CommonEstate Planning Mistakes

By Young Couples

Michael W Reagor EsqMichael W. Reagor, Esq.Dymond Reagor Colville, LLP

Suite 1040, The Edward Building8400 E P ti A8400 E. Prentice Avenue

Greenwood Village, Colorado 80111-2922(303) 793-3400

mreagor@drc-law commreagor@drc law.comwww.drc-law.com

Estate Planning Goals: the Typical PersonTypical Person

“I want to control my property while I’m alive, take care of me and my loved ones if I ybecome disabled, and give what I have, to whom I want, the way I want, and when I , y ,want. Furthermore, if I can, I want to save every last tax dollar, professional fee, and y , p ,court cost legally possible.”

Estate Planning Goals:Peace Of Mind Family HarmonyPeace Of Mind, Family Harmony

Three Keys NOT USED by “Rich & Famous”

1. Maintaining control

during incapacityduring incapacity

2. Quick & cheap wealth transfer at deathat death

3. Protecting beneficiaries from others & themselvesothers & themselves

IntestacyIntestacy

• James Dean:• James Dean:– Died at age 29 without a will

Entire estate including licensing fees passed to– Entire estate, including licensing fees, passed to his father, who had abandoned him as a child.Licensing fees generate $1 $3M annually– Licensing fees generate $1 - $3M annually.

Unintended HeirsUnintended Heirs

• Marilyn Monroe:Di d 36– Died at age 36

– Will left 75% to Marilyn’s acting coach, Lee Strasberg, with “wishes” to donate to charity.with wishes to donate to charity.

– Strasberg later married, and at death in 1982, his estate plus all Monroe’s licensing and royalty fees went to hi id l il dhis widow – a complete stranger to Marilyn – and not to charity!

– Licensing fees generate over $1 annuallyLicensing fees generate over $1 annually.

P d d P fliPredators and Profligates

• The Woolworth Misfortune: Barbara Hutton & F W WoolworthF.W. Woolworth– Granddaughter of Woolworth’s founder– At age 10, inherited $25M in trust.– Trust (now worth $50M) ended when Barbara turned

21, in 1933.– 46 Years and 7 husbands later dies at age 66 with mere– 46 Years and 7 husbands later, dies at age 66 with mere

$3,000.– Years of relentless exploitation, spousal abuse, drug

ddi ti d t t ll d diaddiction and outrageous, uncontrolled spending.

P i FiPension Fiasco

• John Denver

– Died in a plane crash in 1997 with no estate plan.

– $19M Estate probate and IRS disputes took over 6 years.

F il d t i b fi i ! R lt? L f t– Failed to name pension beneficiary! Result? Loss of tens of millions in taxes and tax-free compounding over the life of his children.

#1 Mistake

F ili t AddFailing to Address Health Care Decisions

Modern Medicine

•• 85% of deaths occur in 85% of deaths occur in h i l d i h i l d i hospitals and nursing hospitals and nursing homes (i.e., long term homes (i.e., long term care)care)

Health Care Decisions

ResultResult: :

Longer periods where Longer periods where patients patients lack decision lack decision ppmaking capacitymaking capacity

Health Care Decisions

Problems Problems created when created when we don’t plan:we don’t plan:•• Conflict Conflict –– Terri ShiavoTerri Shiavo

we don t plan:we don t plan:

•• GuiltGuilt

•• No “DecisionNo “Decision--maker”maker”

•• No DirectionsNo Directions

•• DelaysDelays•• DelaysDelays

•• CostsCosts

Solution: Healthcare power of ttattorney

► Identifies DecisionIdentifies Decision--MakersMakers

►► Identifies the types of decisions the Identifies the types of decisions the DecisionDecision--Makers should makeMakers should make

► Avoids family conflicts over decisionsAvoids family conflicts over decisions

► Create certainty in healthcare decisions Create certainty in healthcare decisions yy

Solution: Living Will (aka d d di ti )advanced directive)

► Allows you to make the hard► Allows you to make the hard decision

► You can preparerepare for terminalfor terminal► You can prepare repare for terminal for terminal conditions conditions (“persistent (“persistent vegetative vegetative state”)state”)

► You can reject life sustaining procedures and artificial nutrition and hydrationnutrition and hydration

► You can designate esignate those who are to those who are to be notified, before you diebe notified, before you die► You can leave eave a clear statement of a clear statement of intent for loved onesintent for loved ones

#2 Mistake

Failing to plan for financial & g pproperty matters during incapacity

Stuck in Conservatorship During LifetimeDuring Lifetime

Without appropriate legal documents to manage your documents to manage your assets during incapacity, a

court supervised cou t supe sed “conservatorship is probably

inescapable”p

Problems with conservatorships

• “Time-Consuming”

• “Expensive”p

• “Cumbersome”

• “Creates Delays”Creates Delays

• “Emotionally Trying”

• “Public Record”• Public Record

• “Many cases of abuse go unnoticed”unnoticed

Solution: Avoid Conservatorships withConservatorships with Trusts

Establishing a TrustEstablishing a Trust“An individual can “An individual can appoint a trustee to appoint a trustee to manage his or her manage his or her financial affairs andfinancial affairs andfinancial affairs and financial affairs and thus can avoid the need thus can avoid the need for an appointment of afor an appointment of afor an appointment of a for an appointment of a conservator”conservator”

Solution: Avoid Conservatorships ith D bl P f Attwith Durable Powers of Attorney

Durable power of attorneyDurable power of attorneyA “i di id lA “i di id lAn “individual can An “individual can delegate to an agent the delegate to an agent the power to make financialpower to make financialpower to make financial power to make financial transactions on his behalf transactions on his behalf if he is unable to do so if he is unable to do so himself.”himself.”

Caution – Powers of AttorneyCaution Powers of Attorney

“A power of attorney that is A power of attorney that is not well-thought out can not only be ineffective but may be only be ineffective but may be even counterproductive in achieving the principal's achieving the principal s overall objectives”

Estate Planning Journal – March 2005

Limitations for powers of attorney

Provisions often left out:• Power to sell home• Care for pets• Power to fund trusts• Powers regarding US g g

Mail• Powers regarding g g

Medicaid qualification

Limitations for powers of attorney

Is my power of attorney “durable”?

Is my POA stale?yIs my POA “effective”?Is my POA “right” for myIs my POA right for my

situation?

#3 Mi t k#3 Mistake

Failing to Prepare a Wealth T f STransfer Strategy

Wealth Transfer Plan

An effective wealth transfer plan An effective wealth transfer plan is:is:is:is:

•• Tailored to the assets you ownTailored to the assets you own

Accounts for your uniqueAccounts for your unique•• Accounts for your unique Accounts for your unique family situationfamily situation

•• Designed to streamlineDesigned to streamlineDesigned to streamline Designed to streamline transfertransfer

•• Allows quick and cost Allows quick and cost qqeffective transferseffective transfers

Solution: Will-based planSolution: Will based plan

Will of Sue Jones

I, Sue Jones, a resident of Arapahoe County Colorado being of sound mindCounty, Colorado, being of sound mind, revoke any prior wills and codicils made by me and declare this to be my Willme and declare this to be my Will….

Solution: Living TrustSolution: Living Trust

• Often a better solution than a will based plan because:– Holds and passes assets without probate;– Provides for asset managementProvides for asset management– Deals with disability and death

#4 Mistake

Failing to OrganizeFailing to Organize and Consolidateand Consolidate

Biggest factors causing estate administration delays & increased costsdelays & increased costs

•• L k f i tiL k f i ti•• Lack of communicationLack of communication

•• Inability to locate assetsInability to locate assets

•• Redundant accountsRedundant accounts

•• No central repositoryNo central repository•• No central repositoryNo central repository

Key: Create a COMPREHENSIVE

estate plan! (see next slide for solutions)

Solution: Get Organized!

·· Estate Planning Portfolio Estate Planning Portfolio RepositoryRepository

•• Consolidate AccountsConsolidate Accounts

•• Stocks in “Book Entry”Stocks in “Book Entry”

“D b ki ” “D b ki ” •• “Document banking”: “Document banking”: emergency document accessemergency document access

#5 Mistake

Failing to Plan for Guardians for your Minor Childrenfor your Minor Children

Problem: should a court decide who cares for your minorwho cares for your minor children?

If you have not designated a guardian by will or “other signed writing”, then a court will determine who should serve as guardian for your minor children based on the “best interests” of the child, as determined by the court.

The designated guardian may not be the person you would have selected!

Solution: designate a guardian in a willa will

Colorado Revised Statutes 15-14-202:(1) A guardian may be appointed by will or other signed writing by a parent for any minor child the parent has or may have in the future. A guardian may also be appointed by will or other signed writing by a guardian of a minor child. The appointment may specify thea guardian of a minor child. The appointment may specify the desired limitations on the powers to be given to the guardian. Aguardian may not appoint a surviving parent who has no parental rights to be a s ccessor g ardian The appointing parent or g ardianrights to be a successor guardian. The appointing parent or guardian may revoke or amend the appointment before confirmation by the court.

#6 Mistake

In second marriagesIn second marriages, failing to protect your g p yspouse, and your kids

Typical ProblemsTypical Problems

1 Surviving second spouse leaves your1. Surviving second spouse leaves your money to her/his children

2 Surviving second spouse is a spendthrift2. Surviving second spouse is a spendthrift, effectively disinheriting your children

3 S i i d i i ti i d b3. Surviving second spouse is victimized by a “gold digger”

SOLUTION: QTIP “TRUST” YOUR SPOUSE!QTIP “TRUST” YOUR SPOUSE!

–– Passes inheritance to your spouse (and your children) instead of Passes inheritance to your spouse (and your children) instead of your spouse’s new spouse or your sonyour spouse’s new spouse or your son--inin--law or daughterlaw or daughter--inin--lawlawlawlaw

–– Provides income and principal to Provides income and principal to your spouseyour spouse for life in for life in –– Provides income and principal to Provides income and principal to your spouseyour spouse for life in for life in accordance with his/her needsaccordance with his/her needs

–– Then income and/or principal goes to Then income and/or principal goes to your childrenyour children per your per your and/or your spouse’s choiceand/or your spouse’s choice

#7 Mistake

Failing to Plan toFailing to Plan to Give Away Tangible y gPersonal Property

Most common “fights” after death: Tangible Personal Property (LA Times)Tangible Personal Property (LA Times)

•• Sentimental itemsSentimental items

“R i d ”“R i d ”•• “Reminders”“Reminders”

•• PhotosPhotos

•• JewelryJewelry

A t kA t k•• ArtworkArtwork

•• CollectiblesCollectibles

Solutions for Tangible Personal Property GiftingProperty Gifting

•• Personal Property Personal Property MemorandumMemorandum

•• CommunicationCommunication

•• Clearly articulated Clearly articulated processprocess

#8 Mistake:

Thinking Children (MinorsThinking Children (Minors and Adults) Don’t Need Inheritance Protection

What if your childWhat if your child …

•• Becomes instantly Becomes instantly yy“rich” at 18“rich” at 18

•• Suffers a divorceSuffers a divorce•• Suffers a divorceSuffers a divorce•• Experiences creditor Experiences creditor

blblproblemsproblems•• Gets suedGets sued

Children’s Trust –Inheritance Protection

•• Adult child becomes coAdult child becomes co--trustee trustee or eventually sole trustee of his or eventually sole trustee of his trusttrust

•• Has access to income and Has access to income and llprincipalprincipal

•• Health, Education, Maintenance, Health, Education, Maintenance, SupportSupport

•• Can ultimately consume it all Can ultimately consume it all ––few strings attachedfew strings attached

Keep it in the Family!p y

Income

Principal

Lifetime Children’s Trust

Children’s Trust - BenefitsChildren s Trust Benefits

P i h i f hild ’ diP i h i f hild ’ di•• Protects inheritance from children’s divorcesProtects inheritance from children’s divorces

•• Protects inheritance from lawsuits bankruptcy personal Protects inheritance from lawsuits bankruptcy personal Protects inheritance from lawsuits, bankruptcy, personal Protects inheritance from lawsuits, bankruptcy, personal injury claims, IRS, etc.injury claims, IRS, etc.

•• Protects child against spending unwiselyProtects child against spending unwisely

#9 Mistake

Failing to Insure ThatFailing to Insure That Your Loved Ones Can

Get Your Medical RecordsRecords

HIPAA – A Lock Down on Private Health Care InformationHealth Care Information

•• Medical personnel face stiff Medical personnel face stiff penaltiespenaltiespenaltiespenalties

•• Reluctant to permit family Reluctant to permit family members accessmembers accessmembers accessmembers access

Solution: HIPAA li t lHIPAA compliant release

•• Special HIPAA Authorization ensures Special HIPAA Authorization ensures access to medical information for those access to medical information for those you want to have accessyou want to have access

#10 Mistake:

Failing to Preserve Tax gDeferral Benefits Available With

Retirement PlansRetirement Plans

Be warned!Be warned!

MostMost of your retirement of your retirement account could be account could be subject to immediate subject to immediate jjtaxation on deathtaxation on death

Solution: Prolong IRA Solution: Prolong IRA Ownership!Ownership!

The longer your The longer your beneficiaries can beneficiaries can beneficiaries can beneficiaries can keep funds in an IRA keep funds in an IRA

ft d th th ft d th th after death, the more after death, the more wealth they can wealth they can create!create!

Prolong IRA Ownership!Prolong IRA Ownership!Prolong IRA Ownership!Prolong IRA Ownership!

•• Can my IRA be Stretched?Can my IRA be Stretched?

–– Name a beneficiary now Name a beneficiary now –– primary & contingentprimary & contingent–– Make sure IRA custodian allows the Make sure IRA custodian allows the

stretch. stretch. Some bank and other financial Some bank and other financial institutions are ignorant of the stretch IRA.institutions are ignorant of the stretch IRA.R ll l (401K 403B 457R ll l (401K 403B 457–– Roll your company plan (401K, 403B or 457 Roll your company plan (401K, 403B or 457 plans) to an IRA to ensure the ability to stretchplans) to an IRA to ensure the ability to stretch

Solution: IRA L T tIRA Legacy Trust

To protect and increase wealth by keeping funds in a tax protectedkeeping funds in a tax-protected

IRA as long as possible

HUGE LOSS When Your IRA is Cashed out Early and Spent!Cashed-out Early and Spent!

Assume only $100 000 at age 40 earning 6%Assume only $100,000 at age 40 earning 6%Child withdraws and spends RMD after tax

Child’s Cum. Withdrawals+Balance Age IRA Legacy

TrustCash Out

Trust50 $ 170,352 $ 65,000 60 $ 264,583 $ 65,000 84 $ 474,953 $ 65,000

A difference of over $ 400,000 on a $100,000 IRA!

Still a BIG LOSS When Your IRA is Cashed out Early and Invested!Cashed-out Early and Invested!

Assume only $100 000 at age 40 earning 6%Assume only $100,000 at age 40 earning 6%Child withdraws and spends MRD after tax

Child’s Cum. Withdrawals+Balance Age IRA Legacy

TrustCash Out

Trust50 $ 170,352 $ 98,361 60 $ 264,583 $ 137,06260 $ 264,583 $ 137,06284 $ 474,953 $ 158,983

A difference of over $ 300,000 on a $100,000 IRA!

The IRA Legacy Trustg y

•• Revocable TrustRevocable Trust

•• Established now by IRA OwnerEstablished now by IRA Owner•• Beneficiary of IRA at Owner’s DeathBeneficiary of IRA at Owner’s Death

•• Separate from your Living TrustSeparate from your Living Trust•• Separate from your Living TrustSeparate from your Living Trust

How Does It Work?

IRAIRA

RMDs• IRA pours into the

Legacy Trust at DeathTRUST =

PROTECTION

Legacy Trust at Death

• RMD “withdrawn” from IRA each yearfrom IRA each year

• Trust Principal is Asset Protected!

BENEFICIARY

Asset Protected!

BENEFICIARY

#11 Mistake

Failing to Understand & Plan For Death TaxesFor Death Taxes

Understanding Death Taxes

Fed Excl. Gift Tax Excl. Year Top Tax RateFed Excl. Gift Tax Excl. Year Top Tax Rate

$3,500,000 $1,000,000 2009 45%$3,500,000 $1,000,000 2009 45%Repealed $1,000,000 2010 0%/35%$5,000,000 $5,000,000 2011 35%Repealed $1,000,000 2010 0%/35%$5,000,000 $5,000,000 2011 35%$1,000,000 $1,000,000 2013 55%$1,000,000 $1,000,000 2013 55%

How Big Is Your Estate? (You may be surprised!)

• Home• Retirement PlansRetirement Plans• Life Insurance

R l E t t• Real Estate• Investment Accounts• Autos, boats, RVs• Furnishings collections personal effectsFurnishings, collections, personal effects

Death in 2013

With Tax Pl i

Without Tax Planning

$2.5 Million Estate

No federal estate taxes

PlanningOver $250,000

Planning Estate

in Federal Death Taxes Owed

#12 Mistake

Failing to Transfer “Values”Failing to Transfer Values

Traditional Estate Plans Focus Traditional Estate Plans Focus Almost Exclusively On:Almost Exclusively On:Almost Exclusively On:Almost Exclusively On:

Transferring Assets

Reducing Taxes

Administration CostsCosts

Comprehensive Estate Plans Also Focus on:Focus on:

•• Ethical WillsEthical Wills

•• Incentive TrustsIncentive Trusts•• Incentive TrustsIncentive Trusts

•• Involving children in the Involving children in the o g c d e t e o g c d e t e processprocess

Also known as “legacy Also known as “legacy planning”planning”p gp g

#13 Mistake

Believing Estate PlanningBelieving Estate Planning is a “One-Time Event”

Planning (including estate planning) is not a “one time” event but a process

•• Estate planning is a Estate planning is a lifetime processlifetime processpp

•• Personal and legal Personal and legal changes changes occuroccurchanges changes occuroccur

•• Lasting relationships are Lasting relationships are kkkeykey

•• We have to periodically We have to periodically review and update!review and update!

Are You Prepared?p

1. Terri Shiavo Problems2 I it V

7. IRA Funds Wasted8 Ch ti R d2. Incapacity Vacuum

3. Probate Costs/Delays4 Death Taxes

8. Chaotic Records9. Surviving Spouse’s

Creditors & Predators4. Death Taxes5. Children’s Divorce,

Creditors & Predators

Creditors & Predators10. Family Feud Over

Sentimental Items

6. Family Values Lost 11. HIPAA Privacy Lock-out12. Estate Plan Grows Stale

Contact information:

Michael W Reagor EsqMichael W. Reagor, Esq.Dymond Reagor Colville, LLP

Suite 1040, The Edward Building8400 E P ti A8400 E. Prentice Avenue

Greenwood Village, Colorado 80111-2922(303) 793-3400

mreagor@drc-law commreagor@drc law.comwww.drc-law.com