Don't Forget the Passwords

Every estate plan should include a list of critical information that is easily accessible in the event of death or incapacity. This list should have on it a list of bank accounts, safe deposit boxes (and the location of the keys), other financial accounts (stocks and bonds, online accounts, etc.), the location of your estate planning documents and the like. While you're making it up, don't forget to include the passwords to your online presence, be that eBay, Amazon, Yahoo, LinkedIn, Facebook, everywhere you visit in cyberspace.

Death and Taxes

To many people, estate planning is all about avoiding the estate and inheritance tax. That's why a lot of people give little thought to estate planning, because, as we've discussed, they don't consider themselves wealthy enough to have to worry about estate taxes. We discussed why estate planning is important even aside from taxes, but today we are discussing estate taxes.

There is a lifetime exemption amount for estate taxes. It's a combined estate and gift tax exemption, so to the extent that the exemption is used to give gifts tax free during life, it isn't available at death. But putting that aside, right now (2009) the estate tax exemption is $3.5 million. In 2010, the estate tax is slated to go away altogether. But Congress will probably renew it in 2011 and later, and there is talk that the exemption will be scaled back to the $1 million it was under the Clinton Administration.

Everything that you own at your death is included in your estate. This means all land (houses, rental properties, vacant land, vacation homes, etc.), bank accounts, CDs, stocks, bonds, vehicles, computers, everything down to your china and silverware. Even in today's depressed market, if you have a home, with everything else included, you could be bumping up against the $1 million mark. If that's the case, keep a close eye on the estate tax debates. And if you're up over $1 million, you definitely need to talk to an estate planning attorney.

Of course, everyone should have basic estate planning documents: will, durable power of attorney, and living will (medical directive).

Do It Yourself Bankruptcy

Congress, in its wisdom, requires lawyers to tell potential clients that they (the clients) don't need an attorney to file bankruptcy. That is true; anyone can represent him or herself in any court in the nation. Making that statement, however, doesn't answer the question SHOULD you do it yourself.

Bankruptcy is a very technical area of the law. It's not an area that attorneys dabble in. They either are in it virtually full time or they don't touch it. And these are people who went to law school and have practiced law for years. Knowing that, the question I would ask is, why would anyone try to do it themselves when what they are talking about is their financial future? In the old days (pre-BAPCPA), if a bankruptcy got dismissed, it could be refiled, usually without penalty. So if someone tried a do it yourself bankruptcy and screwed things up, they could find an attorney the next time around. Now there are serious penalties that attach to second and third filings. If you mess up the first one, there might not be a second one.

A Trust as an Estate Planning Tool

Many people think that because they are not wealthy, a trust isn't for them. In fact, a trust can be an effective estate planning tool, especially for families with younger children. A testamentary trust (see last week's post) can allow the trustee the flexibility to provide for the needs of the young children should something happen to the parents. Without a trust, any money (such as life insurance proceeds) would pass to the children. However, because they are minors, a guardianship would have to be established. The guardian's role is to preserve the money until the children reach the age of majority. This means a guardian lacks the ability to provide anything more than basic necessities. For example, if a child shows exceptional musical talent, a guardian may not be able to tap into the money to provide for private lessons. A trustee, on the other hand, given appropriate instructions and flexibility by the trustors, could do that very thing.

Don't assume that just because you aren't "wealthy" a trust isn't for you.

The Bankruptcy Means Test

One of the more devious provisions of the 2005 Bankruptcy Code amendments is the means test. This test acts as a gatekeeper for those filing bankruptcy. Meet the means test and the promised land of Chapter 7 is available. Fail the means test and you are consigned to Chapter 13. Now, don't get me wrong; Chapter 13 has its place, especially if you're about to lose your house. But for millions of people who desperately need a fresh start, Chapter 7 is the goal.

The means test looks at the ability, or means, of an individual to pay back part or all of his debt. If your means allow you to repay, you are forced into Chapter 13. On its face, that isn't so bad because those who can pay, should pay, in the opinion of most people. But the way the means test works doesn't measure ability to pay. Under the means test, the debtor (person who is going to file) averages his income for the past six months and compares that to the state median income. If his average income is below the state median, he passes the means test and can file Chapter 7. If it's above, there are a couple of other tests, but the real key is the state median compared to the last six months' average.

But here's the problem. Suppose the debtor has been out of work (a not uncommon situation right now) for the last 60 days. Right now, he has no income, but for the four months before he lost his job, he had income; maybe a good income. If that four months of income averaged over six months exceeds the state median income, this person does not qualify for Chapter 7, even though he has absolutely no income right now with which to fund a Chapter 13 plan.

Just another of the anomalies forced on us by BAPCPA.

What Types of Trusts are There?

As we discussed last week, a trust is just a way of holding and disposing of assets. I like to think of a trust as a basket to put things in. In general, there are four main types of trusts: Revocable, irrevocable, inter vivos, and testamentary. A trust is either revocable or irrevocable, and either inter vivos or testamentary, though it's possible for an inter vivos trust to be either revocable or irrevocable.

A revocable trust is one that can be revoked by the maker, usually called the trustor or settlor, at any time. An irrevocable trust is one that is permanent; it cannot be revoked once made. An inter vivos trust is a trust made during the trustor's life ("inter vivos" means "during life"). A testamentary trust, on the other hand, is one that is created by the trustor's last will and testament, and doesn't arise until after death. Because of this fact, a testamentary trust is of necessity an irrevocable trust.

A trust is a contract between the maker, the trustor, and another person, the trustee, who holds property given to him by the trustor for the benefit of third persons, called the beneficiaries. The trust agreement sets out the powers and duties of the trustee and usually specifies the conditions on which the trustee can use or give the trust property to the beneficiaries.