Everyday Estate Planning

Those of us with young children and older parents know all about the stress involved in caring for two generations at the same time. It's not easy juggling soccer games, school open houses, and parents who need looking after.

One thing you can do to make things easier in the long run is to talk to your parents -- now -- about whether they've done any estate planning. Although it is difficult to have that conversation, it can make a huge difference to what happens after a parent dies. Planning now means that you'll have a lot less to juggle later. You might even discover that your parents really appreciate your help in getting their affairs together.

Here (with thanks to Leanna Hamill and her estate planning blog) are 10 good questions, from Real Simple Magazine, that you can use to get the conversation started:

• Do you feel comfortable about your financial situation? Would a financial planner be helpful?
• Do you have an estate plan?
• Who should handle your finances if you become ill?
• In the event you become seriously ill, what sort of interventions would you like?
• Do you have enough health insurance?
• Do you feel your doctor is well-informed about the issues facing older patients?
• Can we help make your home more comfortable?
• Are you feeling secure about driving?
• Can you share your thoughts about your funeral?
• Can you compile a list of all your important information?

It is possible (likely) that your parents don't have answers to all of these. But it's a great place to start working with them to get things in place. And one EXCELLENT way to get the process started, of course, is for you to do your estate plan and use that as a way to begin the conversation with them. 

It's autumn. Your kids are in school, the garden needs cleaning up, the leaves are turning beautiful colors, it's time to get that Halloween costume ready, and -- one more thing -- take a moment to make sure that your beneficiary designations are up to date.

It's open enrollment season, so that's a great excuse to take a look and see who you've named as your beneficiaries for your retirement plans and life insurance policies. Many people forget to do this, leaving out children, or worse, naming ex-spouses.

This can be a big deal: for many people these are some of the largest assets you'll leave behind at death. And your will or trust doesn't control where this money goes after you die -- it's that beneficiary form that matters in most cases. While some states do have laws that automatically revoke some estate planning documents naming ex-spouses, it's just a better idea to make sure that yours are up to date.

You should check to make sure you've still got the right people named for all of the plans listed below at least every two or three years or when you've had a major life change (been divorced, or had a new child for example):

• Pension plan accounts
• 401(k), 403(b) or 457 plan accounts
• Self-employed QRP/Keogh plan accounts
• Individual retirement accounts (IRAs)
• Credit union plan accounts
• Disability insurance policies
• Life insurance policies
• Annuities

Families of children with special needs have estate planning issues that can be special, too.  Parents want to make sure that their children -- who may require expensive therapies, medications, and support -- can continue to receive excellent care, even after their parents have died. Parents can purchase additional life insurance to help fund this care, but disabled children often also require government help from Medicaid (federal health insurance) and Supplemental Security Income (SSI).

The problem is, in order to qualify for these programs a person can't have assets in their own name that exceed $2,000 (not including a home, a vehicle, and basic personal items). Without some special estate planning, an inheritance would mean that a child wouldn't be eligible for these programs until they'd spent virtually everything that their parents had left for them -- hardly the result most parents want.

A special needs trust is one that can hold a child's inheritance for them so it can be used to supplement (not replace) government benefits. The money in these trusts can be used to pay for expenses not covered by government benefits, but without disqualifying a child from receiving them. A trustee manages the assets for the child's benefit and a child never has any legal right to claim the money -- so government regulations don't include trust assets when determining a child's eligibility for benefits.

Barry Nelson, a Miami lawyer recently profiled in the Wall Street Journal, set up a special needs trust for his son. The trust can be used for expenses beyond what Medicaid or SSI would pay for, including "travel, companionship and cultural experiences" and "purchase of small visual and/or audio equipment for entertainment purposes," such as an iPod or DVD player, according to the trust document. A special needs trust "gives me -- and it gives every parent -- peace of mind," explains Mr. Nelson, who says medical and educational expenses for his son run between $50,000 and $100,000 a year.

It's natural enough that, as parents age, their adult children begin to think about what they'll inherit and how. This can make parents feel uncomfortable and adult children feel ghoulish. Some families -- I suspect many -- just don't discuss it. How do you tell your kids that you feel one should inherit more, and that another's already gotten all the support they'll need? How do you broach the entire topic with a parent that you love very much, but see fading? But, like so many family issues, it's a conversation very much worth having, and not just for the wealthy.

Estate planning is an act of love, after all. It's about the orderly transfer of what you've managed to accumulate. If you've taken the time to think hard about who needs what you've got and the best way to transfer it to them responsibly, you've gone a very long way to making that transition easier for everyone.

So why not take the next step and at least outline the plan to those concerned? You don't, of course, have to disclose the details if that's uncomfortable. But you can communicate the broad outlines: Are there charities that you intend to support? Are you planning to treat all of your children equally, or are there reasons not to? 

According to a recent article in the New York Times by David Cay Johnston, it's not just a good idea to talk to your kids -- it can significantly lessen the chance that they will challenge your estate plan in court after your death. In his article, Johnston quotes Gerald Le Van, one of the few family wealth mediators in the country, who says, "[T]he children and grandchildren may not like your choices, but at least they feel like you treated them as adults, that you genuinely asked what they wanted and they can then say to themselves, 'O.K., this is not what I wanted, but you don't always get what you want.'"

In second marriages, where there can be deep tension between the adult children of a first marriage and the often much-younger spouse of a second marriage, clear communication can be even more important.

The Times article also quotes Olivia Mellan, a psychotherapist who runs the Web site MoneyHarmony.com, who said that even middle-aged children tended to "interpret the absence of money in a will as being the absence of love from a parent."

When children cannot accept an uneven split or some of the money going to a stepparent, Ms. Mellan recommends telling them: "This is the only way I can die peacefully. I love you, but when it comes to my money, this is what I have to do."

For years, I've told my clients to stop feeling guilty that they haven't done an estate plan yet and feel good that they're making one -- most people never draft a will before they die.

A new survey published by Lexis-Nexis recently backed me up. The Harris Interactive poll, conducted for Lawyers.com, surveyed 1,018 adults and found that more than half (55%) of them didn't have a will. Only one in three African American adults (32%) had a will. Only one in four Hispanic Americans (26%) had a will.

Why do so many people persist in acting like they're immortal? Here are the top reasons identified in the survey:

• People don't like to think about dying.
• People don't know how to get started or who to talk to about an estate plan.
• People think that they don't have enough assets to need one.
  

For the record: We all die. There are terrific self-help products out there to help you get a will done, and there's no minimum asset requirement for leaving behind a valid will -- no matter what you've got, it's important to name guardians for minor children and clearly state your wishes with regard to how your property is to be distributed.

So, what's holding you back now?

When our loved ones pass away, we miss them. It's just how we are. From ancient times, we have found ways to honor the dead and keep their stories alive within us. They live on in our memories and in our hearts. We try and keep them near by cherishing their heirlooms, photographs, clothes and music.

No material object, though, really does the trick--things just can't replace the loving presence of those now gone. For me, at least, the next best thing to being with those I miss most is being with others who also loved them and sharing memories of the joke, the dinner, the bike ride, the office, or the time we all got snowed in.

And now (you may have seen this coming) online memorial sites offer you a way to remember your dear ones and share those memories with others, even if you can't all be together in the same place. Sites like Gates of Remembrance, Last-Memories, and Eobituary allow you to create web pages with music, photos, and writings about the dead. Some sites allow you to post memorial videos, create hardbound memorial books (so you can view them without an internet connection), or create family trees. Some have chat rooms for the recently bereaved. Some provide ways to send e-sympathy cards. Most are free, though some charge monthly fees for storing the archive you'll create.

Honestly, I don't know whether an online site could ever replace a wake, a memorial service, or a good scotch at the beach, at least for me. Death, like birth, is one of the more physical, and therefore, non-virtual, experiences I've ever shared with others. It's profound, it's mysterious, and it requires no electricity.

But for some, these online memorial sites may offer solace and a place to share precious photos, videos, audio files, and memories. Who knows? Maybe online scholars a thousand years from now will find these sites as rich in history and tradition as those dusty family bibles and scrapbooks hidden in the attics of the past. Only time will tell.

If you, or anyone you know, has been approached by someone offering to buy them a life insurance policy and promising a risk-free way to earn some serious cash, be cautious. From the same folks who brought you risky mortgages that you couldn't afford and packaged them as 'no-risk' securities on Wall Street now comes stranger-owned life insurance: a way for third party investors to package life insurance policies into securities, promising a high yield with 'no risks'. Yeah, right.

Here's how it works: A promoter will offer an elderly, wealthy person a fairly surprising deal: The older person agrees to purchase a $10 million life insurance policy, and the promoter lends them the money to pay the premiums for two years. They'll even throw in cash up front for the hassle of applying and going through a medical exam. The insured pays nothing during that time, not even interest. If they die during that time, their family gets the death benefit, minus the cost of the loan. If they don't die at the end of two years, they can keep the policy and pay back the loan plus interest. Or, they can sell the policy and use the money to pay back the loan, or transfer it to the lender and pay nothing.

What's wrong with this picture? Lots. As the Music Man said, "We've got trouble, right here in River City."

Grandpa's not breaking the law by agreeing to do this, but the promoters are aggressively pushing the boundaries of acceptable insurance practice and policy. They're betting that Grandpa won't agree to continue that policy after two years but will instead allow them to become the owners of the policy on his life. That's a pretty good bet, since Grandpa wasn't even thinking of buying that policy until the promoter came to town!

If they pay Grandpa $500,000 up front for the hassle of going through the application process and taking that medical exam, and he doesn't choose to own it after two years, they know that when he dies, they'll collect the $10 million -- which is a great return on investment, even after the up front cash payment and the tax they'll owe on the payout.

But, let's face it, life insurance isn't supposed to be packaged into investments and sold to strangers. It gets special tax treatment (it builds up value tax free and payouts are not taxed as income or capital gains) because it's supposed to protect families after a death. It's supposed to be about widows and orphans, not hedge funds and investments pools.

You aren't allowed to buy life insurance on people you don't know or have no economic interest in insuring. But, here's the really clever/evil part of this scam: after a policy's been owned for two years, the insurance company can't do anything about a stranger owning the policy. That's why the promoters are willing to pay Grandpa up front to buy a policy he doesn't even want!

It might not even work out so well for Grandpa: Buying the policy and selling it after two years could mean that he can't buy insurance coverage in the future. He might take a tax hit on the accrued interest he didn't pay for the two years; he might be taxed on the cash advance up front.

The life insurance industry doesn't like this scheme either. They're worried that if Congress realizes that life insurance policies are really just investments, Congress will start taxing them that way, and they'll lose their special tax-favored status. If that happens, life insurance will probably become more expensive, and we'll all lose one of the all-time best estate planning tools for protecting our families at a reasonable cost.

If scams like this transform the insurance industry in the same way that the mortgage industry was transformed, the whole industry could implode faster than a Las Vegas neighborhood emptied by foreclosures.

Every now and then, I get a call from someone whose parent has recently passed away, leaving behind a will that leaves everything equally to all the children. Except -- and this is the reason for the call -- a bank account, or a house, or a retirement plan, or a life insurance policy that was left to just one brother or sister.

The first question they have is whether this is legally possible: "Can Dad have done that?" they ask plaintively. After all, the will, they point out, left everything equally to all of the children -- how could something be given to just one of them?

The answer is that Dad was perfectly entitled to leave an asset like a bank account, a brokerage account, a house, or a retirement plan to a specific child, regardless of what his will said, because wills only govern the distribution of some, but not all, of the assets that a person owns. (Though spouses have certain legal duties towards each other, there are no such protections for children.)

Retirement assets and life insurance benefits go to the person designated as the beneficiaries of those plans. If Dad named his youngest daughter, Grace, as the beneficiary of his IRA or life insurance policy, the money is hers, and she has no legal obligation to share it with her siblings.

The way in which an asset is legally owned, called its title, can also determine the person who owns it after somebody dies. If Dad had placed Grace on the title to his home or bank account as a joint tenant, she would be the sole owner of that property upon his death. Owning property in joint tenancy means that when one owner dies, the other automatically owns the entire asset by what lawyers call the "right of survivorship" and no probate is required to transfer the asset.

And many bank and brokerage accounts can be transferred at death to a named beneficiary as well. If Grace had been the sole caretaker of Dad during his last illness, and he had wanted to reward her for her selfless dedication, he might also have left her one of his bank or brokerage accounts by making that account a transfer-on-death (TOD) or a payable-on-death (POD) account. By filing out a simple form at the bank or brokerage company's office, he could have designated Grace as the sole owner of the account upon his death. Again, such a designation would trump his will.

If you're a senior citizen with a valuable house, a scarcity of cash, and a low income, you're likely to have been approached by a salesman for a reverse mortgage. Reverse mortgages are aptly named: Loans are made based on the equity in your home -- you receive cash now and the loan is paid off, with interest, only when the house is sold or you move out (often after your death). A recent New York Times article reports that there's now a $20-billion-a-year industry in reverse mortgages, with "elderly homeowners taking out more than 132,000 such loans in 2007, an increase of more than 270 percent from two years earlier."

While reverse mortgages can offer financial security to seniors otherwise unable to qualify for a traditional second mortgage or to find any other source of cash, they tend to be expensive and are often sold with high-pressure tactics. One woman, profiled in the Times' article, borrowed $218,900 against the value of her home, and received only $33,000 in cash. She disbursed the rest of the loan into complex investments that made it difficult to get her money back (and probably generated large commissions for others.)

And if that's not scary enough, a financial regulatory group has just issued a report that warns seniors not use these expensive loans as a way to finance their retirement, because they have high fees (typically 7% of the home's value) and can make it difficult for homeowners to leave their property to their heirs.

For helpful consumer information on what to look for and what to avoid when shopping for a reverse mortgage, check out the Federal Trade Commission's fact sheet and the AARP's Reverse Mortgage section.

Actor Heath Ledger made a will when he was just 23 -- unusual, and very smart for a rising star in the movie industry. Unfortunately, Ledger didn't update his will after his daughter was born two years ago. So when he died unexpectedly at age 28 in January, his will left nothing to his daughter Matilda or her mother, actress Michelle Williams.

In most states, this means that little Matilda would be entitled to nothing from Ledger, because in most situations children who are left out of a will cannot claim a share of a deceased parent's estate. There are exceptions in some states -- for example, in Florida, a minor child (younger than 18) is entitled to your residence.

Luckily, in this case, Ledger's family -- who inherit under that five-year-old will -- have promised to do the right thing and take care of the girl and her mother. But Matilda must depend on their good hearts, not the law.

Almost everyone eventually needs more than one will. If you've made a will, pat yourself on the back -- but then go dig your document out of the back of the filing cabinet and see whether or not it still reflects your wishes.