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Young Parents and Estate Planning

I am often asked to meet with young parents to discuss what type of estate planning is necessary now that children are in the picture. While everyone needs to have some basic planning in place, the birth of children is a milestone which makes it critically important to make sure that the important issues are addressed.
The following documents are critical for any young parent:
A Will with Testamentary Trusts, to assure that assets remain available to the surviving spouse in the event of a death. Otherwise, the PA default provision provides for approximately one-half of your probate assets to pass to your child or children instead of the surviving spouse. In addition, the Will is where permanent Guardians of your children are named, so the Court knows your desires about who should be formally appointed to care for your children if both parents pass away. You don't want to leave this important decision up to a judge who doesn't know you or your family.
It is also important that your Wills create one or more trusts to take care of finances for your children until they grow up. Otherwise, the Court will appoint an independent financial guardian, often an attorney or accountant, who will make decisions about the children's financial affairs until they turn 18, at which point such young children have complete control over financial assets they are unaccustomed to managing.
General Durable Power of Attorney for both of you should be drafted. Your Power of Attorney can manage your affairs during periods of incapacity, or if you are simply ready for a helping hand. You would likely be the initial Agent for each other immediately, with named successors as the back-ups in the event of incapacity.
Medical Powers of Attorney and Living Wills for each of you, which will update these documents with recent changes in Pennsylvania and provide specific guidance for your family about who is in charge, and how to make important medical treatment and critical care decisions (for example, artificial respiration, feeding tube decisions, hydration, non-comatose severe brain damage, etc.) if you are incapacitated by injury or illness. 
HIPAA Authorizations, to assure that family members can obtain information regarding your condition from hospitals and physicians, even if they are not currently the designated medical Agent making decisions. HIPAA laws otherwise can prohibit medical providers from sharing information regarding your condition and care.
Temporary Standby Guardian Designation so that in the event that neither of you is able to serve as parents, due to death or incapacity, your designated Standby Guardian will have immediate authority to care for your children pending permanent appointment of a Guardian as designated under your Wills. 
The above items take care of the basic parent estate planning documents. We prefer to accompany these with the following in our Young Parent planning:
Summary of Nominated Individuals, which I like to prepare for all of my estate plans, to bring together in one place the identity of various people assisting in your plan, such as Agents, Trustees, Executors, and more. This helps remind families who is responsible for what, and when.
A Diagram of Wills and Trusts is a helpful tool I design for every plan, visually depicting how the plan operates as it moves through the various stages of vitality, impairment or death which may lie ahead (hopefully, far ahead). It is useful for explaining plans to family members, how things are integrated, and even reminding yourselves how you have planned for your family.
Estate Organizational Materials which I have prepared for my clients to complete, to help provide families with information which will be helpful to ease the transitions during periods of incapacity, or following a death. While the legal matters are addressed in the legal documents, easy access to certain categories of information can further help to avoid confusion or delay when your life takes a difficult turn. Such materials include inventories of your assets, location of important documents, your goals for your children, funeral directions, disposition of heirlooms and personal items, and more.
Asset Coordination
For any estate plan to work properly, careful attention to the manner in which assets are titled, and/or beneficiaries named, is required. We often provide young families with a memorandum of instruction regarding how their specific assets should be titled, and how beneficiaries should be identified for the best tax advantage and protection. Otherwise, the plan may not operate properly for your family. If necessary, we can assist with preparation of any beneficiary designation forms provided by your financial institutions, though most clients handle this on their own at this stage.
Contact us today to start this process before time slips away. Don’t let protecting your family be one of those things you meant to do, but didn’t.  As always, we are available to answer any questions you may have regarding estate planning issues for your family or your family-owned business.

What's In a Name?
How common mistakes in asset titles and beneficiaries cause trouble

The valuable assets which we enjoy to provide us with security, comfort and freedom in life are hard to come by, and harder to keep sometimes. With everything going on in our lives, it is easy to lose track of some of the background "details" about our financial lives, but when a death happens, those details can suddenly become very important. We at The Estate Planning Centers often see mistakes that families have made in the way they address the basic title or beneficiary designations in their assets, and the unfortunate-to-tragic results. The following examples show how families who don't take the time to talk to their lawyer, financial advisor,  or another trusted professional can face hardship.
Let's leave client names out of it, but imagine my typical example couple, Bill and Mary Jones, and their two children, John and Susan. I always pick on the husband first, so let's suppose Bill passes away.
Bill had a bank account in his name alone at the bank. Maybe it was an old account he just never added Mary onto, or maybe it was a part of Bill's former work as a carpenter. Does Mary get the account? Not automatically. Since the only owner is deceased, it now has to go through the probate system. Did Bill have a Will making Mary his beneficiary? If so, then after the probate process is undertaken, Mary can get the account. If not, then the law only gives one-half of the account to Mary, and one-quarter goes to John and to Susan. In the very least there is expense and delay, and a likelihood of it going to the wrong people.
Bill also owned an old hunting cabin in West Virginia with his brother which they inherited when their own father died. No one goes there much, but the taxes are low and they haven't paid much attention to it. What happens to the cabin? If the brothers owned it "jointly with rights of survivorship", then with or without Bill having a Will, it goes to his brother under the title. If they owned it merely "jointly", or as "tenants in common", then one-half will pass through the probate process. That process, however, has the same problems as we saw with the bank account above.
Bill and Mary had another property they loved; their vacation condo in South Carolina. They bought it for a bargain 20 years ago for $58,000, and today its worth over $250,000. They had heard about probate problems, so they solved that issue by "selling" it to the children for $1.00.  What they didn't realize is that when the children someday decide to sell the condo, they are going to owe income tax on all the sale proceeds over the $58,000 that Bill and Mary paid for the condo. If they instead let it pass to the children because of a death of Bill and/or Mary, the children wouldn't have had to pay tax on the capital gains built up throughout Bill and Mary's lifetime, but no one mentioned that important fact to them.
After Bill passed away, Mary wanted Susan to be able to help her with Mary's banking, so at the advice of a bank teller, Mary added Susan to the account. Now, Mary and Susan own the account jointly. If something happens to Mary, instead of one-half of the account going to John, it all goes to Susan. If Susan has an accident and tragically dies first, then Mary has to pay inheritance tax just to get back her own money. I've heard people complain "my child was just on their for my convenience; I didn't mean for the child to be an owner", but the typical bank paperwork makes the child a joint owner. At least the inheritance tax rate between Susan and Mary is only 4.5% in Pennsylvania. Other people added for "convenience" bring higher tax rates upon death (Mary's brother at 12%, Mary's sister-in-law at 15%).
After Bill died, Mary told John that he should get Bill's golf trophy collection someday, since he enjoyed golfing with Bill, and she told Susan that she should someday get the train that always ran around the base of the family Christmas tree when they were kids. Later, forgetting this discussion, Mary gave the trophies to Susan to get them out of the house, and she gave the train to Bill's children when they were visiting one year. When Mary dies, if the children have developed some friction between themselves, the issue of who gets what (and their differing views of who is being "reasonable" and who is being "a jerk") is too often a problem.
Mary saw that John was happily married and doing well in his career, but Susan's spouse left her with two small children. Mary updated her Will to provide that 80% of her estate would go to Susan, and 20% to John. Unfortunately, Mary forget to revisit the beneficiary designations on the biggest part of her estate, her life insurance and her retirement accounts. These were directed 50% to each child years ago, and Susan is very upset when her brother won't voluntarily give her the money Susan feels is rightfully hers. John, meanwhile, is still upset about the golf trophies...so you can see how seemingly small details can have a huge impact!
Maybe Mary had just Bill listed as the beneficiary on her IRA, and didn't add the children as contingent beneficiaries. Since Bill has already passed, upon Mary's death, this makes her estate the beneficiary. If the children had been listed by name, they could have continued the tax-deferral of this valuable asset, and stretched the account out over their lifetime. With it passing to the estate, however, the account must be withdrawn more quickly, and the income taxes paid for the years of withdrawal. The children not only lose the tax-deferred growth opportunities, but the large withdrawals push them into higher marginal income tax brackets as well.
If Mary's life insurance listed Susan and John as beneficiaries, but Susan passed away before her, who gets her share? Does it go to Susan's children? Does it go to John? It depends. It depends upon the language Mary wrote on the beneficiary form, and on the printed language on the form itself, and on the language of the insurance policy document which no one bothered to look at. Many people are surprised when it all goes to John, as most often occurs. Even if it goes to Susan's children, what if they are still young? Under age 18, these grandchildren will need a court-appointed Guardian to watch over their money, at significant expense. If they are over 18 but still financially immature, they now have totally free control over an asset they didn't work for, didn't expect, and don't know how to manage. This freedom often means the money will be spent quickly with little to show for it.
When Mary changed her Will, she forgot that she had put some assets in a revocable living trust several years before, in order to avoid probate. The attorney who changed the Will didn't know about the trust, and didn't update it to reflect her new wishes. When Mary dies, the assets passing under the Will can get the intended 80/20 split, but the trust will still have to split those assets 50/50.
After Bill died, Mary had rekindled a romance from her high school days. At age 70, she decided to remarry her old flame, Ralph. When Mary dies several years later, who gets what? The accounts she put Ralph's name on jointly, because that is what she was familiar with during her marriage to Bill, go to Ralph. Her Will directs her other assets to her children, but Ralph has rights to demand approximately one-third of her total estate as the surviving spouse, unless they took the time to provide for a marital agreement waiving this right in advance. Without such a "prenuptial agreement" in place, the fact that Ralph never developed a strong relationship with Bill and Mary's adult children makes it more likely he will enforce this right. If Ralph is incapacitated, his own children can often enforce the right for him under his Power of Attorney document.
I wish I could tell you that these are just hypothetical examples, and that these types of things don't really happen. My practice, however, has shown me that this is how life goes when people don't take the time to plan. Is your family protected? Are your affairs in order? Do you even know? Perhaps. Perhaps not. If you want some professional insight on the strengths and weaknesses of your current estate planning efforts, please contact our office to arrange a complimentary consultation. The time to ask questions, get correct answers, make informed decisions, and take deliberate action is now, not later. 


Still Time To Capture Extra Social Security Benefits
Caution: The Loophole is Closing Soon!

Many of my clients receive Social Security checks each month, and very few (i.e. none) feel that those checks are too large. If you knew that you could increase the size of your Social Security check by taking advantage of a loop-hole when you started your benefits, you would probably wouldn't want to overlook that. Many people, however,  have done just that, and failed to maximize their benefits for the rest of their retirement. The loophole in the law which permits such an increase, however, is about to be closed by a change in the law. For married clients considering when to start their Social Security benefits, it is definitely time for a close look. If you have already started to receive benefits, there may technically be a solution, but you probably won't like it.
When Congress passed the Senior Citizens Freedom to Work Act in 2000, it was intended to let retirees delay receipt of their Social Security check and continue working in order to increase the later size of their benefit. Clever financial professionals discovered that there were fully legal strategies which could exploit the lackadaisical way the law was drafted in order to increase a married couple's benefits. With the "lightning speed" at which our government works, after only 15 years, that mistake is being fixed. On October 30, 2015, the Senate passed an approved House bill to eliminate these strategies (Bipartisan Budget Act of 2015), but delayed implementation for six months and grandfathered in people already exploiting the technique. President Obama signed the new law on November 2, 2015.
The strategy being eliminated involves the "file and suspend" and the "restricted application" elections, which made it possible for one spouse to file for Social Security benefits, but delay their right to get monthly checks. During the suspension of benefits, they continue to accrue the annual increase in Social Security benefits at 8% per year. How many investments earn a guaranteed 8%? In the meantime, the non-filing spouse elects to receive spousal benefits under the earnings record of the spouse who filed. This gets a stream of income coming into the house, while letting the main benefit continue to grow for a few more years. This would also increase the size of the "survivor's benefit" if the suspended spouse later dies. Ask anyone who has been retired for a while if they wish they had started with a larger base benefit. The longer we live, the more we wish we hadn't been in such a hurry to get that check.
The purpose of this article is not to educate you on the intricacies of this strategy, so I'm not going to run examples here. There are a wealth of articles already published in magazines and on the internet on the issue. (Just search "Social Security file and suspend").  AARP has good information, and economist Laurence Kotlikoff has written extensively for PBS and NPR on the issue. Instead, the two points I want to make are:
  1. There is a current strategy that may increase net income for couples in their 60's who haven't yet elected Social Security benefits but are eligible to do so; and
  2. That strategy is going away unless you take advantage of it in the next 4 months.
If you are already obtaining benefits, the full use of this strategy might require you to repay benefits received to-date from other savings, and effetively hit restart on your benefits. The numbers can be attractive, but many people just don't like the thought of giving back the money they already received. (I told you that you wouln't like it.)
For all of you who may be eligible for Social Security benefits but haven't started taking them yet, I heartily encourage you to get some advice on this issue ASAP. Don't just "wing it", and don't put it off. Talk to your financial advisor, or give us a call to set up a time to come in an talk with an expert about how the system works, and how you can best game the system. When in doubt, I'd err on the side of asking some questions.
Feel free to give us a call if you'd like to schedule a time to sit down and talk with a professional about these issues, or any other planning issues on your mind.