Category Archives: Pieces of the puzzle

Yes, I Can Help Your Parents Transfer Their Home To You, But Let’s Talk First…

I’ve been practicing law for a while now, and there are some themes that come up over, and over, and over again.

One is that it is smart for Mom and Dad (or Mom or Dad) to transfer their home to the adult children while they’re still alive.  And when people believe this, I get calls or emails from people who want to know if I can help them to do it.  They are rarely prepared for the response I give them, which is “Yes, I can, but why do you want to do this?”

The answers are varied, but invariably, they boil down to 3 basic categories: (1) They want to avoid probate; (2) They think that this helps to prepare the parents for long-term care or Medicaid planning; (3)  They can’t really say why.

This is when I get to tell the people asking me this question the following:

First, here in the state of Washington, probate generally is not something to be feared.  What I tell people about the process is “If we don’t have an estate tax problem, we don’t have odd assets which we have to try to value or dispose of, and, most importantly, if everyone is playing nice, then the process can frequently be wrapped up in 6 to 8 months, for a moderate cost.  In addition, going through the probate process provides certainty for the heirs and beneficiaries that all the claims and potential claims against the estate are dealt with, so no one shows up a year later with their hand out.  Finally, the appointment process by which the Court identifies and empowers a person to deal with the estate often eliminates struggles over how to proceed.

Second, transferring the house to kids is a transfer of an asset that will count for purposes of computing eligibility for Medicaid benefits, and if Medicaid or long term benefits are necessary within 5 years of making this transfer, you may have just made Mom or Dad ineligible for receiving that assistance for a period of time that can be as short as months and as long as years.  So instead of helping Mom and Dad, you could be harming them, but this is a question of timing, and it could be part of long term planning provided it is considered long before Mom or Dad need long term care.

Third, people rarely understand that there are tax consequences for making these kinds of transfers, for both Mom and Dad, and for the kids.

For Mom and Dad, they need to make sure they cite the correct exemption to avoid state excise tax on the transfer.  Because the value of the home is almost always more than annual federal gift tax exemptions, they should also be filing a federal gift tax return.  Because the amount of the lifetime federal gift tax exemption amounts available to each citizen is currently in excess of five million dollars, most of the time, Mom and Dad should be able to apply available exemption amounts to the gift, unless they have already used up their exemption on prior gifts.

For the children, accepting this gift made during Mom and Dad’s lifetime (an inter vivos gift) means that they don’t get a stepped-up basis in the property that they would get by inheriting it instead.  If they inherit the property, the kids get a basis in the property equal to the value at the time Mom or Dad passed away.  This minimizes or eliminates capital gains if the kids were to sell the property shortly after.  However, taking the property as an inter vivos gift means that they get what is often a much lower basis in the property, making capital gains on the sale a much greater possibility.

Inter vivos gifts of a parent’s home to the children can be a useful part of an integrated and well-thought out estate plan, but it is not a transaction that should be engaged in lightly, or without serious consideration.

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Filed under Pieces of the puzzle, Planning, Probates and Estates, Wills

I Can’t Say It Enough…

…good estate planning requires advice from more than one discipline.

I was talking this morning with a friend of mine who is an estate planner.  I haven’t known him for a long time, but I like his approach, and I think it differentiates him from other financial planners I’ve known, because he’s got a passion that you can’t really fake, and it is clearly about doing the right thing for the client.  In this case, it means that he spends a considerable amount of time helping clients protect what they already have before he talks to them about using the wealth they have to accumulate more to fund whatever their end goal is.

I’ve been doing this long enough to understand that not everyone is wealthy, but I think that most people want to build what wealth they have.  Sure, some people have come to see me about their estate planning because they have gotten the bad news from a doctor, and that distant inevitability is now an impending certainty.  A holistic approach is probably not foremost in their minds, but an awful lot of people I’ve represented have more wealth than they think they do, and when we sort that out as part of the process, it often requires consulting with other professionals.  Granted, if we’re doing the estate planning because someone has stage four cancer, then we aren’t likely to be talking with them about life insurance, but we might be talking with them about brokerage accounts, 401(k)s, individual retirement accounts, and their interests in closely-held corporations and LLCs, which means that we will be talking  about transfer-on-death or payable-on-death designations on accounts, and how those designations can impact their estates, which means that we will be talking with their financial planners.  We will be talking about potential tax consequences for various potential courses of action, which means that we will be talking with CPA’s and accountants.  And sometimes, I even end up talking to representatives of charities about gifts that clients want to make.  When I am doing this for the clients who know that they aren’t long for this world, I’m not just sad for the client’s approaching demise.  I’m sad for the opportunities that they lost by not acting sooner.  Sometimes, this is because of procrastination, and sometimes, it’s because people don’t understand that estate planning shouldn’t be a mass of disjointed pieces, but a comprehensive plan, focused on the goals they rate as most important, and executed with a series of coordinated steps which have been considered and mapped out with the assistance of a team of professionals who want to help them succeed.  Once I help clients to fully understand this approach, I don’t often end up having  conversations about cost, because they understand that compared to the return they can achieve, the cost is minimal.

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Filed under Pieces of the puzzle, Planning, Probates and Estates, The Practice

The Bad News Is…

One of the things that law school didn’t really prepare me for was the clients who you can’t help.

When I first started practicing law, I was eager to help clients and potential clients, and there was one who stands out in my memory as the first one I couldn’t help.  He had cosigned on a car for a relative, who had defaulted, and he came to see me, because the bank had come calling on him.  I saw nothing in the documents or the circumstance he described that would permit me to be of any meaningful assistance, but I was slightly worried that he might try to hurt me after I told him that I couldn’t help him.

He was very deliberate as he pushed back from the table, and left the room, never saying a word, and his jaw set like a rock.  After my initial relief at not having to dodge a punch or three wore off, I recall thinking “Well, that’s one person whom I’ll never see again.”

But I was wrong.

Before I moved on from that firm, the man came back to see me two more times.  The next time I met with him, he had a contract he wanted me to review before he would decide whether or not to sign it.  I was delighted that he consulted with me first.  I read through the document, noted a few points that I though he should be aware of, which prompted him to tell me that he was going to think about it before deciding to sign or not.  After wrapping up my notes, I looked up and said “Can I ask you something?”

He smiled and said “Let me guess.  You want to know why I came back.”

I nodded my head and said “Yes.  I could tell you were pretty upset when you left last time.”

He laughed and said “You’re not wrong, but I will tell you that I wasn’t upset with YOU.  In fact, I liked the way that you didn’t sugar coat it, even though you didn’t like telling me that there was nothing you could do.  You were honest with me, you didn’t waste my time, and you told me what I did wrong without making me feel stupid.  I knew I had found someone I could trust, and that makes you worth the money you charge.”

I saw him one more time, when I wrote a Will and powers of attorney for him.  Again, he expressed his thanks for the straightforward advice, and the no-nonsense approach.  I still think of him often, because I still encounter people whom I can’t help.  I won’t say that it’s easier telling clients this now than it was then, but I find that by trying to be respectful of their time, and by trying to not make them feel stupid because they made a mistake, I give them something of value, even if it was only allowing them to leave with the dignity they had when they walked in to my office.  Not everyone reacts well to such news, but I have managed to keep a few of them as clients because I approached their problems in this manner, which turns a negative into a much larger positive.

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Filed under Contracts and Agreements, Empathy, Logic Isn't Always The Life Of The Law, Pieces of the puzzle, Planning, The Practice, Wills

The Three Biggest Obstacles To Completing An Estate Plan

Although everyone should have an estate plan, I am constantly amazed at how many people procrastinate about following through with this key responsibility.  When I was new to the practice of law, it was much easier for me to look at the planning that many people fail to do, and dismiss it as irresponsibility and selfishness, but nearly a decade and a half of practicing law has softened my perspective, and I have an empathy for people who haven’t yet executed documents that will make life easier for those they leave behind when they pass away.  This is due in large part to some of the things I have had clients tell me when they have come in to start the process.  There are many different reasons why estate planning is not a high priority for a lot of people, but they generally fall into one of three categories:  The fear of confronting one’s own mortality, fear about the cost, and struggles with family conflicts and/or a desire to be “fair” with all of the children.

The Fear of Confronting One’s Own Mortality

After witnessing how this obstacle affects people, I am convinced that for many of them, it is an unconscious and reflexive reaction.  The last thing that most twenty- or thirty-somethings want to think about is the idea that they could be dead tomorrow.  This may be because of busy lives, with jobs, and kids, and obligations, and hobbies.  It might be because they are still young, and healthy, or believe themselves to be healthy, and for many people, that patina of the invincibility of youth might not lose its luster until middle-age, and its aches and pains that don’t go away, or the sudden loss of former classmates and peers injecting the inevitability of death into the forefront of their thinking.  After talking with several long-time life insurance salespeople I know, I tend to believe that there is something to this perspective.

When middle-age comes, some react by retreating farther from the idea of estate planning, and always seem to find reasons to procrastinate and not make decisions, sometimes to the consternation of their spouse, who may have a newfound desire to address these issues, if only to find a measure of peace in knowing that there is a plan, and with it, the comfort of knowing that they will not be at the mercy of statutory schemes which might not reflect the promises and expectations underlying their relationship.

Others surrender to the knowledge that life always ends, and that sometimes, it is sudden, and unexpected.  I have observed that these people are often motivated a maturity and a deep enough love for their families to want to make that time as easy as possible, and perhaps also to leave a legacy for the future.

Fear About The Cost

As a now middle-aged person with two kids of my own, I understand the reluctance to agree to have an attorney sit down and prepare a set of documents at a cost of hundreds of dollars an hour with apparently no cap the eventual cost.  One of the wonderful contradictions about estate planning is that while every time I draft someone’s documents, those documents are unique, because they are tailored to their situation and their desired outcome.  But. in most cases, I also know exactly how much it should cost, because the means of getting there is often substantially similar to others I have drafted.  Still, it doesn’t really matter how you explain this to a client, because they understand that they might have the one set of documents that takes longer, and if you quoted a range, their memory will always gravitate toward the low end.  Recently, after years of consideration, I made the decision to offer flat fee estate planning documents for “simple” estates…a circumstance that I discuss thoroughly with clients after reviewing their particulars, because sometimes they believe their estates to be “simple”, when they really aren’t.  The fact is, after considering it, the fee structure works out to what the client probably could have expected to pay for me to prepare the documents on an hourly basis, but I also understand how the certainty of knowing exactly what they are going to pay can be a selling point.  Every now and then, I will get someone who believes that the cost for preparing “simple” or modest estate plans is still too much.  This is an objection that I understand, and it is why I often try to put it in perspective.  I recently had a brake job done on my car.  It was something that needed to be done, and I did it because it had a tangible benefit not only for myself, but for my wife and children.  Getting your estate planning done is something that you would do for the same reasons, and the cost was actually pretty close to being the same.

For people who have more complex estates, the costs will be greater, and flat fees aren’t necessarily an option.  But there is usually more at stake, and not planning accordingly can mean paying taxes that might have otherwise been avoided (and the need to sell assets in order to pay those taxes), and an end result that wasn’t what anyone wanted, along with the insult of greater than average probate costs incurred in the injury of that conclusion.  In these situations, I generally find that the clients understand that the cost is a legitimate expense of getting their affairs managed properly.

Struggles With Family Conflicts and/or A Desire To Be “Fair” With All of the Children

This is the obstacle that I have the most empathy for, probably because I have children of my own, and until I did, I couldn’t really understand the old saying “You love all your children equally, but you love each one of them differently.”  I have spent countless hours with parents who struggle with sussing out how to be fair with each child, while being keenly aware of the strengths and weaknesses of each.  This is a dilemma made more difficult for parents who own businesses, because often, there may be one of more of the children who have no interest in the business, but that is where the bulk of the wealth of the family is centered, and one or more of the children have an active interest and role in the day-to-day operations of the business.  These are situations which require the attorney to present several options to the parents, and to help the evaluate each one before deciding on one.

Sometimes, I see parents struggling with how a child is living their life.  It might be an issue with the child being a spendthrift.  It might be that the parents deeply disapprove of the child’s spouse.  It might be a history of conflict with the child, that may or may not include some violent episodes.  It might be alcoholism or drug use.  It might be the child’s sexual orientation.  Any one of these can cause a great deal of anguish for parents who are struggling to finalize estate plans.  I’ve heard the pain in a parent’s voice when they describe the reason why they are struggling with trying to treat a child equally with the rest of their children.  Sometimes, I can help them feel a little better about that burden, by offering an option whereby a more responsible sibling can be made trustee of the spendthrift’s share, or through the creation of a testamentary trust which will keep the addicted child from receiving a lump sum which will be lost in a binge which may also take their child’s life.  I have shared the agony of parents who have disinherited children because of conflicts or irreconcilable differences, which the parties have been unable or unwilling to resolve.  And I have come to understand that even for the ones who don’t appear to have struggled at all with such a decision carry the weight of that decision as a private wound.

One of the many lessons I have learned in years of practice is that everyone should have an estate plan, not only to deal with their own death, but to make sure that someone they trust has the ability to make medical and financial decisions on their behalf if they become temporarily or permanently disabled.  The nature of any of the contingencies that a decent estate plan would address are usually the kind for which people can find reasons to procrastinate, but if deciding for yourself isn’t reason enough to take care of this important task, providing the peace of mind of an actual plan for your loved ones should be.

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Filed under Empathy, It Ain't Perry Mason, Pieces of the puzzle, Planning, Trusts, Wills

Initiative 594’s Inheritance Trap

I-594 isn’t just a compounding of previous violations of the Second Amendment, it is also fraught with traps for the unwary, including one for those who inherit pistols. The language in question is as follows: (4) This section does not apply to: (g) A person who (i) acquired a firearm other than a pistol by the operation of law upon the death of the former owner of the firearm of (ii) acquired a pistol by operation by operation of law upon the death of the former owner of the pistol within the preceding sixty-day period, the person must either have lawfully transferred the pistol or must have contacted the department of licensing to notify the department that he or she has possession of the pistol and intends to retain possession of the pistol in compliance with all federal and state laws. This means that as part of the probate process, the Personal Representative/Administrator of the estate and the attorney need to determine as soon as possible if the deceased owned pistols.  If no one checks, and the designee or heir takes possession without following these steps, then they have broken the law…even if it is the spouse of the deceased.  What can make an error a travesty is that the transfer or notification to the Department of Licensing must take place for every pistol that is acquired, meaning that if someone inherits more than one pistol, and doesn’t follow these steps, they may now be convicted of a misdemeanor for the first pistol, and a felony for each subsequent one. As a practical matter, if you are actually planning ahead, and you want to leave your pistols to someone, you should probably discuss this requirement with the intended recipient, and put language in your Will requiring your Personal Representative to make sure that these steps are followed, and to name a backup recipient if your first choice cannot pass a background check, or has had their concealed weapons permit revoked.

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Avoiding Unnecessary Liability In Probates

One of the biggest mistakes I often see in probate matters is when a Personal Representative of an estate sells real estate and conveys it by Statutory Warranty Deed.

There are four deeds used to transfer real estate in the state of Washington: The Statutory Warranty Deed, the Bargain and Sale Deed, the Quit Claim Deed, and the Transfer on Death Deed.  The first two require the Grantor, who is the person authorized to convey title to the real property, to make warranties to the person or persons receiving title.  The Statutory Warranty Deed is the gold standard, and warrants the following:

1.  The Grantor owns in fee simple (owns all the rights of ownership) and has the right to convey;
2.  The Property is free of all encumbrances (including encroachments);
3.  That the Grantee will have quiet and peaceful possession (meaning no one will have a claim against their ownership and use of the property;
4.  The Grantor will defend the title against all lawful claims;
5.  The Grantor conveys any after-acquired title.

A Bargain and Sale Deed is one in which the Grantor makes the first 3 of the above warranties.   Conversely, no warranties are made with a quit claim deed, in which a Grantor conveys any right or title they may have.  (Transfer on Death Deeds are specialized devices used to designate beneficiaries and avoid probate in certain circumstances, and therefore would not be used by a Personal Representative in the context of probating an estate.)

In many probates, a Personal Representative is acting with non-intervention powers, which means that they do not have to get the Court’s permission to sell real property that is owned by the estate.  However, in most cases, the Personal Representative also has no idea of the real property has been encroached upon my a neighbor, or if there is a cloud on title, either due to lien or and old claim which has never been removed.  Because the Personal Representative often has no knowledge of such things, I often counsel them to convey the real property by means of a type of Quit Claim Deed called a Personal Representative’s Deed.  This will spare the estate the expense of having a piece of property surveyed and having to order a title report from a title company, which is often a step taken by a Buyer, who wants title insurance on their purchase anyway.

I have encountered some Buyers who want deeds with guarantees, and some practitioners will often counsel their clients to use a Bargain and Sale Deed in the context of a probate, but in a tight real estate market in which the seller has an advantage, it is easier for a Personal Representative to avoid unnecessary and potentially costly risks, and use a Quit Claim Deed, especially since such sales rarely get the absolute top dollar that a living and breathing property owner might hold out for.

Depending upon the estate, it is usually a good idea to have an attorney review the purchase and sale agreement as well, especially if the Personal Representative does not have non-intervention powers, because then the sale will be conditioned up on Court approval, and a number of other statutory requirements and factors will also govern the sale of the property.

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Filed under Contracts and Agreements, Pieces of the puzzle, Probates and Estates, Real Estate, Transfer on Death Deeds

Organ Donations As Part of Estate Planning

For many years now, I have been asking estate planning clients if they would like to be organ donors.  The intent of the question is to find out if they would like to be general organ donors, donating whatever organs can be used for transplant at the time of their death.  When clients answer this question affirmatively, we will give them some instructions for getting in contact with the organ donor registry if they haven’t already marked their driver’s licenses as being organ donors.

However, a short time ago, we had a client ask us a question we had never been asked before:  “Can I make a specific bequest of an organ in my Will?”

It wasn’t a question that I could answer right away.  Because of the sensitive nature of organ donations, and the public interest in not wanting to foster a business in organ harvesting, I guessed that if it was permitted, there would likely be a whole host of rules to be followed as part of the process, and I was right.

However, as it turns out, the answer is “Maybe, under certain circumstances.”

The Washington Revised Uniform Anatomical Gift Act, RCW 68.64 sets forth the procedures for making anatomical gifts, including specific bequests of organs.  The statute does permit a donor to make a specific bequest of a specific organ to a specific person, provided that the rules set forth for doing so are followed, but if the named recipient is unable to make use of the organ, it will pass to the next appropriate organ or tissue bank, or organ procurement organization.

Because there are a number of formalities to be observed and steps to be taken in order to correctly make a specific bequest of an organ, and additional steps to be taken if the donor’s driver’s license or state issued identification card already denotes the donor as an organ donor, I cannot recommend enough meeting with an attorney to help make sure that the gift the donor wishes to make will be directed to the appointed person.  This is especially important as the statute exempts parties and organizations from liability for action taken in good faith attempts to comply with the statute.  This means if a donor registry is unaware of a specific bequest made in a donor’s Will, and it gives the donated organ to a person other than the named beneficiary, it is unlikely that it can be held liable, absent gross negligence or some other factor that would counter a good faith claim.

Now that I know the answer to this question, I’m looking forward to another client asking about this option in estate planning.

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