Plan for the Unexpected — Your Estate Plan

First Republic Private Wealth Management
April 6, 2022

Watch this collaborative discussion from our panel of senior First Republic Private Wealth Management leaders on ensuring your estate plan is aligned with your vision. 

Read below for a full transcript of the conversation. 

Rich Scarpelli - Good afternoon. Thank you for joining us today for our discussion on planning for the unexpected your estate plan. Before I introduce myself and our guests, we have a few housekeeping items we want to go through. We will be taking questions and questions can be submitted through the Q&A function. You should see that at the bottom of your screen. We're also going to leave some to time at the end to go through some of the many great questions I know you all will have. So with that, I'm Rich Scarpelli, Head of Financial Planning at First Republic. I'm joined by two fantastic colleagues of mine, Lisa Siegel, Senior Managing Director and Regional Leader in our New York office for Advanced Planning. She's also an accomplished trust and estate attorney. Our second guest is David Hodge, a trust and estate attorney as well and Managing Director and Regional Trust Team Leader here at First Republic on the west coast. So, we have the coast covered today. We have everything covered. I feel much more comfortable. Welcome to the audience as well. We have quite a fun topic to discuss today. Something David and Lisa are quite experts at. Lot to cover, but David and Lisa, I want to make sure we cover three main things for our audience.

The what and the why of estate planning, what is effective estate planning, what does a core set of estate planning documents look like? And some of the terminology around that sometimes can get confusing for folks and ourselves, and finally, what are some of the common pitfalls and missteps we should avoid? And that's probably most important. So we definitely want to leave some time with that. And I'm sure there's going to be a few other things that we're all going to touch upon here and there throughout the presentation. I know there's lots to talk about. So it's really imp important to be prepared, for everybody to be prepared, myself, yourselves because once the unexpected happens, it's just too late. Many times it's just too late. Many of you have heard about some of the most famous individuals that were just not prepared for the unexpected, names such as Jimi Hendrix, Bob Marley, Kurt Cobain, Prince was in the news not too long ago.

Lisa Siegel - And Rich, if I could chime in here, speaking of Prince and common pitfalls and missteps, his estate comes to mind because his estate was just recently finalized. As you may recall, he died in 2016, quite unexpectedly at age 57, he left a valuable and complicated estate that was made even more complicated because he didn't have a valid will. At the time of his death he was single, but he had been divorced twice, he had no children, but numerous full and half siblings. Two of these siblings had predeceased him, one of whom had a child. And so the reason that I'm kind of sketching out a family tree of sorts is to highlight the cast of so-called family members who tried to claim a piece of Prince's estate and the absolute chaos that followed in the form of lawsuits and other legal proceedings to determine who were really the rightful heirs to his assets. So finally, just this year, after six very long years of legal battles of who gets what and tens of millions of dollars paid to lawyers and other advisors, his estate will ultimately now be split among six of these siblings and a publishing company. And so is this really what Prince would've wanted? You know, probably not, but we'll never know because he didn't have a will.

Rich - Yeah. You know, Lisa there's a lot of folks who don't have that plan in place. It's a shame that it has to go down that way for many and you know, correct me if I'm wrong, you don't have to have an estate like Prince's, tens of millions, hundreds of millions of dollars to run into these problems. It doesn't matter how large or small, you can encounter the issues that Prince did or anybody else does when they don't have that plan. So question is how do we avoid this? What's the polar opposite? What do we consider effective estate planning? What do we consider effective estate planning, Lisa?

Lisa - So effective estate planning is the process of ensuring that your assets are distributed and structured according to your wishes in a tax-efficient manner, considering both the ownership and the enjoyment of those assets by your chosen beneficiaries. And so, in a way, if you think about it, Prince really did have an estate plan. Everybody who owns property has an estate plan, and that plan will ultimately direct how the property will pass to your surviving beneficiaries. So property can pass by beneficiary designation, by right of survivorship, and, or by somebody's last will. Alternatively, property could be held in revocable living trust, that could be used instead of a will. And we'll learn more about revocable trust a bit later in this presentation. But as we saw with Prince, if you don't have a will state law will step in and determine your beneficiaries for you under what's called the intestacy statutes. So when a person dies without a will, it's referred to dying intestate. This means that his or her property will be disposed of by the laws of intestacy. And these laws differ by state. Every state has its own statute on this. So just as an example, in New York, if a person dies without a will leaving a surviving spouse and issue, children, grandchildren, $50,000, plus one half of the intestate property would ultimately pass to the surviving spouse and the remaining intestate property would pass to the surviving children, grandchildren issue, et cetera. So therefore by doing nothing, by not having an estate plan, a person who dies has in fact elected to follow the statutory default plan. In other words, these intestacy statutes that exist in all states. And this will rarely be consistent with his or her wishes. And so David, since California is a community property jurisdiction and New York is not, I'm wondering what the intestacy distribution would look like there as compared to what it looks like here in New York.

David - Yeah, Lisa, so if you're married or in a domestic partnership in California, intestate distribution can look quite different when compared to New York, both because we're a community property state, but also because our intestacy laws make different assumptions about how you would want your assets to be divided. And I want to walk through some intestacy scenarios, comparing the laws of New York and California, because I think it helps to illustrate that doing nothing and relying on intestacy laws is not a substitute for a true estate plan. Like you said, it's not going to be consistent with your wishes and it has other shortcomings as well. So for example, let's say you're married with two children. If you die intestate in California, your entire intestate share of community property, which is generally one-half of all earnings and assets acquired by both spouses during marriage will pass to your surviving spouse. In many California marriages, everything is community property or everything becomes community property due to commingling. So everything would go to your surviving spouse and your children are not assured of receiving anything. Had you died in New York, survived by a spouse and children, about half of your property would go to your spouse and the rest to your children. Now let's say you're married without children, or you weren't survived by your children because remember we're planning for the unexpected here.

In California, all of your community property still goes to your spouse. But if you have separate property, which generally means assets acquired prior to marriage, half of your separate property goes to your spouse and the other half goes to your parents or your siblings or your nieces and nephews, depending on who survives you. In New York under the same circumstances, everything would go to your spouse regardless of when or how your property was acquired. Now, other states have laws that differ from both California and New York. So the outcome can be very different depending on where you live. And if you move to another state, then your intestate estate plan will be amended because it's the intestacy laws of the state where you reside at death that will govern. And not having control over who gets what isn't the only problem with dying intestate, having assets distributed through intestacy involves a lengthy and expensive and often complicated court process with an increased potential for conflict. The Prince estate is an extreme example, but the impact on a much smaller estate can be relatively even more severe. Now, maybe even after hearing all of this, the idea of dying intestate still doesn't really bother you, but your estate plan covers more than just what happens to your stuff when you die. Another important aspect of your estate plan will be to protect you if you become mentally incapacitated during your life by appointing someone to make financial, legal and medical decisions on your behalf. If you are becoming incapacitated without any estate plan, it's possible that you would need to be placed under a conservatorship, which also involves a lengthy court process that can be expensive and possibly contentious. So, wherever you live and whatever your situation, you need an estate plan. You need to go through the estate planning process, evaluate your goals, think through some of these scenarios that aren't necessarily pleasant to think about and put together a plan to ensure that you are protected and ensure that your assets are distributed efficiently and in accordance with your wishes.

Rich - Thanks, David. Thanks, Lisa. So important, we all need to have an estate plan in place clearly based upon the comments that you both shared with us. Why don't we move to what are the actual documents? I'm sure our audience is dying to find out. Okay, what sort of documents do I need in place regardless. Lisa, why don't we start with you. What documents do I need? Where should I be looking at?

Lisa - All right, well, why don't we start with a last willing testament. So, as I mentioned, a will controls the assets that are owned by a person at the time of their death that do not pass by rights of survivorship or by beneficiary designation. Now in some states, New York is one of them, wills are often used as the primary method to transfer assets at the time of a person's death. So, technically a last willing testament is a legal document that directs how your individually titled assets will be distributed after your death. A person who creates a will is called a testator, and there are strict formalities to create a valid will. So for example, the testator must have capacity to make a will. And that generally means that he has to be 18 years of age or older, of sound mind and memory, that the will is properly drafted, signed, and witnessed. Generally what that means is that the will must be in writing, the will must be signed by the testator at the end, and it must be signed by at least two witnesses in the presence of a testator. In some jurisdictions, the testator must declare to the witnesses at some point during the execution ceremony, that the document is in fact the testators last will. There can be some variation of these formalities on a state by state basis. It's also important to note that wills are public documents, therefore it does not ensure privacy. And if that is an issue for someone, then a revocable trust structure might be a better alternative than just having a will in your estate plan. Individually titled assets, which are distributed pursuant to your will, are subject to probate. And probate is the legal process of proving or legitimizing your will and administering your estate. You probably have heard probate proceedings can be very protracted.

They could be expensive. In my experience, it doesn't always have to be that way. If there is a harmonious family situation and all the beneficiaries are known, there is no contestable issues. Lawsuits are not expected. The will is well drafted. It includes what's called a self-proving affidavit, and this is another form that's executed along with the will. And it removes the need for locating witnesses and obtaining their affidavits on a postmortem basis. So if all of those facts are in place, it's possible that the probate process could go relatively smoothly in a reasonable amount of time at a reasonable cost. And you could get the preliminary letters, letters of administration actually appointing the executor. But however, now where we are March or almost April of 2022, and we're still living through the pandemic, we all have heard that in most jurisdictions there's been tremendous court delays. And so the probate process really could be delayed now across the country. And so perhaps this is one reason why revocable trusts are becoming even more popular in New York. We see them use routinely in other states. Certainly, I know California and Florida structure most of the estate plans using revocable trusts. And so David, perhaps you can discuss how revocable trusts and pour-over wills are used in an estate plan, as opposed to just using a will.

David - Yeah, Lisa, so in California and many other states, it's been popular for quite a while to use a revocable trust, also known as a living trust as an alternative to a will. And for foundational estate planning purposes, the primary reason to use a revocable trust is to avoid probate. So like a will, your revocable trust is where you direct how your property is distributed upon your death. But unlike a will, a revocable trust takes effect during your life and allows for the transfer of your assets at your death, without any involvement of the court. So kind of big picture definition of a trust. A trust is a legal arrangement in which a trustee owns and manages property for the benefit of named beneficiaries. Now, typically, while you are alive and have mental capacity, you will serve as the trustee of your revocable trust and you will have the authority to deal with the trust assets for your benefit in the same manner as if the trust didn't exist, your trust will be disregarded for all income tax purposes. It's really just you owning and dealing with the property. But your revocable trust will hold legal title to your assets. And this is a very important point because this does not happen automatically. You need to fund the trust and you need to fund the trust during your life in order to get the benefit of avoiding probate. Upon your death, your trust will become irrevocable and the person you nominate as your successor trustee will immediately have the authority to manage and distribute the trust assets without going to court. Now, even with the revocable trust, you still need a simple will known as a pour-over will, which leaves all of the assets of your probate estate to your revocable trust. It functions as a safety net to catch assets that you did not transfer into your revocable trust prior to your death, and then pour them over to your trust.

Now, hopefully your trust will be properly funded during your life and your poor-over will won't ever need to be admitted to probate, but it's there as a backstop to ensure that all assets will ultimately end up in your trust. So what are the advantages of using a revocable trust and pour-over will? The major advantage, as I mentioned is avoiding probate. Why do we want to avoid probate? Well, it can be expensive. It will involve attorney's fees and executor's fees that are often determined by statute and based on the gross value of your estate. So depending on the nature of your assets, these fees can be quite significant relative to the overall size of your net assets. Aside from expenses, courts can be slow and unpredictable. This was really seen during the COVID-19 pandemic when courts were experiencing closures and historic delays. And it's generally nice to save people a trip to court if you can. Court isn't the best place to hang out, so if you don't have to go there, you can spare your loved ones a trip to court. Privacy is also an advantage. Generally probate proceedings are public record in California and in many states. So if you prefer that information about your assets and beneficiaries remain private, you should use a revocable trust. A third advantage is incapacity planning. If you become incapacitated during your life, your successor trustee will be able to step in and manage the property of your trust for your benefit without any additional documentation or court approval other than some record of you having become incapacitated. A will standing alone does no not offer any protection if you become incapacitated. So what are the disadvantages? Well, the main disadvantages you need to retitle your assets.

Failure to do so may mean that probate is still required. And this is not usually a one time thing. This requires maintenance and attention throughout your life. Some of the main assets you need to be concerned with are all of your financial accounts, bank accounts, brokerage accounts. You need to work with your financial institution to have those transferred from your name to the name of your revocable trust. Deeds for all real property. You need to transfer all of your real property to your revocable trust. This is usually done by a quick claim deed, which is a simple transaction, but it still needs to be done. And you should review beneficiary designations on retirement accounts and life insurance policies to ensure that your revocable trust is named there, if that's who you wish for these assets to pass to. Finally a general assignment, transferring all of your tangible personal property into your trust. Now, this probably sounds more complicated than just having a will and it is, and using a revocable trust is likely going to involve greater upfront investment of time and money, but when it's done properly and when it's right for your situation, using a revocable trust will often allow for a smoother and more cost-efficient transfer of your assets to your beneficiaries.

Rich - Thanks, Lisa. Thanks, David. I know there are a couple of other documents out there that folks should have in place. Can you run through some of those. Lisa, can you start?

Lisa - Sure. So as David mentioned, a will standing alone does not offer any protection if you become incapacitated, right? A will only comes into play is upon death. So these ancillary documents are additional estate planning documents that are needed to cover contingencies such as sickness or incapacity during your life, as opposed to distributing assets upon death. And these ancillary documents are recommended and become part of your core estate plan, whether your estate plan is structured using just a will or a revocable trust as David has just explained. So they may operate a bit differently, but they're still recommended in either case. So in the case of an estate plan using a will only, and not a revocable trust, what would happen for example, if a person let's say got COVID and was incapacitated for a period of time, perhaps, in the hospital, who then would have the authority to manage that person's financial affairs during that time of incapacity? So there's a special type of a power of attorney. It's generally a durable power attorney, but it is a legal document where you would give another person the authority to act on your behalf regarding financial and legal matters. And so the typical grant of authority would include real estate transactions, banking, insurance, and estate-related transactions and anything else that relates to financial and business type matters. This document is usually executed at the same time that you would sign your will. And it also has strict execution requirements. Generally speaking, it would require two disinterested witness and it would have to be notarized. And so just as an example in New York, this form, this type of a power of attorney is referred to as a New York statutory short form, that document in New York has recently been revised. And it allows now for substantially conforming language to be used in the power of attorney to avoid unnecessary rejection. It also provides safe harbor provisions for those who in good faith, except and acknowledge power of attorney. And it actually now allows for sanctions for those who would unreasonably refuse to accept a valid power of attorney.

The other important thing to note is in these powers of attorney, they often allow for gifting provisions. This could vary by state. And when we talk about gifting provisions, we're really now kind of leaning more into the tax planning mode, which we haven't talked about yet, but it's just important to know that that type of a provision can be included in that document as well. And then the only other thing that I would mention at this time is given the pandemic, we have seen new rules that have come out in many states about electronic and remote notarization of documents, of these kinds of documents. In some states, it was allowed during the most critical time of the pandemic. And then in other states now more legislation has been passed to permit these remote notarization to become permanent. And that recently has happened here in New York. And so, I mentioned that the operation of the power of attorney may work differently, whether your estate plan is structured using a will or a revocable living trust. And so David, how would this differ and how does a power of attorney work in conjunction with an estate plan that's set up using a revocable trust?

David - Yeah, so although a power of attorney is usually effective to give someone the power to act on your behalf for financial and legal transactions while you still have mental capacity, these powers typically are only exercised when and if you become incapacitated. If you're using a revocable trust in your estate plan and you become incapacitated, your successor trustee will have the authority to deal with the assets owned by your trust. And your agent under your power of attorney will only be able to deal with financial and legal matters outside of the assets owned by your trust. So the role of your agent may be somewhat limited, but it's very likely that they will still have at least some role if you become incapacitated. So you still need a durable power of attorney, even if you have a revocable trust. The other ancillary document, which is commonly part of a core set of estate planning documents is known as an advanced healthcare directive in California. This document serves two main purposes. First, it appoints someone to make medical decisions on your behalf, if you are unable to do so yourself. And second, it includes important instructions for your end of life care. Specifically, you can direct whether or not you want to receive life-prolonging treatment. If you are terminally ill or unlikely to regain consciousness, and whether you want to receive pain relieving medication, even if it will hasten your death. Lisa, is there a similar healthcare document or set of documents in New York?

Lisa - So, sure David, in most states or in all states, they have some variation of an advanced healthcare directive, just so happens in New York that we have two documents that essentially do what your one healthcare directive does out in California. But so what we have, one document is called a healthcare proxy and that document is where you would appoint someone to make healthcare decisions in the case that you can't make them for yourself. It would also give your agent the power and authority to serve as your personal representative for all purposes of HIPAA regarding protected health information and the release of medical and hospital records. It just so happens, we have a separate document that deals with end of life care. In New York, it's just a declaration, a living will declaration where you declare what your intention is in what circumstances, you would want to discontinue life-prolonging medical treatment and what your instructions would be regarding end of life care.

Rich - So, Lisa, can we stick with you? I was wondering, you all went through that, that was great, but there's a lot of individuals named in those documents. I'm wondering if we can just run through some of the terminology and some of the roles that folks play like executor, executrix, trustee, et cetera. They don't all have to be the same person, I know that, but what's the difference. And can we clarify a little bit of that for a audience? Cause I know sometimes that can be confusing.

Lisa - Sure. So, the executor, or in some states they're referred to as a personal representative, that person is nominated in your will. And this person is responsible for collecting assets, paying credits, selling property, if necessary and ultimately making distributions to the named beneficiaries. So the executor or personal representative must actually be appointed by the court. In New York, it's the surrogates court. In other states, it might be the probate court. So it's important to know that just because you name somebody in your will, that doesn't mean that person automatically qualifies or automatically gets appointed. That has to be done by the court, by the judge. The executor, as you can imagine, must be of age 18 years of age or older and competent. The characteristics of a good executor or personal representative includes someone who is honest and trustworthy, capable of being impartial and available and willing to serve because it is a job, administering in a state is a job and it could take a period of time. And for that reason, executors and personal or personal representatives are entitled to compensation. And usually there is a state, a statutory fee schedule that will help to sketch out the amount of fees that this person can receive.

In some cases, if the estate is large enough, a corporate fiduciary might be better than a family member, a family member, or an some other individual. And also like many of these rules, there could be other certain qualifications that vary by state. So it's always important to work with an attorney and see what the requirements are for the state that you're in. And so, I just described the important role of the executor or personal representative when somebody's estate plan is structured using a will. But as David just walked us through, there's a complete alternative to that. Or somebody's estate plan is structured using a revocable trust. And if that person would, if they were successful and they retitled all of their assets in their revocable trust, there might not even be a reason, or they might not even have any assets to go through probate. And so they might not even need to tap their executor under the will. And so in that case, I would think that their trustee of their revocable trust has a really important role now in administering the trust assets. And so David is that job of a trustee under a revocable trust. Is that similar to what I've just described as the job of an executor under a will?

David - Yeah, Lisa, the role of the trustee is very similar to that of executor when it comes to settling your affairs and distributing your property after death. The major differences are that your trustee will act without any court supervision and may also play a role in managing your property if you become incapacitated during life. If you have a revocable trust and a pour-over will, your trustee and executor should be the same person, just due to how intertwined these documents are. For your durable power of attorney and for your healthcare directive, you can name people different than who you've named as trustee or executor, but you should consider those same factors, honest, trustworthy, and these people should also be very close to you. They should be family members, trusted advisors. They should know your wishes and they should know how you would want them. They should know how you would want to make decisions, cause they will be substituting for your judgment. Now the roles of trustee and executor are not necessarily in honor to bestow on your most trusted family member or friend. They involve a lot of specialized work and come with a lot of liability exposure. Trustees and executors are fiduciaries, meaning they owe a legal duty to the beneficiaries of your trust and estate to act in their best interest and to act with the appropriate level of care and diligence. Beneficiaries frequently sue trustees and executors for breach of their fiduciary duty. So these are also factors that you should take into account when deciding who to appoint as your trustee or executor. And if you have a complex estate or family members with strained relationships, a corporate or private fiduciary may be better suited to the task. You also have the power to appoint more than one person as co-trustees or co-executors. So you might consider naming multiple family members if you think they can get along or naming one family member or individual who has better insight into your wishes and intent to serve with a corporate fiduciary who can handle the day-to-day and more technical aspects of administration.

Rich - Wow, that's a lot of ground you both covered. There's so much to know. And I do believe our audience has a great idea of what needs to be done and some of the documents that they need to put in place. I know we're past, I'm looking at the time we're past the bottom of the hour. We definitely want to get to pitfalls, missteps and pitfalls. What folks need to know. David, let's just go back to you, then to Lisa, and then I'll kind of finish up on pitfalls. And why don't you start David?

David - Yeah, I've mentioned this before, but I want to emphasize it again. Major pitfall, if you're using a revocable trust is failing to properly fund it during your life. And the result could be that you still need probate, which we're trying to avoid. So make sure your trust is properly funded. Another pitfall is failing to update your estate plan after a significant life event, such as marriage, divorce, remarriage after divorce, birth of a new child or death of a beneficiary or fiduciary under your existing documents. If any of these events happen, you need to review your estate plan to make sure it is still consistent with your wishes. This is especially true if you get married after you have created a will or revocable trust, because if you fail to update your documents, your new spouse may be entitled to a substantial portion of your estate under what are known as omitted spouse laws. And this year might be a lot more than what you would've wanted them to receive had you revisited your estate plan and made that decision for yourself.

Lisa - And so I would say one of the pitfalls that I've seen or mistakes I guess, is failing to follow the strict rules of execution. I've mentioned that a couple of times and you could have a beautifully drafted will or a power of attorney or even a revocable trust, and if they're not executed properly with the formalities of the jurisdiction that you're in, they're going to be deemed to be void and they're just not going to work to operate and to distribute your estate plan. So I would just say, be careful about that. I mean, in my opinion, it's best since these are all legal documents, it's best to have these prepared by attorneys, most particularly trust and estate attorney, these attorneys that are specialized in this area and also to have the execution ceremony when the documents are signed to be actually supervised by the attorney to make sure that all those formalities are being handled correctly.

Rich - Okay, and I'll close out the final pitfall, something that we have any even mentioned or touched upon at all during this session is around gift and estate taxes. The gift and estate taxes, they generally don't apply to most US citizens, but definitely something folks should be aware of. If you didn't realize that you were causing a gift or an estate tax, it could be disastrous because there are ways to plan around that. So why don't we just run through that and then we'll shift to some questions and I'll take us through that. I have a few slides to share. So when you make a gift in excess of $16,000 per year, per individual, that excess amount is subject to gift tax. The $16,000 is not, you're thereby using your annual exclusion gift. That's what the IRS calls it. So for example, if you made a gift of $17,000 to a child, 16 would not be subject to tax, the excess of a thousand dollars would. However, the IRS gives you an additional exemption that you can need into. It's $12 million of lifetime gift and estate tax exemption. So in our example, that excess of a thousand dollars, $17,000 or $16,000, would reduce the $12 million lifetime exemption that you have, would reduce it by a thousand, and that balance would carry over to the following year. And year by year, you would do the same thing until one day you pass away.

What's ever left over would offset any estate value that would be subject to the estate tax at that time. I do want to point out that the estate and gift tax rate is the same. It's 40% right now, who knows what Congress is going to do in the future. I know there's been talks about changing that around, but right now it's at 40%. I will all also say it's really important to know that $12 million exemption is set to expire at the end of 2025, and in effect be cut in half. I imagine Congress is going to do something. I think David and Lisa, you would agree with me. So it's really important that you understand that the estate gift tax exists. Be aware of those amounts when you start to bump up against those amounts. There is additional planning opportunities that you can explore. We won't cover those today, but you should just know that you could explore those opportunities with your advisors. So, you know, with that, Lisa, David, let me just stop sharing. Thanks, we covered a lot. In summary, some key takeaways for everybody before we get to some questions, I can see some questions coming in. Number one, don't wait to get your plan in place. I know it does take time. Lots of decisions you all have to make. Start now. Number two, watch out for the missteps that we pointed out. We laid out three good ones. And then number three, review your plan often to be sure your plan is what you want for both you and your family. Life's dynamic, life changes, and you need to incorporate those changes in your plan. So I can see we're 40 minutes in. We do have some questions. Let me look at the question box. Lisa and David, you can take a look as well. Let's start with this one. This is my favorite. "Should I do it myself or hire an attorney?" I'm curious Lisa and David, with you both being attorneys, what your opinion is. Myself, just so folks know, I went out and hired an attorney. I'm more than capable of doing it myself as a non-attorney, but I definitely hired an attorney because I can understand the missteps that could happen. And I want a well drafted document, but curious what both of you think. Lisa, why don't we start with you?

Lisa - Okay. So I mean, Rich, I feel like it's almost kind of a question for probably myself and David, since we're formerly practicing trusting estate attorneys. So you can almost guess what my answer's going to be. I would agree with you. I would, suggest that you work with an attorney who is specialized in this area for all the reasons you said and all the reasons that we kind of walked through today. Not only do you want to make sure that the documents are drafted correctly under your particular state's law, that it includes all of the dispositions in the manner that you want to protect your family. But again, not to reemphasize this over and over to make sure that they get executed according to the formalities that are required in that state.

David - Yeah, and I agree. I mean, an attorney is going to give you the best bet that everything is done, right? It's going to cost more money, but you need sometimes that experienced advice to help you determine what's best for you. We've been to talking a lot about California and New York law. If you live in another state, you need somebody who's familiar with the laws of your state to help you build the right estate plan for your situation. I will say though, that there are other services out there. There's full-blown do-it-yourself type services, and I'm sure we have plenty of people in our audience that are perfectly capable of doing this and creating an a estate plan that will work, but there are a lot of mistakes that can be made. And in addition to those do-it-yourself, there's sort of a hybrid these online services where you will get some attorney support, but it is more of a fill-in-the-blank and then consult with an attorney. And those can be a good fit if you have a simple estate and you're very cost conscious.

Rich - Thanks, David. So let look at some of these other questions. Here's a question that's come in. "Do you recommend families have a will "and a revocable trust in place "to protect assets or does the revocable trust "cover all the above?" Have a will, estate plan and revocable trust, I should say. So, David, you talked about the revocable trust. Well, Lisa, and I'm sure there's a difference between New York and California, but should you have the will and the revocable trust, or should you not? What's your opinion on that?

Lisa - Well, you need a pour-over will with a revocable trust to catch those assets that you didn't transfer into your trust during life. In California, you can make some mistakes. If you have probate property that you didn't transfer into your trust during life and collectively, the property is worth less than $166,250, you can use a simple affidavit to have those assets transferred to your trust, which is the rightful beneficiary of them through your pour-over will. And if you exceed that threshold, you may have to go to court. You may have to go through probate, but the purpose of your pour-over will is to put the assets into your trust cause your trust is the document that says what you really want to happen with the distribution of your property. So you need them both, and you need this comprehensive estate plan. You need a power of attorney and you need a healthcare directive, cause those documents serve this purpose of protecting you in the event of your incapacity. The piece about protecting assets. One point, using revocable trust does not give you any creditor protection. That can be a common misconception. If you transfer your assets to a revocable trust, they are still subject to the claims of your creditors. Using trust after your death to structure gifts to your beneficiaries can offer some creditor protection, but during life and for purposes of your creditors, they won't be protected.

Rich - And then here's another question, Lisa, I'm going to turn this to you. "Does it matter if the executor or trustee "is a resident of a different state?" I think the answer is no, but I'm going to look to you to confirm, you're the attorney.

Lisa - Yeah. So that's a great question. In some states that matters and in some states it doesn't. I mean, it's almost like that's a lawyer's answer, right? It depends. And so you have to check. I believe, if I'm remembering, right. I believe in Florida that if you're out of state, you have to be relative. You have to be related. If you're not related, I don't believe that you could still be a personal representative in Florida. But I'd even have to double check that. I haven't looked at the statute for so long. So it depends. So that's what I meant by when I said, you have to check the qualifications for each state because they could be different.

Rich - Right? And so if you name a personal representative and say you name a family member, which I know you can do, right. Can the court come in and say, "Oh, no, that's not an appropriate person," and appoint somebody else or who I name, is that set in stone?

Lisa - Yeah. So, Rich, there's a distinction, right between who you name, you could name anybody you want. It's just a sheet of paper, right? You're putting it in your will. The will doesn't really mean anything until it's submitted to the probate court and the probate court signs off on it and the judge approves it and issues, what's called letters of administration. And so that process that the judge is going to go through. If you have named somebody that does not qualify under the rules of that state's statute, the judge will not appoint that person. So even though you have written that person's name or nominated that person in your will, that person won't be appointed. And so the estate won't be opened, you won't get letters and now you'll have to go through the next process in your jurisdiction on who next in line can qualify. And then new papers would have to be submitted to the court.

Rich - Wow. All right. Here's another question. One of my favorite questions, because it's something I've wrestled with, my wife and I did, it's around guardians. "Should I have a single person or married couple?" I think maybe the question, they don't necessarily mean a single person, but one particular individual, as opposed to two individuals, a married couple or partner situation in terms of guardians. I'll kind of weigh in. And then Lisa, David, curious about your thoughts. I've personally named one individual, my sister-in-law. Yes, my sister-in-law is married and related, but God forbid something should happen. They have a great marriage, perfect marriage in my mind, knock on wood, but God forbid something should happen. There's conflict between them. There's a divorce. I don't want my kids or the funds that are held in trust to be, you know, drawn into that in any way, shape or form in terms of arguing and fighting, who's going to be guardian over a child. So I just, that's my long-winded way of saying, I just named one individual as opposed to two, but Lisa, your thoughts.

Lisa - Yeah, so I would agree with you. I mean, I like naming one person and then if that person can't act for whatever reason, then you would name a successor to that person. I think if you name two people together, first of all, they both have to agree, if they don't agree, it becomes more complicated. And then in the case of a married couple, like you said, you know, what if the marriage isn't going well, what if they're going to get divorced? And so I would vote for the single person, the one person. Single as in one person, not in necessarily being married or single.

David - And I generally agree. We did it a little different because we named our parents, my wife and I named our parents as first in line. I won't say whose parents in which order, but we wanted grandma and grandpa to be co-guardians together and fill that parent role If they're both around. After we get beyond them, we just named individual guardians, my sister and not my brother-in-law, even though we would expect both of them to be involved, but like you referenced, if something happened to their relationship, we wouldn't want the possibility of my brother-in-law having a custody battle with my sister. So that's how we structured our guardianship nominations.

Rich - Here's a, I don't know if you all are combing through the questions, but I definitely am. There's a couple more that we can go through. "Is there a dollar value of an estate for trust?" I guess they're asking, you know, do you reach a certain estate tax value or estate value where you definitely should have some sort of trust structure. And I'm not too sure if they're asking about revocable or irrevocable. Here we primarily talked about revocable. I'd say it may not matter depending on the state, but any thoughts around that? David, start with you.

David - I mean, in California, I think the higher value, the stronger the case for a trust because of the statutory set attorneys and executors fees and probate, I think the fees are likely going to be more. Your trustee is still going to charge some fee, but there's less work. There's less attorney work, so usually fees are going to be less if you use a trust. I mentioned earlier, there's the small estate affidavit. This is in many states that have this. So if you want to save money and just have a will, and you really don't expect your assets to exceed, certain dollar threshold, you could use the will and use that small estate affidavit to still avoid probate. But I mean, there's not a specific dollar amount, but I would say the more valuable, the more complex, the more it favors using a trust, at least in California.

Rich - Okay. Thanks. Here's a good question. "What do you think are the most common mistakes people make "in decisions of what and how much property and assets "to leave to others?" Yeah, I'm curious if you have thoughts, but I have some thoughts. One of the most common mistakes that I've seen in my 25 year career is just leaving assets outright. Not necessarily the amounts, the amounts is a whole other thing, right? How much to give depends on the size of your estate and how you want to incorporate charity, et cetera, but just the medium and the mechanism, do you give it outright in trust? How long do you keep it in trust for those beneficiaries throughout their lifetime? Do you have it paid out certain ages, 20, 21, 22, 35, 40, I've seen that, but I've seen mistakes where it's just gone completely outright. And again, subject to that individual's creditors. Creditors and predators, we call it. So, that's one mistake. I don't know David and Lisa, if you have any comments, if not, we move on to another question,

David - I have a perspective on this just with having a litigation background. If you want to disinherit one of your children, if you want to completely eliminate them, or you want to reduce their inheritance or give disproportionate benefits, a mistake is if in a prior version of your estate plan, you gave them an equal share and then the next amendment or statement that you do, you totally cut them out. You're not disincentivizing them from contesting the estate plan. They're very likely to go to litigation because they have nothing to lose. Most states have what are called no-contest clauses, which mean if you can test a testamentary instrument and you don't have probable cause to do so, you'll forfeit your inheritance. So by leaving them nothing, they have no skin in the game. They have nothing to lose. They might as well contest and try to get a piece of the estate. And they'll probably have some opinion about why you did it, and they'll probably want to blame some other family member for influencing you and properly to do it that way. So, those are cases that I saw and at least when it comes to wanting to avoid litigation, if you're leaving disproportionate benefits, I wouldn't recommend completely cutting out a family member because they need to have something to lose.

Lisa - And Rich, you know, if I could add a little bit to that. So, it really does depend upon what is the value and structure of your assets, right? And so, the easy answer is that if you have a very large estate, you know, millions and tens of millions in very large numbers, then we always see that those types of estates are left in further trust for family members or others because the estate is so large and there's tax planning to be done. The gray area becomes when the estate is a little bit smaller. Is it economical? You also have to look who the beneficiaries are. Are there any limitations or restrictions with them? Maybe they're not good with handling money. I mean, what do you do in the case if somebody was inheriting $500,000, right, but they don't know how to manage money. I mean, do you put that in further trust or you don't. And we didn't really discuss, I mean, today we discussed the basics of an estate plan. The initial plan, the foundational plan, should you have it structured using just a will or a alternative to that, which is a revocable trust in a pour-over will. We didn't really get into what happens after that person dies, and then the assets are actually passed on to the next generation in further trust or outright. And that's a topic for a whole other webinar to discuss all the issues that come up in that regard.

Rich - All right. Well, we're approaching the hour. It's been a great conversation. Why don't we end here, unless David, you look like you're about to say something.

David- There's one question I want to answer.

Rich - All right, go ahead.

David - Does FRB offer this trust service? Absolutely. We absolutely do. I'm with First Republic Trust Company. We have teams throughout the United States that will act as your trustee, they will act as your executor, and they will administer your trust in estate.

Rich - All right, good plug for the trust company. That wasn't the intention, but hey, good plug. Yes, we're absolutely there to help. All right, so why don't we wrap up. We're wrapping up the day, wrapping up the month, wrapping up the quarter. Can't believe three months have gone by. Looking forward to the spring. I'm sure all of you are around the country. Want to thank everybody for joining us. Lisa, thank you. David, thank you, really great to see you both and looking forward to the rest of the year. Take care all.

First Republic does not provide tax or legal advice - Client’s tax and legal affairs are their own responsibility. Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this webinar.