason to, for what it might do to the cost of our premiums. Only 1 out of every 240 people ever uses car insurance. But most of us still have it.

How many people do you think use long-term-care insurance? One out of every two, among those who have it. It is used more than any other kind of insurance, yet it’s the kind of policy that way too few of us have.

Why do you think you’d need LTC insurance if you already have medical insurance? Because there is not one medical insurance policy in existence that covers long-term care.

If this situation were this dire, are you thinking it would be better all around just to dump the bills on Medicare? You couldn’t, because Medicare won’t pay them. Medicare will only pay 100 percent for the first twenty days of an LTC stay and will pay only if the facility is a Medicare-approved skilled nursing home. This means that the home must be approved by Medicare and have registered nurses on hand twenty-four hours a day, seven days a week.

Even if you needed skilled nursing care, you would have had to spend three days in the hospital before being admitted to a skilled nursing facility, and both stays would have had to be for the same illness. Also, after those first twenty days, if Medicare miraculously paid in the first place, for the next eighty days in the year 2011 you  would  be responsible for paying the first $141.50 a day out of your own pocket before Medicare kicked in. This daily amount changes, so please check out the current amount by going to http://www.medicare.gov. In essence, then, Medicare pays for the first twenty days in just a few cases, and then it’s your turn. Medicare payments for LTC care stop after day 100.

Well, what about Medicaid, then? Doesn’t Medicaid pay for nursing homes? An agency of last resort, Medicaid currently takes over, at any age, when you’re financially destitute. It’s welfare. Medicaid is a federal agency but run in each state by the state. Currently it’s true that 40 percent of the people in nursing homes are paid for by Uncle Sam—but Medicaid is not the answer.

For one thing, “financially destitute” is a tricky concept. If you are reading this book, you’re reading it so that you won’t be financially destitute, and I’ll tell you what I tell everyone I advise: If your plan is to divest yourself of your assets should a nursing home become inevitable, please turn to another financial adviser. Historically, many people have made themselves poor on paper to qualify for Medicaid by transferring assets and trying to make it look as if their money has disappeared. This is a demeaning process and can be devastating to the spouse, if there is one, who remains at home. The spouse who needs long-term care is then sent to a Medicaid-approved nursing home, which is not necessarily a place where you want to spend your last days. These are often overburdened facilities, and quite simply, our government can no longer afford to fund them. The government is also urging us all to consider

LTC   insurance—for   peace   of   mind,   to   assure   quality   care,   for   the

freedom to choose, and for asset protection.

If the government is trying to get out of the long-term nursing home business right now, you can be sure they will be out of it entirely by the time the baby boomers reach nursing home age. The good news in all this is that the government is also making it cheaper and more advantageous for us all to sign up for the care we might one day need.

Anna and Art haven’t had to use their long-term-care insurance yet, but their story ended up more happily than most such stories. They at least are protected, if the day comes when they need protection.

There is nothing we can do when unexpected illness hits, but we can take the steps today to make sure that our loved ones’ “tomorrows” are financially protected. This is not a topic that anyone, including me, likes talking about, but as we get older, and our parents or children get older, we’re going to have to deal with it whether we want to or not. In the baby boom generation most of us have more parents than we have children—and those parents are getting older. It is important to really think about what would happen if something did happen to you or someone you love. Do your parents or other family members assume without your talking about it that you would take care of them? If so, would you still be able to take care of yourself and your family? What are the costs of a home in your area or in your parents’ area? If you’re single, married, living with someone, a parent: Who would take care of you? And would taking care of you make it hard for that person to take care of himself or herself?

 

LTC INSURANCE: WHY IT’S A BARGAIN FOR MANY OF US

 

In my opinion the best age to purchase an LTC policy is no later than fifty-nine, although it can still be a bargain at any price if you’re older. Regardless of your age, if you carry an LTC policy and do have to go into a nursing home one day, or need care in your home, you will almost certainly pay less for all your payments combined than you would for one year in that nursing home. And many people live in nursing homes much longer than in the past. The average length of stay is 2.4 years, and even longer if you have Alzheimer’s. And one out of three people who reach age sixty-five will spend some time in a nursing home over the course of his or her lifetime. More important, LTC policies now can cover at-home care as well as nursing home costs.

Long-term-care premiums are based on how old you are when you purchase the policy as well as the level of coverage you choose. For example, how long you are willing to pay for your long-term-care needs before the policy begins to make payouts—what is known as the elimination period—will impact your premium rate. Other variables include whether your policy includes an inflation adjustment and the overall payout you will be entitled to. In 2011 it was not uncommon for a policy purchased before age sixty-two to carry an annual premium of

$1,500 to $2,000.

That is indeed a lot of money. But in 2011 the average daily cost at a nursing home was $213 and if you were to need full-time care in your own home the daily cost could be double that amount. Even assisted living facilities have a steep cost; an average of $3,261 per month in 2010. Just imagine what those expenses might be when you are older and ready to need such care. So I ask you to think long and hard about purchasing long-term-care insurance. It can be incredibly valuable insurance that will give you, and your loved ones, peace of mind.

You can learn more about long-term-care insurance at www.long-

termcareinsurance.gov and the website of the American Association for Long-Term Care Insurance, www.aaltci.org. Consumer advocate Phyllis Shelton, one of the nation’s leading LTC insurance experts, can be reached at www.GotLTCi.org.

 

HOW CAN I TELL IF I CAN AFFORD IT?

 

In the past, some people walked into my office wanting to buy an LTC policy, but we found, when we looked at their financial big picture, that it wasn’t right for them because they couldn’t really afford it over the long haul. This insurance is meant to keep you from going into the poorhouse in case of a long-term stay, not to put you into the poorhouse just to pay for it. If you sign up at fifty-nine, you have to be able to afford it—both now and in the years after you retire. It will do you no good to buy a policy at fifty-nine, retire at sixty-four, and find, at seventy-four, that you can no longer afford the premiums. You would have been better off not purchasing the insurance in the first place but investing the money instead. I also recommend that you only purchase a policy today that you could still afford if the premium increased 40 percent or more. The sad fact is that many LTC insurance providers have been given approval to increase premiums by that much, or more.

How do you know if you can afford it? By taking a good hard look at your future financial picture. Make some calculations to see what would happen to your ability to pay for this insurance when you retire and no longer have a paycheck coming in. Ask yourself what would happen after retirement if your partner died: Would you lose a Social Security check? Would his or her pension stop or be reduced? Could you afford it if the rates went up? The insurance agents you’re talking to should be concerned about these same questions, and run as fast as you can from anyone who begins to pressure you. If you can afford it, LTC insurance is great. If you can’t afford it well into your retirement, it won’t do you a bit of good.

If you can’t afford it, you can still be responsible to those you love. If you are worried about your aging parents, or when the time comes that you begin worrying about yourself, you can seek out the advice of an attorney who specializes in elder care. If your parents live far away, see

an elder care attorney near where they live, not where you live, because the assistance available varies widely from state to state and even can vary from region to region within the same state. In any case, an elder care attorney will go over all the options available to you—and these keep changing—given your particular situation.

 

HOW DO I CHOOSE A LONG-TERM-CARE INSURANCE COMPANY?

 

When you buy your LTC insurance, you don’t plan on using it for many years from then, if ever. It is imperative that the company you buy it from will still be there if ever you need it. Let’s say you bought your policy at age fifty-nine, when you were perfectly healthy. Fine. Then let’s say the company you bought it from decides it doesn’t want to be in the LTC business anymore when you turn sixty and have been diagnosed with some terrible disease.

What does this mean for you? Do you get your money back? No, of course not, they’ll tell you. Why should you get your money back? We were covering you for all those years, and if you had had to go into a nursing home, well, we would have been there for you. Your insurance may be picked up by another company but that’s not a chance any of us wants to take. So you must buy your policy from a company with a firm commitment to the LTC arena.

 

ESSENTIAL QUESTIONS

 

Thus the essential question is: Is the company going to be in the LTC business for the long haul? Here are the questions you must ask each company you are considering in order to find out. These are good questions to ask when considering buying any policy, but essential in the case of long-term care.

 

Questions About the Company:

How long have you been selling LTC insurance? The only acceptable answer is: Ten years, minimum. If the answer is one year, two years, or three, they are still experimenting.

How much LTC insurance do you currently have in force? The only acceptable answer is hundreds of millions of dollars or more. With that much money in LTC care, they are already making a handsome profit— and not thinking of getting out of the business.

How many times have you had a rate increase for those who already own a policy? The only acceptable answer is two times or fewer.

Note that the “already own a policy” clause is important. You are not looking for rate increases for people who have not yet purchased a policy. You are looking at rate increases for people who have already taken the plunge, bought the insurance, and are therefore vulnerable to the whims of the insurance company. You want a company that treats its current policyholders as respectfully as it treats all the prospective buyers it is trying to attract.

In how many states are you currently selling LTC insurance? The only acceptable answer is: Every state. Because each state regulates its own insurance policies, and because it’s tedious and expensive for insurance companies to be licensed to sell every kind of insurance in every state, if the company is selling LTC insurance in only one state—yours—you can be sure they are still experimenting.

Is your company on the block to be sold? The answer you want to hear is: No. Even if the company has a great LTC track record now, what would happen if the company that bought it wasn’t a company you felt safe with?

What are your ratings from the following independent companies, all of which rate the safety and soundness of insurance carriers?

 

AM BEST

WWW.AMBEST.COM

 

 

MOODY’S

WWW.MOODYS.COM

 

 

STANDARD & POOR’S

WWW.STANDARDANDPOORS.COM

A-PLUS OR BETTER

 

 

AA OR BETTER

 

 

AA OR BETTER

The only acceptable answer is: At least two of the insurance rating companies listed must have awarded these ratings or better. Insist that the insurance company send you the ratings in writing, or call the ratings companies yourself.

 

Acceptable answers to every single one of these questions will tell you if the company is safe. Here are the questions you want to ask about the policy itself.

 

Questions About the Policy

What does it take to qualify for benefits? In order to qualify for your benefits, and have your insurance company start paying your LTC bills, you are going to have to prove to this company that you really need long-term care. This is called “making it through the gatekeepers.” You won’t see a penny until you qualify.

In a tax-qualified plan, the first gatekeeper is not to be able to carry out certain activities of daily living (ADLs). In order to function normally, most of us need to be able to 1) bathe ourselves; 2) feed ourselves; 3) clothe ourselves; 4) transfer ourselves (get in and out of bed, chairs, and the like unattended); 5) be continent; and 6) use the toilet. With a good policy, if you got to a point in your life where you could not do two out of these six ADLs, then you would qualify for benefits.

The second gatekeeper is cognitive impairment, which simply means that you qualify if you come down with, say, Alzheimer’s disease or cannot think or act clearly on your own and therefore cannot care for yourself.

How much is it going to cost?

Please note: there is a huge difference in pricing among companies offering LTC insurance (or any insurance, for that matter). I have seen policies from different carriers offering essentially the same benefits but with a difference of up to $1,500 a year—a big difference, especially for retirees, and especially when premiums can be raised. When you are comparing these prices, make sure that you are comparing apples with apples—comparing policies that have the exact same benefits across the board. Otherwise your price comparisons won’t give you the information you’re really looking for. The benefit period, the elimination period, the benefit amount, the inflation rider, and home health care will all need to be identical when comparing prices among different companies. Here are explanations of what those terms refer to.

The benefit period means the length of time the policy will pay for your long-term care. I recommend choosing at least a three-year plan.

The elimination period means the amount of time you have to pay out of your own pocket before the policy will kick in. I recommend a thirty- day elimination if money for premiums is not an issue. If it is, then go for no more than a fifty-day elimination. Can you imagine where your loved ones would get the money to pay for the first hundred and twenty days of your stay, for instance, if the cost of a home was $10,000 a month? I would rather see you pay a little more now than possibly a lot more later.

The daily benefit amount means how much the policy will pay per day

if you use the benefits. Policies are now being sold in two ways: the original way, where there is a specific fixed amount of money that the policy will pay per day for your covered LTC stay, or for home health care. If the policy that you are considering is sold under these guidelines as of 2011, I would recommend purchasing about a $150-to $200-a-day benefit (depending on your location without considering inflation benefits) amount for LTC care. The actual amount you purchase ultimately depends on where you plan to use the policy and how much of your needs you expect it to cover. You would figure the exact daily benefit amount you should purchase by calculating how much other income you will have at that time that could go to pay for an LTC stay.

A policy that offers just a daily benefit amount works like this: If you bought a six-year policy that offers a $167-a-day benefit amount, you would have a policy that would pay up to $167 a day for six years in a facility.

The other way a growing number of policies are being offered is based on a pool-of-money approach. The pool-of-money design is one where you start off the old policies purchasing a specific benefit amount for a specific period of time. But in the new policies, the insurer takes the dollar amount you have purchased and conceptually puts it in a benefit account. That account can be accessed at claim time for any kind of covered service up to your lifetime maximum benefit. This results in a

policy that will pay for home health care (see below) or a nursing home in any order, in any combination, for any length of time. When the pool of funds is used up, the policy or your coverage is over. But this way you can use the pool of money to best meet your needs.

The inflation rider means how much the daily benefit amount paid will increase year after year. I recommend 5 percent compounded inflation. Unless you are over seventy, in which case a 5 percent simple inflation or a higher daily benefit to start is the way to go. If inflation benefits were added to the benefit amounts example above, then both daily benefit limits and the amount of money in the pool will go up by 5 percent per year until benefits are exhausted.

The home health care (HHC) clause means that you can receive certain kinds of long-term care at home if this care is administered by professionals, friends, or individuals deemed qualified by the insurance company to provide HHC. Some plans state that if you belong in a nursing home but prefer to be at home, the policy will pay your LTC benefits at home. I tend to view HHC as coverage you would need at home for the short term—for a broken hip, for example. With HHC, you are expected to get well. With LTC, you are not expected to get better.

As of the writing of this book, many carriers include far more than just home care in that portion of their policy. There are policies that offer benefits for assisted living centers, adult day care centers, adult congregate living facilities, and other community-based care providers. So it is important that you find a policy that has a good emphasis on home care benefits. Make sure you ask what is covered.

Why is it important that an HHC policy offer so many different kinds of care alternatives?

It is important that you have a choice in what kind of care you may want versus having to take the kind of care that your carrier is willing to pay for. So given that most of us would prefer to avoid being put in a home or institutionalized at all, it is important that you know there are policies out there today that have options that include being able to move into a private residence that has been converted to allow barrier- free access and has some monitoring staff available around the clock, but where you have a private room, furnished with your personal furniture and decorated with your personal items. It’s less of an institution; it’s more palatable. Most important, in my opinion, it’s the growth market

for the future. Nursing homes are now getting more and more skilled care for patients who used to be in hospitals. More and more custodial patients are finding better care options outside the nursing home.

Given that the trend is moving toward care outside of a nursing home, is it better to purchase an exact daily benefit amount policy or a pool-of- funds policy?

Given the situation today, I am leaning now toward the pool-of-money design because the insured are covered, in the best contracts, without much regard to site of care. They have an increasing freedom to choose, which allows for a degree of independence.

If you or a loved one you’re responsible for ends up in a nursing home or needs extensive at-home care, all the great things you wanted to do with your money, all the sums you eventually accumulate, all can be lost. Don’t let this happen. There is nothing worse than seeing someone in his or her seventies or eighties devastated emotionally by losing a spouse to a nursing home, then also having to endure the financial devastation that can follow. Although our bodies age, we all still feel deep inside that we’re twenty or thirty years old, and we don’t want to deal with things like this. But we must. We may even feel that our parents are still invulnerable. But they’re not. Estimates are that at least

70 percent of people over age sixty-five will require long-term care services at some juncture. Love and loyalty aside, if you are to pay for this, it may leave you very little money with which to  create  more money and not very many ways to hold on to what you already have.

With long-term-care insurance in place, this most likely will not happen. You will have gone a long, long way toward being responsible not only to those you love, but also to yourself and the money you’ve worked so hard to earn.

LONG TERM DISABILITY INSURANCE

Long-term disability (LTD) insurance is another kind of insurance that can

protect you if a catastrophe happens that prevents you from being able to earn a living. Depending on the kind of work you do, an injury, an illness, or certain chronic conditions could cut off your income for a long time or even permanently. These policies will usually pay up to 66

percent of your current salary in the event of such a disability.

Suppose you do heavy labor and are laid up with a back injury, or you are a psychotherapist and lose your speech because of a stroke. When this kind of disaster strikes, an LTD policy can really save the day. You may think that you do not need one because you are protected by workers’ compensation. Remember that workers’ compensation covers you only if you are injured while performing your job. LTD insurance will pay for you whether you hurt yourself on the job or at home or on vacation.

In many ways this insurance is every bit as complicated in terms of finding a good policy as long-term-care insurance is. To find a good carrier, you might want to ask many of the same questions I listed under LTC insurance.

In looking for a good policy, here are some elements that you need to understand and some further questions to ask:

What percentage of income will the policy pay? Most policies pay a percentage of what you are earning; typically the maximum is 60 to 66 percent of your current earnings. The higher the percentage, the more expensive it usually is. Many companies have a cap on how much they will pay monthly, if bought through your employer. For large employers, it is usually $5,000 a month.

How long is my elimination or waiting period? Just as with LTC policies, this is how long you will have to wait till the company starts to pay. A normal waiting period is three to six months.

Till what age will they pay? Most policies pay only until you are sixty-five years of age.

Do you cover me if I am disabled because of illness as well as in an accident? The answer should be: “Yes.”

What if I can only work part-time because of my disability? You want a policy that will pay according to how much you can and cannot work. If you can work part-time, the company should pay you a portion of your disability payments. The term for this is residual benefits.

Is the policy guaranteed renewable? Here you want to hear absolutely

“Yes”—you do not want to have to qualify each and every year for benefits.

Is it “owner’s occ” or “any occ”? Do you feel as though I just started talking a different language? This question is very important. What it asks is under what circumstances the company will pay you. Will it pay you only if you cannot perform any job whatsoever, or will it pay if you cannot perform your job? Suppose you’re a musician and you lose some of your hearing. You might be able to function and sell pencils on the street corner, so you are not necessarily “disabled,” but you can’t do your job. If you have an “any occ” disability policy, it will pay you only if you cannot perform any occupation, so you would not be able to collect benefits for your loss of hearing. If your policy were “owner’s occ,” it would pay as long as you, the policy owner, cannot perform your own occupation.

 

PRICING

 

LTD insurance is not cheap; the average policy is about $600 a year. The most cost-effective way to buy it (usually) is through your employer if they offer it. In many states it is mandatory that your employer offer it to you in your benefits package, so depending on where you live, you may already be covered. Make sure you ask your benefits person to find out if you are covered and, if so, how much coverage you have and how it works. If you do not feel that it is enough, or you do not have any, you might consider looking into purchasing some on your own.

The main companies that specialize in disability insurance are:

AFLAC

WWW.AFLAC.COM

 

UNUM PROVIDENT LIFE  INSURANCE

WWW.UNUMPROVIDENT.COM

 

NORTHWESTERN MUTUAL LIFE

WWW.NORTHWESTERNMUTUAL.COM

A/B TAX PLANNING TRUSTS/NON-US CITIZENS TRUSTS/SPECIAL NEEDS TRUST

SHERRY’S STORY

 

Sherry was worried. Her husband’s father was dying, and she feared that when he died it would be the financial death of the whole family as well.

Tim, my husband, and his brother, Daniel, work for their dad at this machine shop he owns. They’ve worked there forever. I keep the books and see all the papers, so I know pretty much what’s going on. The shop makes pretty good money, but it’s just all these machines mainly, and a lot of the money goes back into the business to keep the machines going. Some of them are getting pretty old, but the business is still worth over a million bucks.

The way it’s set up is that Tim’s dad owns the whole business. He says one day it’s all going to be Tim’s and Daniel’s, so not to worry. He’s pretty old and not well at all, and Tim’s mother is probably not going to live that much longer, either. I don’t mean they’re both going to die tomorrow, nor do we want them to, but they are both in their mid-eighties, and death, I keep telling Tim, is a fact of life. Pop owns the business, and when he dies, if Mom is still living, she inherits it. He has a will saying so. Then her will leaves everything to Tim and Daniel. The shop is a family business, so what happens next is that Tim’s and Daniel’s wills both leave the business to each other. We’re all really close, but it still doesn’t feel right to me, or to Daniel’s wife, Christine, either. What will happen to me when Tim dies? What happens to Christine when Daniel dies? When Christine

and I ask them, they’re just like Pop—they both just say, “Don’t worry, I am taking care of it. End of discussion.” But I am worried.

Sherry was right to be concerned. How many times have we said or heard the words: “Don’t worry, I’ll take care of it”? These words don’t handle the problem; at times, in fact, as was the case here, they create the problem. Sure, we all intend to get around to taking care of things, but there’s a big difference between thinking we will and actually doing it. Being responsible to those you love is knowing that you have taken care of everything, rather than just thinking you have. Being responsible also means being open to talking about issues such as death, sitting down with everyone involved to discuss their concerns, fears, misguided assumptions, and questions. Seldom do the words “I’ll take care of it”

take care of anything.

When Sherry came to see me, I told her her family could be in big trouble. Even though Pop and Mom had a will, in truth they had not taken care of the very problems they sought to avoid.

To begin with, their total assets were worth more than the maximum amount you can leave to anyone other than your spouse without having to pay estate taxes to Uncle Sam. Those limits are:

 

FOR DEATHS OCCURRING IN        AMOUNT OF EXEMPTION

 

2011-2012        $5,129,000

2013 OR LATER       TO BE SET BY CONGRESS

 

In the year 2012, if Pop and Mom die, and Tim and Daniel inherit a business worth more than $5,120,000, they are going to owe estate taxes. And because the ownership of the business and house and bank accounts will have passed to them under a will rather than a trust, they could be hit with huge probate fees as well.

Is there a way for Sherry’s family to reduce the federal estate tax that would be owed on an estate worth more than $5,120,000? Yes. Tim and Daniel’s father could really take care of it by setting up a tax-planning trust. This is a trust for those with estates worth more than $5,120,000 in 2012.

Depending on whom you talk to, these trusts can be known as credit shelter trusts, bypass trusts, or A/B trusts: they’re all the same thing. I like to call them bypass trusts, because I just love the thought of bypassing taxes.

 

BYPASS TRUSTS

 

As of 2012, the bypass trust can eliminate federal estate taxes on estates of married couples valued at $10,240,000.

Federal estate taxes fall into the realm of the IRS and don’t vary from state to state the way probate fees do, so don’t confuse estate taxes with probate. Probate fees are determined in each state and cover the cost of processing a will through the court system. (Please note, however, that some states also impose their own estate tax.) Federal estate taxes are the share of the estate owed to the IRS if you leave more than the amount of exemption to anyone other than your spouse. Unless, that is, you eliminate or minimize the sting by setting up a bypass trust.

In Sherry’s family’s case, here’s how the inevitable deaths of Mom and Pop would play themselves out with and without a bypass trust.

 

SHERRY’S FAMILY: SCENARIO ONE

 

There are two main ways to reduce or eliminate federal estate tax on the first spouse’s death. One is the unlimited marital deduction, and the other is the exemption or credit shelter amount that can be left estate tax-free to any beneficiaries including your spouse. Husbands and wives can leave an unlimited amount of wealth to each other without owing any estate tax whatsoever, as long as you’re married to a U.S. citizen. (If you’re married to a non–U.S. citizen, you need to consult an estate lawyer now!) Each individual can pass on to his or her beneficiaries other than a spouse, the $5,120,000 exemption that is in place through 2012. Congress had not yet decided what to do after 2012. So be sure to stay abreast of new legislation as it develops.

Let’s say the family business is worth $6 million when Pop, Sherry’s father-in-law, dies. Assuming he dies first, and all the assets are passed to Mom, she would owe nothing in estate taxes. She receives the six- million-dollar estate and owes nothing. But let’s say Mom dies in 2012. Now she has the whole $6 million on her side of the balance sheet but can only leave the credit shelter amount for that year of $5,120,000 to her kids without their having to pay estate tax. No one ever got the benefit of Pop’s credit shelter amount because he just passed everything to Mom.

So when Mom dies the kids will have to pay a total estate tax bill of

$308,000. (Based on the maximum estate tax rate of 35 percent for 2012.)

If, however, before either Mom or Pop dies, $6 million is separated out of Pop’s individual name and into two shares, each for $3 million, and Pop’s share is held in trust for the benefit of Mom when he dies, and the family follows certain rules, then the IRS will see the money as if it never left Pop’s side of the balance sheet. The $3 million that’s Pop’s “half” can be passed down free and clear when Mom dies, because it’s less than or equal to the credit shelter amount for 2012 of $5,120,000. As for Mom, the $3 million on her side of the balance sheet can be passed down in the same way when she dies. Remember, in the year 2012, you each get this $5,120,000 credit shelter amount. But most of us who are married don’t take full advantage of it. We just simply leave everything to a spouse who was able to get everything anyway, so in effect the first spouse to die wastes the credit shelter amount exemption.

To  take  full  advantage  of  it,  you  can  set  up  a  bypass  trust.  The

deceased’s half of the money goes into the trust, preserving this exemption. However, a positive development is that for 2012 a change in federal law makes it automatic for spouses to inherit each other’s exemption amount. But because it is not clear what the law will be after 2012, you can ensure your family will be in great shape by using a bypass trust.

 

WHAT ARE THE RESTRICTIONS ON THE HALF HELD IN TRUST FOR MOM?

 

Mom can be her own trustee over Pop’s half so she has full management and control over it. Depending upon how the trust was drafted, she can have an absolute right to all the income generated by his half, and she can spend any part or all of the $3 million if she needs it. The key word is “needs.” She has to spend her entire $3 million before she starts spending his. Finally, Mom can’t change who gets Pop’s share of the estate after he dies. The beneficiaries named by Pop are the ones who will get the money. And Mom will have to file separate tax returns each year, one for her half and one for Pop’s. That’s it. These are minor

restrictions to endure for a savings of $308,000.

 

PROBATE

 

The way things are set up now, Sherry’s family will encounter another problem when either Pop or Mom dies: probate. Remember, as it stands now, the business is in Pop’s name alone, and he is passing it on with a will to Mom, who will then (with her will) pass it to her sons.

To transfer the title to the assets when Pop dies, or to have Mom’s name put on the papers, there are procedures in most states that allow you to sign an affidavit with a certified death certificate so you don’t need to go to probate court to transfer assets from spouse to spouse. But look out if your state doesn’t allow this and you haven’t checked the form of ownership on the deeds to real property like your home. If there are names on the titles other than Mom’s or Pop’s, you may be in for a rude surprise. If this is the case, or you don’t know how you hold title to real estate, or what the words by your name on the deed mean, seek legal counsel. Ask your attorney to put what you want to know in writing so you understand the consequences of the many types of ownership forms out there. The words “joint tenant” and “tenants in common” (or the absence of any such words) have different meanings

and can make the difference between a $150 fee to transfer ownership

and thousands of dollars in fees or even more, depending on the value of the real estate.

But the simple procedures available to most surviving spouses to change title to a home, business, bank, or brokerage account cannot help Daniel or Tim when Mom dies. If everything is left to them via her will, they’ll have to go through the probate procedure and be hit with unnecessary probate fees. The probate fees that Daniel and Tim would have to pay in California are about $55,000.

If you add together the probate fees and the estate taxes, Tim and Daniel will owe more than $308,000 when Mom dies—and no, they can’t send the IRS or pay the lawyers’ fees with some rusty old machines. Where would they get that kind of money? They don’t have it, and it would be owed within nine months of Mom’s death unless they qualified for certain limited extensions.

 

PAYMENT OF ESTATE TAX

 

Estate taxes are due nine months from the date of death. Under very special circumstances, you can get an extension for six months, but it’s not as easy as you might hope, and you also have to pay interest on the sums due. When you have acquired enough money to have to pay estate tax, the government thinks you will be smart enough to have planned for the day you’ll owe the money and just assumes, often wrongly, that you’ll have it on hand. This can be a real problem if you didn’t plan at all, because you and your parents (or whoever you’ll be inheriting money or property from) have never discussed it.

If you’re left an inheritance of assets such as real estate that might not be so easy to cash in fast, or assets that you didn’t want to cash in, and you have no liquid cash of your own, you could be in a very precarious situation. Advance knowledge of what will happen when the time comes gives you time to prepare, either by getting a life insurance policy that would help pay the death benefits or by liquidating assets sooner rather than later.

Sherry’s family’s situation is different from most. In their situation the main asset they will be inheriting is a family business. Under the Internal Revenue Code Section 6166, they might be allowed to pay off  their estate tax over a ten-year period of time, with interest.

For most people, it would be worse. Most people owe estate taxes nine months from the date of death, and that’s that. If you can’t pay your estate tax, interest will be charged. If you inherit a closely held business, the rate is 2 percent. It’s great to get an inheritance—unless you’re not prepared for it.

 

ADDITIONAL INHERITANCE PROBLEMS

 

Let’s take Sherry’s story one step further. Assume that after Tim and Daniel inherit the business, one or the other of the brothers dies. They have left the business to each other via a will, so the surviving brother will have to come up with money to pay estate taxes, even before he inherits anything, since estate taxes have to be paid before the deceased’s property can be distributed.

What is more, and family business notwithstanding, Sherry or Christine will be at the mercy of the surviving brother and not protected in any way.

Sherry had very good reason indeed to be worried.

 

 

SHERRY’S FAMILY: SCENARIO TWO

 

AVOIDING PROBATE

 

Is there a way for Sherry’s family to avoid paying probate fees? Yes. As we’ve seen, these assets should have been put in a revocable living trust (this page) instead of being left to one or the other brother via these various wills, so that they would pass smoothly and without probate fees from family member to family member.

 

AVOIDING ESTATE TAXES

 

If Sherry’s family were to set up a bypass trust now, before Mom or Pop died, the scene that would inevitably play itself out would be a much, much brighter one.

In the first place, Mom would retain control over everything she and Pop worked for without any court intervention. When she died, Tim and Daniel would inherit the shares in the company—and would not owe one penny of estate taxes in the year 2012 for the first $5,120,000 they inherited. In this scenario, rather than owing $350,000 in estate taxes, they would owe nothing. Zero. And you can add in another $54,000 or so savings, because neither probate fees nor court costs would be owed, either. For estates valued at more than $5,120,000 in 2012, this is an urgent matter.

This plan will not work unless it’s put into place before one of the spouses dies. How? Simple. You amend your revocable living trust (or will, but I hope you’ll have a trust) to specify that after one or the other of you dies, the assets from his or her half of the estate will be put into a new trust, this bypass trust. In effect, you’re putting the money from a revocable trust into an irrevocable trust, because the ultimate beneficiaries have been specified by the spouse who has died, and they cannot be changed.

In the majority of states the revocable living trust is the original trust created jointly by the two spouses. It is the instrument that enables the surviving spouse, after the first one has died, to divide the estate into two shares, the survivor’s trust and the bypass trust. In the revocable living trust, set up while you’re both alive, you specify what happens when one spouse dies and the other is still living and then what happens when both spouses have died.

In some states, however—and check with your estate planning attorney on this—it may be better to use two individual trusts from the beginning, one for the husband and one for the wife. It works the same way, though. The trust set up by the first person to die becomes irrevocable on death but provides that the assets are held for the benefit of the surviving spouse for his or her lifetime. The surviving spouse’s trust continues on the way it always has. After the death of the surviving spouse, it pays out, from both parts of the bypass trust, what’s promised to the beneficiaries. In community property states, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, we start with a revocable living trust, which provides for what happens when one spouse dies and when both die, and the trust specifies that the revocable living trust can be split into two trust shares

upon the death of the first spouse. The trust continues on as it always

has, but you must create the bypass trust at the first death.

After the first spouse dies, the surviving spouse will have to carefully value everything, all the marital assets, and divide them up, at least on paper. (In order to get the maximum benefit in capital gains treatment if you ever want to sell appreciated assets in the future, you’ll need to get a valuation on your assets sooner or later anyway.) This will require the assistance of a good attorney. If the attorney can’t explain the plan to you in a way that you can understand completely, then go to someone else. Don’t pay the attorney the full amount (you may be required to pay a retainer) until all your questions have been answered. If someone tells you it’s too technical to explain, most likely they don’t understand it, either. There are some technical points, but there is no reason you can’t understand the main terms of the trust and why it says what it does.

In the case of Sherry’s family, if Pop or Mom dies before they can be

persuaded of the value of a bypass trust, it will be too late and the error

 will be costly.

 

DO I NEED A BYPASS TRUST?

 

It’s easy to tell whether you need a bypass trust. With your spouse, do a quick addition of everything you own—any expected life insurance proceeds due on policies owned by you or your spouse, the equity in your house, your retirement accounts, additional investments, your cars, everything. Now subtract any money you owe. If, to your amazement, you are married and your assets are worth more than the current credit shelter amount of $5,120,000 as of 2012, then, yes, you need a bypass trust. As I mentioned earlier, even though spouses can automatically inherit each other’s unused estate tax exemptions in 2012, the law past 2012 is not set. So that is reason to still have a bypass trust.

Think you’re a long way from needing a bypass trust? Repeat the calculations from time to time, perhaps when you do your taxes every year. Your mortgage is closer to being paid off. Your retirement funds are growing. Maybe you inherited a little money here or there.  No matter how much you have, your spouse will be okay if you die first; spouses, remember, can inherit billions without paying estate tax if they are U.S. citizens. But once your spouse dies, or if the two of you happen to die together and those surviving you have more than the current credit shelter amount, it’s estate tax time—unless you have this trust in place. With this kind of trust, you can double your credit shelter amount in this situation. The minute you’re lucky enough to hit that credit shelter mark, which is $5,120,000 in 2012, unless you plan to leave all your money above the exempt amount to a charity, you need a bypass trust.

I am very serious about this. If you and your spouse fall short of the current credit shelter amount, but are getting up there, I urge you to set up a bypass trust. You never know when a two can become a one, so don’t chance it. A bypass trust will cost about $2,500 in attorney’s fees to set up, unless you own a lot of real estate and have lots and lots of cash, in which case it will cost more, or unless you’re just amending a revocable living trust you already have, in which case it will cost less. But wouldn’t you rather leave your hard-earned money to your loved ones than to the IRS?

In the case of Sherry’s family, because Tim and Daniel will eventually die, Tim and Daniel should also set up a revocable living trust, setting up in turn a bypass trust; what’s good for the goose is good for the gander. Tim’s and Daniel’s children should not have to go through what their fathers are going to go through if Mom and Pop don’t take action. At the very least, the brothers should each have a revocable living trust that leaves the business to each other in trust with their share of the income it generates to Sherry and Christine.

They should also think hard about what they want. Let’s say that one of the wives predeceases her husband. Maybe that brother will want his share of the business to go directly to his kids, not to his brother. If there isn’t some provision for this, the first brother to die might leave his children with nothing. I am sure that Tim and Daniel don’t intend to deny their children an inheritance, but the way their estates are set up right now, that might well be what happens.

 

UNINTENTIONALLY DISINHERITING YOUR CHILDREN

 

If you have a child from two or more marriages and want to protect them all, please, please go see a lawyer now. And if you have more than the current credit shelter amount in assets, want to protect all your children, and don’t go to see a lawyer, you are being tremendously irresponsible to yourself, your money, and your children.

In the case of Sherry’s family, let’s imagine that Pop and Mom do manage to get their act together and, with the aid of a bypass trust, leave the business to Tim and Daniel in the most respectful way possible. But Tim and Daniel don’t follow suit; they keep their wills. Let’s say Tim dies first, the business goes to Daniel, and Daniel’s will says everything goes to Christine, who in turn has a will leaving everything to her children. What about Sherry? What about Tim’s own children? Did he mean to disinherit them? Did he intend for Daniel’s kids to get the whole business and his to get nothing? That’s not what he meant, but that’s what could happen. Or if Daniel dies first, did he mean for the same scenario to happen to his children? No, of course not. Both brothers need to set up revocable living trusts themselves to protect their families, as

well as each other.

 

FOR SPOUSES WHO ARE NOT U.S. CITIZENS

 

This doesn’t happen often, but it affects more people than you would think—and it’s important. It’s true that there is an unlimited marital deduction when it comes to estate taxes between spouses. But that holds true only if your spouse is a U.S. citizen. If not, the most you can leave him or her is the credit shelter amount allowed for that year (see this page), which in 2012 is $5 million.

In other words, if Mom in Sherry’s family was not a U.S. citizen, and if Pop left her the business through his will, she would owe $350,000 in estate taxes.

There’s a way around this. If you or the spouse who isn’t a U.S. citizen has a child who is a U.S. citizen and who is reliable, that child, when he is of age, can act as one of the trustees for or with the non-citizen spouse, thereby passing on the assets without being taxed. However, if the estate is worth more than $2 million, the laws are unbelievably complex, so you must see an attorney at once.

 

A FINAL NOTE ABOUT SPECIAL NEEDS TRUSTS

 

Whenever I set up an estate plan, I made it a point to ask about any special needs of the children. Over the years I have been surprised at how many of my clients have children who, in one way or another, will need long-term management of the assets that they will eventually inherit. Children who suffer a disability of any kind or the effects of substance abuse, or simply are unable to hold on to money—whatever the case, many of them really end up needing help.

In severe cases of disability, your special loved one might be on SSI, or Supplemental Security Income, and possibly even on Medicaid. Even if you’re helping the child, too, Medicaid can sometimes step in in dire cases and help with, for example, lifelong medication. Parents have to be very careful about how they leave money to children on SSI or Medicaid who will need financial watching over later on, when they are not here.

Leave such a child, say, $50,000, and that child might lose his or her federal subsidies and no longer be able to go on once the inheritance is gone.

The answer to this may be a special needs trust.

Under the law, if certain limitations are built into a trust, they will make it impossible for creditors to reach the funds in the trust. For example, if I am the beneficiary of a trust that holds the $50,000, but I’m not the trustee, then I have no control or management over this money. Only the trustee has the power to give me money. Because I have no legal right to demand it, my creditors can’t take the money I owe them from the trust. Therefore I’m not really considered the owner of the $50,000, and it can’t be considered my asset in determining my eligibility for government assistance. In some states laws have been passed that take this basic trust principle and use it specifically to allow money to be held in trust for the benefit of a developmentally disabled person while still allowing that person to retain all public benefits.

The greatest   protection   is   provided   for   someone   who   suffers   a

developmental disability, one that impairs his or her ability to provide self-care and custody, which constitutes a substantial handicap. The primary purpose of these special needs trusts is to provide that person with a lifelong supplemental and emergency fund of assistance. Currently there exist basic living needs, such as dental care,  which public benefit programs do not provide. While the parents are alive, they often provide for these needs when necessary. In the interests of love, human dignity, and humane care, they want to keep providing for these needs after they’re gone.

Because the cost of care for developmentally disabled people is very high, the assets in trusts set up to provide for their care don’t count against the beneficiary in qualifying for government assistance. The way they work is that the trustee is directed to pay for the beneficiary’s special needs, which is to say, the requisites for maintaining the beneficiary’s good health, safety, and welfare when, under the discretion of the trustee, such requisites are not being provided by any public agency, office, or department of the state or of the United States. “Special needs” include, but need not be limited to, dental care, special equipment, programs of training, education and habitation, travel needs, and recreation.

If you are trying to protect someone who is not developmentally disabled but receives SSI, the same type of planning is advised but may not be protected to the same extent and may require more careful work on the part of the trustee. But when you love a special person, you already know there are more considerations needed at all times, and you probably don’t mind the technicalities, if you know they offer the greatest hope of protection for your special one.

ON BECOMING RESPONSIBLE

What was the goal you wanted to accomplish by reading this book? Did you want to find a viable way to reduce your debt, put more money into retirement plans, figure out how to invest your money? Perhaps you’re thinking, Well, now I know all about wills and trusts, but that won’t help me with my Visa bill, will it?

Oh, but it will. What you need to know and believe is that when you have taken care of others, you have responded to the higher values of your existence—people first, then money. It’s as if, on a material level, you’re giving thanks by taking care of those who helped you enter the world, those to whom you gave life, those who have  guided  your passage through your life. By taking these actions, you remind yourself of who you really are and what is important to you, what is important in this life. This knowledge is a powerful force. I think it is almighty. The force starts to push forward like a bulldozer, clearing out all the obstacles that prevent you from living the life you deserve to live. As you complete the rest of the steps in this book, these obstacles will continue to be cleared away. Unlikely as it may sound to you now, you will be closer and closer to paying off your Visa bill, taking that trip to Italy, or whatever your goal happens to be.

Please take the actions outlined in this chapter. Do one this week— make a call, get quotes for insurance, ask your parents about what would happen if they had to go into a nursing home. One action this week will clear you to take one action next week, and so on, until you  have become responsible to those you love

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