Poor Man’s Probate is Usually Poorly Planned

On more than one occasion a friend of mine in my neighborhood or at church has come up to me and asked a question something like this, “David, do I really need a will? I don’t actually have very much and it seems like a lot of money to spend just to get some papers written up.” After I ask a few questions about their circumstances, in about half of these situations I discover that they have already done something, usually on advice from a non-attorney, and the individual is really wondering whether or not they have done the right thing. They’ve engaged in a course of action designed to lead to what some call a “Poor Man’s Probate” and the results, which they will probably never witness, are usually not at all what they would want for their survivors.

Here are some of the things I’ve seen:

A deed, usually a quit claim, has been recorded adding a child or children as owners.

A child or children have been added as co-owners of bank or investment accounts.

A life insurance policy has been purchased naming a minor child as a contingent beneficiary.

A life insurance policy has been purchased naming a grandparent as a contingent beneficiary. because the grandparent will look after the minor children.

Can you see the problems presented above? Here are just a few I spotted, and I’m not saying this list is exhaustive.

Quit claim deeds wipe out title insurance policy guarantees. If a boundary dispute pops up the title insurance company will look at the current ownership and will be excused from liability because the current owners aren’t the ones they promised to protect.

Florida’s strong homestead protection laws will protect you from various creditor claims, but if a judgment is entered against your child who has an interest in your homestead, a cloud will be created on title to the property which could make it difficult to sell.

Your bank or investment account could be garnished in order to meet obligations created by a judgment against your child.

If you and your spouse both die in an accident, life insurance death benefits will need to be put into a guardianship for your minor child. Who will be the guardian? Will they be a good steward of those funds? Will your child be emotionally ready to receive a large sum of money at the age of 18 when unfettered access to the funds will be given?

What if you forget to change the insurance policy beneficiary when your parent, the grandparent of your children, has a stroke, then you and your spouse both die in an accident. The death benefit is paid to your parent whose guardian has a statutory duty to use those funds for your parent’s benefit, not the benefit of your children. Worse still, if your parent has remarried and the proceeds go into a joint account with the new spouse, then the new spouse will have a claim on those funds.

All of these results are bad. Some are truly disastrous. All of them would cost far more to unravel than it would cost to make proper plans.

The basic documents we recommend are a will (or better yet a trust with a pourover will), a durable power of attorney, health care surrogate designation, and living will. If your funds are extremely limited just get the durable power of attorney, health care surrogate designation, and living will. One solution does not fit all needs and so we carefully interview people to find out what their particular needs are and what solution best fits them, but don’t make the very costly mistake of thinking that no planning or ad hoc planning are the solutions to your estate planning needs.

David Pilcher

Probate, Wills, Trusts, Planning

Citizen wants reimbursement from Michael Jackson's estate

Even after death, as in life, everyone and his brother wants a piece of Michael Jackson's money.

Sources to TMZ report that upwards of $20million in creditor claims are being filed in his estate. The claims come from a doctor, various law firms and a lady named Shellie Doreen Smith, who claims to have been married to Michael Jackson in the seventies.

My personal favorite is the taxpayer who sued on behalf of the City of Los Angeles taxpayers. Apparently the taxpayers picked up $3.3 million of the memorial tab and he believes the estate should pay back the City. The article claims him as a "do gooder". I suspect a "do gooder" lawyer is behind this claim. But then again, why shouldn't the estate pay for the memorial service? Is only one Los Angeles taxpayer outraged? Seems like all should be; I certainly would be.

Hallie Zobel
Bailey Zobel Pilcher

Probate, Wills, Trusts, Planning

Congress Finds Time to Subpoena White House Party Crashers, but No Time to Enact Estate Tax Reform

I feel safer knowing that Congress plans to subpoena the aspiring reality-tv stars who "crashed" a White House party. http://www.nydailynews.com/news/politics/2009/12/09/2009-12-09_subpoenas_for_crashers.html

And inquiring into the fairness of the college football Bowl Championship Series (BCS) is a subject of grave national interest that obviously requires immediate Congressional attention. http://www.newser.com/story/75809/house-panel-kill-colleges-bcs-system.html

Fast action in times of crisis -- that's what I look for in the legislative leaders of my country.

I'm sure that these pressing items are the reason that Congress most likely will not find time to pass estate tax reform before January 1, 2010. http://online.wsj.com/article/SB126098351451293981.html

As you may remember, on January 1, 2010, the estate tax goes away. This sounds like great news, doesn't it? US citizens can step back and enjoy this culmination of a decade of constant change in the estate tax laws.

Don't get too comfortable, however.

First, the capital gains tax rules also change effective January 1, 2010. This means that (with exceptions), instead of inheriting assets with a basis of fair market value at the date of death of the person who left you the wealth, you will inherit the assets with the basis of the person who died.

For example, let's say that Aunt Tilly died and left you a share of stock that is trading on the NYSE for $105. You sell the stock for $105. How much would you pay in capital gains tax on that sale? If Aunt Tilly died on December 1, 2009, the answer would be zero. You inherited the stock with a basis equal to the fair market value on Aunt Tilly's death, and you sold it for the same amount. $105 - $105 = $0 capital gain. $0 x 15% capital gains tax rate = $0.

However, if Aunt Tilly dies on January 1, 2010, your capital gain tax depends on what Aunt Tilly paid for the stock. Let's say that Aunt Tilly bought the stock in 1978 and paid $5 for it. Your capital gain would be $105 minus $5 equals $100. At the 15% long-term capital gains tax rate, you would pay $15 in capital gains tax on the sale of this asset.

Big deal, you think? A 15% capital gains tax is much less than a 55% estate tax, isn't it? Not so fast there, cowgirl. Remember that anyone who inherits an asset is subject to the capital gains tax on the sale of that asset, but only people of a certain wealth are subject to estate tax. Also, how will you know what Aunt Tilly paid for that share of stock and when she bought it? What if Aunt Tilly left you a diamond earrings worth $5,000? Or improved real estate worth $200,000? How will you know how much she paid for these assets? The burden is on the person who inherits the asset to prove to the IRS what Aunt Tilly's basis was. If you can't prove Aunt Tilly's basis? The IRS presumes the basis to be zero. $200,000 minus $0 = $200,000 x 15% = $30,000.

Didn't we go through this in the 1970s and it was such a pile of hot mess that it was repealed by Congress? Tax professionals were thwarted in their efforts to calculate a taxpayer's tax liability to the point of impossibility of performance. No one could figure out Aunt Tilly's basis in anything.

Second, the repeal of the estate tax is only for twelve months. On January 1, 2011, the estate tax comes roaring back at 55% for every dollar over $1 million in wealth transferred at death.

I don't know about you, but a lot of my clients are worth more than $1 million dollars. They don't consider themselves to be wealthy, and frankly, neither do I. Let's take a couple who has been married for sixty years. There is a $300,000 life insurance policy on the husband and also on the wife. Their home, bought for $40,000 in 1962, now is worth $200,000. They have retirement savings of $300,000. This couple is worth $1.1 million -- and at the second death, $55,000 will go to the IRS and not to the children.

Sure, I can do fancy estate planning for this couple, split their wealth in half, protect half at the first death, and the remainder at the second death, and thus shelter all of their wealth from estate tax. But this couple doesn't feel they need sophisticated tax planning, and can't fathom splitting assets they have owned together for sixty years. They barely need an estate plan! The life insurance policies and retirement savings have beneficiary designation forms and pass outside probate, and the homestead passes to the children under Florida law.

But for the estate tax, this couple could have a very simple, inexpensive estate plan. However, due to the 2011 estate tax rules, this couple should pay far more than they wish to me to prepare an estate plan they do not prefer, to avoid an estate tax they don't feel they should be subject to in the first place.

Finally, the earliest estate tax returns for people who die in 2010 would be due on September 1, 2010. Congress has gotten very comfortable in passing tax laws that are retroactive. This means that Congress could pass as late as August legislation that affects the estate taxation of someone who died in January. Tax practitioners and their clients will be traversing unstable terrain, with no certainty as to what the tax liability of someone who dies in the early months of 2010 actually will be.

I'm an attorney and a CPA and I have six college degrees. If this tax situation baffles me, how am I supposed to explain it to my clients? Happy Holidays to you, Congress.

Merrell Bailey, Esq., CPA*, MBA, MSTaxation, MSAccounting
Bailey Zobel Pilcher

Probate, Wills, Trusts, Planning

(*inactive license, Alabama)