Did you know that today, May 1, 2013, is national Law Day. This is a day “to explore the movement for civil and human rights in America and the impact it has had in promoting the ideal of equality under the law …(and to) reflect on the work that remains to be done in rectifying injustice, eliminating all forms of discrimination, and putting an end to human trafficking and other violations of our basic human rights.
This year, Law Day has a special meaning for Coloradans… Colorado is celebrating equality today with the enactment of SB 13-011, the Civil Unions Act. It is a proud day for our state. Way to go Colorado!
Many people recognize the importance of preparing an estate plan: they want to ensure that their estate will be distributed in accordance with their wishes. They prepare a Will that directs how their personal property will be distributed and to whom. However, they often forget to include a very important component of their estate – their digital assets.
In this technology-driven era, nearly everyone has at least some digital assets. Digital assets can include any text, images, multi-media information, or other personal property stored in a digital format, and may be comprised of such things as photos and videos stored on your computer or online, emails, playlists, online medical records, social media accounts (Facebook, LinkedIn, Twitter, etc), online financial accounts (bank accounts, PayPal, etc.), domain names, blogs, online loyalty programs… the list goes on and on. These digital assets may represent a sizable portion of your estate; a recent McAfee, Inc. survey estimates that the average perceived value of digital assets for a person living in the U.S. to be $54,722 (McAfee.com, 9/27/11). Therefore, it is important to account for these assets in your estate planning documents.
Due to the relatively recent popularity of online accounts and digital asset accumulation, the rights of personal representatives, agents, and beneficiaries with regard to digital assets remains largely unclear. Without written authority (via your Last Will or Power of Attorney) your loved ones may have to obtain a court order to gain access to your digital assets/online accounts. This process can be burdensome for your loved ones, and very time consuming. And, this delay can result in serious consequences: online accounts may need to be accessed immediately to ensure that penalties aren’t incurred or that services are not cancelled, and unmonitored accounts lead to an increased risk of identity theft. Other (non-financial accounts) may also require immediate attention; there may be private emails/messages that you do not want one or more of your loved ones to read.
There are a number of steps you can take to ensure that your digital assets are dealt with effectively upon your death/incapacity:
- Prepare (and regularly update) a comprehensive inventory of your digital assets, including:
- Asset description
- Carefully store and safeguard the inventory. You will want the proper person(s) to be able to access the inventory when appropriate (upon your death or incapacity) but you likely would not want them to gain immediate access to it.
- Take steps to provide your agent (personal representative, power of attorney, etc.) with the proper authority to access your digital assets.
- Include a provision in your Last Will or Trust granting this power.
- Execute a Power of Attorney authorizing your named agent to access your digital assets/online accounts.
(Be aware that individual websites/companies may have their own policies regarding who may access an online account upon the account holder’s death; you may have to fill out additional company-specific forms or provide additional information.)
- Provide instructions to your Personal Representative/Agent regarding how you would like your digital assets to be dealt with upon your death or incapacity.
Although it came down to the wire, a bill has been passed by both the Senate and the House to avert the estate tax “crisis” that would have imposed steep estate taxes on estates valued at more than $1 million. Instead, much of the existing estate tax laws remain intact: a $5 million exemption (indexed for inflation) with portability still allowed. The highest tax rate was increased from 35% to 40%. This Forbes article “After the Fiscal Cliff Deal: Estate and Gift Tax Explained” provides a more detailed discussion of the new law.
Although naming a specific person(s) as the beneficiary on your various financial accounts and policies (e.g., bank accounts, brokerage accounts, IRAs, life insurance policies, and annuity contracts) is one way to conveniently and quickly transfer those assets upon your death, you should exercise caution when making your beneficiary designations as doing so can cause unintended consequences. Before naming a beneficiary, please consider the following:
Lack of Liquidity
At the time of your death, there will likely be a number of final expenses that will need to be paid. If you have listed a beneficiary (other than your own estate) on each of your financial accounts, there may not be sufficient liquid funds to pay these expenses. In that event, one or more of your other assets that you intended to leave to your loved ones (your home, automobile, etc.) may have to be sold to come up with the cash.
Uneven Distribution of Estate
Solely owned accounts registered as “transfer on death” or “payable on death” or other accounts/policies for which you have listed a beneficiary will automatically pass to the specified beneficiary at the time of your death. Such accounts/policies supersede your Last Will and/or any Trust agreement you may have in place. Therefore, even if your Will/Trust states that all of your assets are to be divided equally among your children, if you have listed only one child as the beneficiary on an account/policy, that child will receive that entire account in addition to any inheritance they receive under your Will/Trust. When creating (or updating) your estate planning documents, review your beneficiary designations to ensure that they accurately reflect your estate planning intent.
Think twice before listing a minor child as a beneficiary on your accounts/policies. Under Colorado law, while a child may inherit assets at any age, they are not permitted to control them until they reach age twenty-one (21), unless the inherited amount is under ten thousand dollars ($10,000), in which case they may gain control at age eighteen (18). Therefore, if you name a minor beneficiary on your accounts/policies and such beneficiary remains a minor at the time of your death, a conservator will be appointed by the Court to manage the inheritance until they reach the required age. This will require a hearing and payment of court costs, and the conservator appointed by the Court may or may not be the one you would have selected. Also, it may not be in the minor beneficiary’s best interest to gain access to the entire amount when they reach age 21. You may wish to consider creating a trust to hold the funds until the beneficiary reaches the specified age(s) and/or achieves the stated milestone(s).
Outdated Beneficiary Designations
Be sure to regularly review your beneficiary designation(s) on each of your accounts/policies. As circumstances change, you may also change your mind regarding whom you want to receive the accounts. For example, if you get divorced, you likely wouldn’t want your ex-spouse still listed as the beneficiary on your accounts/policies.
Death of a Beneficiary
It is important to know what will happen in the event your named beneficiary predeceases you. If you have failed to name a contingent beneficiary, the account will likely become part of your estate. What happens in the event you have named multiple beneficiaries (e.g., all of your children)? Will the deceased beneficiary’s intended share be distributed to their descendants (e.g., your grandchildren), will it be divided among the other surviving named beneficiaries, or will it be included in your estate? Check with your financial institutions to find out their specific policies regarding this matter, and be sure to name a contingent beneficiary.
While it may make sense to name your estate as the beneficiary on other accounts, it is almost never a good idea to name your estate as the beneficiary on your IRA (or to fail to specify a beneficiary for your IRA, leaving your estate as the default beneficiary). If the estate is the IRA beneficiary, the IRS requires the account to be rapidly distributed rather than allowed to stretch over the lifetimes of named beneficiaries, which can lead to significant tax consequences. Additionally, as part of your estate, the IRA will be a probate asset and subject to claims of creditors.
If you would like guidance in designating your account beneficiaries to best achieve your estate planning goals, please feel free to contact me.
You wanted to protect your family and loved ones from having their inheritance depleted by estate taxes. You wanted to ensure that, upon your death, your assets would be seamlessly distributed to your named beneficiaries without the necessity of probate. So, you invested your time and money in creating a Revocable Living Trust because you believed it would accomplish these goals – you met with an attorney, discussed your estate planning objectives and family circumstances, reviewed drafts of a lengthy and complex trust document, executed the final trust agreement in front of witnesses, and then tucked it away in a safe place, glad to have the task finally completed. Unfortunately, you omitted one very important step, FUNDING your trust, and without it, all of your effort could be for nothing.
“Funding” your Trust means that you transfer ownership of your assets into the name of your Trust. Unless an asset is titled in the name of your Trust at the time of your death, it will have to go through probate (a legal process to administer the estate of a deceased person) – and because you have already invested significant time and expense in the creation of your Trust, surely you do not want your representatives/beneficiaries to have to invest additional time and money in the probate process (the exact thing which your Trust was created to avoid).
In the case of real property, “funding” involves executing a new deed transferring the property from your individual name (or joint names, if married), to your name(s) as trustee(s) of your Trust. The accountholder name on bank accounts, brokerage accounts, stocks/bonds, etc. will need to be changed with the applicable institution to be in the name of your Trust. Your Trust will need to be named as beneficiary on your life insurance policy. Other property may be transferred into the Trust by means of an Assignment. And, keep in mind, that as you purchase new assets, they will need to be titled in the name of the Trust as well. An estate planning attorney can guide you through the funding process and ensure that all necessary steps are taken to properly transfer your assets into your Trust.
If you have questions about or would like assistance funding your existing Trust, or if you would like general estate planning advice, please contact me to schedule an appointment:
The Small Business Forum is an all day forum with workshops, panels, interactive sessions, and dozens of small business resources. This is a convergence of great business leaders, consultants, and experts in their fields, all with the purpose of helping to make the small business community thrive.
I will be presenting a workshop entitled “Small Business Legal Health Checkup” that will cover such topics as: Limited Liability Protection, Contracts, Leases, Intellectual Property, Employment Matters, and Business Succession Planning.
For more information or to register for the forum, go to http://milehighbiz.org/sbf2012.
I hope to see you there!
I saw this online… while it isn’t your ordinary Living Will and lacks important legal provisions, I like the idea of personalizing your Living Will to include a description of what “quality of life” means for you.
I, Maxine, being of sound mind and body, do not wish to be kept alive indefinitely by artificial means. Under no circumstances should my fate be put in the hands of doctors interested in simply running up the bills.
If a reasonable amount of time passes and I fail to ask for at least one of the following:
- glass of wine
- cold beer
- glass of wine
- ice cream
- Starbucks coffee
- Mexican food
- french fries
- glass of wine
- ice cream
It should be presumed that I won’t ever get better. When such a determination is reached, I hereby instruct my appointed person and attending physicians to pull the plug, reel the tubes and call it a day.
Many small business owners are strapped for cash and look for ways to cut costs wherever possible. However, there are some areas where an upfront investment of funds can end up saving you significantly in the long run. Legal services are one such area. Small business owners will find that obtaining legal advice and assistance from a qualified business attorney can save them time, money, and headache in the future. Consider the following case study:
Pete Smith began working for Pro-Plumbers a little over ten years ago. During his time with the company, Pete learned the ins-and-outs of the plumbing profession and became a skilled plumber. Last year, Pete married his high school sweetheart, and now the two are expecting their first child. In order to better support his growing family, Pete made the decision to go out on his own and begin his own plumbing business. “Pete’s Plumbing” opened for business at the beginning of last year. Initially, Pete operated his business as a sole proprietor. However, after having bids for projects rejected time after time (even though he was the low bidder) because he lacked corporate status, Pete made the decision to incorporate his company. On his next free evening, Pete went online to the Colorado Secretary of State website, completed the one page articles of incorporation form, paid the required filing fee, then went off to bed, feeling good that his business was now a corporation. “This incorporating stuff is pretty easy,” Pete thought smugly to himself, “only a fool would have to hire an attorney to do this.”
The next day, Pete submitted a bid on an extensive plumbing project for a new hotel – he filled out the requested paperwork, signed it simply “Pete Smith,” and attached one of the business cards his wife had created for him when he first went out on his own; it read, “Pete’s Plumbing: The Pipe Pro.” A few days later, Pete received word that he had won the bid. Although excited about the project, Pete realized that he didn’t have all of the tools necessary for such a big job. Because his company had only a few hundred dollars in the business account, Pete wrote a check for the majority of the equipment from he and his wife’s joint checking account and put the rest on their personal credit card.
A few weeks later, Pete was working on some pipe on the exterior of the hotel when he received a phone call from his wife telling him that her car had broken down and she needed a ride to the airport to catch her flight. Pete hurriedly finished connecting the final two pieces of pipe, turned the water back on, and left for the evening. In his rush to leave, Pete forgot to check the seal on the two pipes. Slowly water began to leak at the connection site and puddled onto the sidewalk. In the cold weather, the puddle quickly turned to ice. The following morning, as the project foreman was making his rounds to see how the project was progressing, he stepped onto the ice, fell, and broke his neck. After an investigation into the accident revealed the faulty pipe connection, Pete was served with a civil complaint seeking $500,000 in damages. As part of the discovery phase of the lawsuit, Pete was required to turn over all of his corporate documentation and financial records. At trial, the court determined that Pete was not entitled to limited liability protection because he hadn’t adequately perfected his corporation by executing Bylaws and holding the required meetings; because he did not hold his business out to be a corporation by signing all contracts as “Pete Smith, President of Pete’s Plumbing, Inc.” and including the “Inc.” designation on his business cards and other marketing materials; and because he had commingled his own personal funds with those of the business. The Court ruled that the corporate veil should be severed and found Pete personally liable for all of the damages. To come up with the funds to pay the judgment, Pete had to sell his family’s home and drain most of his personal savings.
Had Pete consulted an attorney while forming his business, he would have been made aware of the steps necessary to obtain and maintain limited liability protection. And, as his business grew, Pete’s attorney would have been there, by his side, to answer any questions and to provide guidance to ensure that these requirements were met. Then, when Pete was sued, all he would have stood to lose would have been the business’ assets; he and his family’s personal assets would have been safe.
Don’t make the same mistake Pete did. Whether you are just starting your business or have been in business for years, you should consult with an attorney to ensure that you have taken the necessary steps to protect yourself and your business. If you would like to schedule a complimentary consultation to discuss your business’ legal needs, please contact me by phone at 720.635.3218 or by email at email@example.com.
Many clients have asked me about adding one or more of their children as joint tenants on the deed to their home. They believe that doing this will simplify matters at the time of their death by allowing the property to pass directly to the named child(ren), without having to go through probate. While adding the child to the deed will allow the house to be transferred outside of probate, it can create a number of unexpected and undesirable consequences as well.
- Loss of Control. When your child is added to the deed as a joint tenant, he becomes entitled to certain rights with regard to your home…you are essentially giving him half of your property. Once your child is on the deed, he can decide at any point to end the joint tenancy and sell his interest to a third party – without your knowledge or consent. Worst case scenario – you could end up sharing ownership of your home with a complete stranger.
- Due on Transfer Trigger. Nearly every standard mortgage loan contains a due on sale clause, which provides that the lender can demand immediate repayment of the full outstanding balance on the loan if the borrower is no longer the record owner of the property. Even if you simply add your child to the deed, this can trigger the due on sale clause. Therefore, make sure that, if you do decide to add your child to the deed, you talk to your lender first to ensure that you will not be immediately required to pay off the loan.
- Effect of Child’s Death/Divorce. By adding your child to the deed, you could ultimately end up sharing ownership of your home with an unintended third party – e.g., your child’s spouse or even their ex. If your child were to die, his share of the property could pass to his spouse (or another named beneficiary) in his Last Will or by statute. What happens if that spouse ends up remarrying? You could end up sharing ownership of your home with a virtual stranger. Or, if your child divorces, his ownership interest in the house may be considered marital property and subject to the terms of his divorce settlement, potentially giving your child’s ex an interest in the home.
- Exposure to Creditors. When you transfer partial ownership of your home to your child by adding him to the deed, his creditors may look to the value of his interest in your home to pay his debts. If your son is on the title to your home and is forced to file for bankruptcy, your house could be sold to satisfy his creditors. Typically, homesteads are protected in bankruptcy, but when you transfer an interest to your child who does not live in the home, it loses its homestead character. Likewise, if your child fails to pay his taxes, the government could place a tax lien on your home.
- Capital Gains Tax. When your child is added to the deed, he takes it with the same basis you have in it. This means that, should he decide to sell the home at the time of your death, he would face capital gains tax on the portion he owned prior to your death. For example, assume you bought your home for $100,000. When you added your son to the deed, his 50% interest has a basis of $50,000. At the time of your death, the home has a value of $200,000, making your son’s share worth $100,000. Therefore, upon the sale of the home, he would owe capital gains tax on $50,000. Whereas, if he had inherited the home at the time of your death, he would have been permitted a stepped up basis in the property and, at the time of sale, would not own any capital gains tax.
- Medicaid Penalty. Ordinarily, your residence is considered an exempt asset when calculating whether or not you qualify for Medicaid assistance. However (except in very specific circumstances – e.g., transfer to a disabled child or a transfer who a child who is living in the home to provide your care), if you gift your home or a portion thereof, you may incur up to a penalty of up to 60 months before you can qualify for Medicaid (the precise length of the penalty depends on the value of the gift).
- Gift Tax Implications. Under current law, you are permitted to gift $13,000 per year, per individual tax free (thus, a couple can jointly gift $26,000 per year, per individual). When you add your child to the deed to your house, unless you receive payment of fair market value from the child, it is deemed to be a gift. Consequently, if the value of the interest in your home that your child receives is greater than $26,000, it will be subject to gift tax.
- Unequal Distribution of Estate. It may be your wish to leave your children equal shares of your estate when you die. However, even if your Will directs that your children inherit equal shares, by adding a child to the deed, you may defeat that goal. This is because, by adding a child’s name to the deed, you remove that asset from your estate and no longer control its disposition. Only the child named on the deed will have rights to the home and only he will be entitled to the proceeds from the sale of the home.
For these reasons, I would recommend thinking twice before adding your child to the deed to your home. If you would like to discuss your specific circumstances and to learn about other estate planning strategies that may better achieve your goals, please contact me to schedule your FREE one-hour initial consultation.
Dan was a single guy living at home with his father and working in the family business. When he found out he was going to inherit a fortune when his sickly father died, he decided he needed a wife with whom to share his fortune. One evening at an investment meeting, he spotted the most beautiful woman he had ever seen. Her natural beauty too his breath away. “I may look like just an ordinary man,” he told her, “but in just a few years, my father will die, and I will inherit $20 million.” Impressed, the woman obtained his business card. Three days later, she became his stepmother. Women are so much better at estate planning than men.