Where to keep my documents?

Thirty years ago, the common practice was for attorneys to keep their clients’ original signed wills in their firm’s vault. While this seems like a good idea on the surface (attorneys can keep it safe from prying family members, it won’t get lost in the household paperwork, etc), there were many drawbacks. The space required to maintain a fire-proof vault proved increasingly expensive for law firms, and wills remained lost when the family didn’t know the attorney used for drafting the will (not to mention the questionably ethical behavior of some attorneys in “persuading” families to hire them to represent the estate in probate before turning over the will).

While this trend allows for more transparency in representation, and makes estate planning more cost effective, the onus is now on the client to find a safe storage space. Let’s talk about a few of your options.

Safe-deposit box? No.

Do not put your important documents in a safe-deposit box. While it’s true that they will be safe, they will also be inaccessible. The papers giving authority to someone to open the box are already in the box. Additionally, if you keep powers of attorney in your safe-deposit box, you are limited to accessing those papers during bank hours — and too often, the time you need your documents is not during business hours.

Fire-proof safe or envelope? Yes.

These are now readily available at most office stores or online, reasonably priced, and can be stored in the back of a closet or under a bed. While you could use a locking file cabinet, the protection you get from a fire-proof container is valuable. You can also keep other important papers in it, including passports, social security cards, etc. But wherever you keep it and whatever you decide to keep in it, make sure that your personal representative knows where to find your documents.

Make additional hard copies? Yes.

Your originals are the only ones admissible in court. Unless they can’t be found. So it’s a good idea to keep hard copies of your documents in other places - like your safe-deposit box. Most attorneys will keep a copy of your documents for 3-7 years, even if they don’t keep your original documents. This can be helpful in the event that your originals cannot be found.

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What is Community Property? And why does it matter in estate planning?

Let’s say that you and your spouse have a joint checking account and you both work. You earn $70,000 and your spouse earns $50,000. It all goes into the same pot, so you might logically say something like, “yeah, we both own it, but I contribute more to it.”

But in Washington State, you’d be a little bit wrong. The checking account is owned by both, BUT both of you contribute equally to it.

How?

In Washington, all assets that are acquired during the marriage are owned 50% by one spouse and 50% by the other spouse. Your paycheck for $70,000? Only $35,000 of that is yours. And you own $25,000 of your spouse’s salary. So you are both contributing $60,000 each to your joint account. That’s community property in Washington State, but not all states have community property and not all states define in as a strict 50/50 split either.

Sidebar: Community property states include Washington, Idaho, California, Arizona, New Mexico, Nevada, Texas, Wisconsin, and Louisiana. In Washington and California, community property means a 50/50 split of all assets and debts acquired during the marriage. The other community property states take a softer view and call for “equitable division” of the community property upon divorce. Many of the states without community property, like Florida, New York, and Oregon, divorce laws follow the rules of “equitable distribution.” The main difference here is that equitable doesn’t always mean equal in a divorce; the court aims for what is “fair” over a stricter numerical matching. In Washington, judges pay a lot more attention to whether the grand total at the end is as close to equal as is reasonable (though as any Washington State divorcee will tell you, it is rarely exactly the same value). But this blog isn’t about family law, so…

Why does community property matter for estate planning?

Let’s say you’re married and you die tomorrow intestate (that’s fancy for without a will). All of your community property goes to your spouse automatically. This is great because a) it’s super easy, b) your spouse has an unlimited exemption for state estate taxes on their inheritance from you, and c) your spouse also gets a “step up in basis” for any assets that have appreciated (think real estate, investments, etc — things that are worth more today than when you first bought them) which means your spouse will pay less capital gains tax if/when those assets are sold. It’s a pretty awesome benefit for your spouse, who now has to figure out how to live with out you.

Sidebar: Community Property Agreements are effective because of these spousal benefits. Basically, in a Community Property Agreement, you and your spouse agree that all of your current and future assets will be community property upon the death of the first spouse, and that all community property will pass to the surviving spouse. It’s one way to avoid probate for the spouse who dies first, BUT they are currently overpowered in my opinion, and infrequently used today. First, even during marriage, you can acquire separate property (WHAT?!? I know, keep reading) and you may not want it to become community property for a variety of reasons. Second, a community property agreement will override contrary designations in wills, joint tenancy designations and so forth. And third, probate is generally not a big deal for 99% of people — it’s not expensive in Washington, we have nonintervention powers so the courts basically keep out of it, and while it is a public record, most people would rather watch Game of Thrones than the wills of the recently deceased. /End rant

What is separate property and how is it different?

Separate property is any assets or debt that you owned before you got married, or that you received as a gift or an inheritance. In divorce, generally separate property stays separate, but it’s totally different in estate planning. Let’s take the same circumstances as above, but this time, you bought a house before you got married (or inherited a house from your Great Aunt Agnes while you were married). That house is separate property, so it does NOT automatically go to your spouse. The good news is that your spouse still has the unlimited exemption for state estate taxes and the step up in basis. But it gets complicated in terms of what exactly passes to your spouse (just look at RCW 11.04.015). If you have two kids, then the house goes 50% to your spouse and 25% to each kid. If you don’t have kids, then the house goes 75% to your spouse and 25% to your surviving parents (to split between them equally). Doesn’t that sound like fun?

Wait. It gets more complicated.

Separate property can become community property (even without signing a community property agreement). If separate property becomes “co-mingled” with community property, it will become community property. And unfortunately, whether property is “co-mingled” depends heavily on the specific facts of the situation. For example, you buy a house and then get married. The house is separate property. Then you use your paycheck (community property) to pay the mortgage (separate property). Then your spouse uses some of his inheritance from his mother’s death (his separate property) to renovate the kitchen on your (separate property) house. On the weekends, you both fix up the house — painting, minor repairs, general maintenance. At some point, this house will become community property. But at which point? Oy. It gets complicated — and this is where a clear estate plan can really help.

Sidebar: I wasn’t done ranting about community property agreements. Here’s one place where they can have unintended consequences. Let’s say that your parents leave their house to you and your brother jointly. You are now joint tenants in common with a right of survivorship, which means that when one of your dies, your half passes to the surviving sibling — and all this is set up in your parents’ wills. Except your brother executed a community property agreement with his wife. Now when he dies, all his property — including his joint tenancy with your house — become her property, and now you are joint tenants in common with his wife until one of you dies. Which means a house that would’ve been yours to pass to your kids could now become hers and pass to her kids. And maybe you are okay with that, and maybe you aren’t — but what very likely is that it is not what your parents’ intended. And this is basically what happened in Lyon v. Lyon, 100 Wn.2d 409, 670 P.2d 272 (1983), so you can read it for yourself. /End rant. Again.

Recap:

Community property is all of the assets and liabilities acquired during a marriage.

Separate property is all of the assets and liabilities acquired before a marriage, or received as a gift or inheritance during a marriage.

It matters for estate planning because community property passes to the surviving spouse automatically, even without a will, whereas separate property does not (which is why a will is so useful).

And Anna generally doesn’t like community property agreements. They are overpowered, can have unintended consequences if the people executing them don’t fully understand how they work, and are generally unnecessary since we already have nonintervention powers for probate, probates are usually inexpensive in Washington State, and privacy can be maintained through other devices when someone really wants to keep their affairs private. I’m not saying never use them — just be very sure that you know what you are doing and why you are doing it before signing one.

5 Common Estate Planning Myths for Unmarried People without Kids

When I talk with people who aren’t married and don’t have kids, estate planning is usually the furthest things from their minds. And yet, in some ways, it is even more important for these individuals to have an estate plan. Here are the five of the biggest myths for people in this situation.

1. I don’t own a home, so I don’t need a will.

Wrong. Many people presume that because they don’t have one large asset, they don’t have anything of value to pass along. What many people forget is that they have other investments — retirement accounts, savings bonds, stock or mutual funds, etc. While it may not be millions, it is worth thinking about what you want to happen to those assets after you pass. Do you have a nieces and nephews that you want to see attend college? Do you have charities or organizations that you want to support with bequests from your estate? Do you have a sibling with special needs who could use some extra care through a trust for their benefit? The only way to insure that your assets are used to support the people and organizations that you love is through estate planning.

2. So I have a few assets, but it’s still not much. I’m sure my extended family can figure out something fair.

The truth is that everyone has an automatic estate plan provided by the government (See RCW 11.04.015). If you die without a will, your assets will be distributed to your next of kin according to the laws of intestacy. Intestate means “without a will.” And it gets complicated pretty quickly. For someone who is not married and does not have children, your estate goes to your parents. If your parents are no longer living, then it goes to your siblings. If you don’t have any siblings, then it goes to your parents’ siblings (your aunts and uncles), and then to their kids (your cousins), and so forth. What if you come from a blended family? Well, your half-siblings count as siblings, but your step-siblings probably do not unless they were legally adopted (same deal for step-parents). Eek.

But let’s keep going! Let’s say that you are survived only by your sister, and by your brother’s two kids. Guess what? Your estate won’t be divided into three equal parts. Rather, your sister will get 50%, and your niece and nephew will get 25% each (equally splitting the 50% that would’ve gone to your brother). Complicated, right?

While the division provided for under the statute may be “fair,” it may not be equitable and it can cause a fighting and hurt feelings for your family. Now think: is this really what you want to happen with the funds in your retirement account if you don’t get to use them?

3. I get it. I need a will. But I don’t need a fancy “estate plan.”

A basic estate plan consists of 4 documents: a will, a power of attorney for health care decisions, a power of attorney for finances, and an advanced directive.

The power of attorney grants someone the ability to make decisions on your behalf if you are incapacitated (or, for finances, unavailable). These are two of the most important documents that every single person needs. For married couples, the default is that your spouse will make health care decisions for you if you are incapacitated. But for unmarried people, the power passes to your adult children, then your parents (if alive), then your adult siblings, and then their kids, and so forth. Are those the people you really want making these kinds of decisions for you? Or would you rather pick a dear friend?

Similarly, a power of attorney for finances allows someone you trust to access your financial accounts if you are incapacitated (for example, in a medically-induced coma following a car accident) or unavailable (for example, when your wallet and passport are stolen while you’re traveling in Brazil). This person can do things like wire money to you while you are abroad, or simply pay your rent and bills so your apartment is still home when you are released from the hospital. The biggest benefit here is that, unlike a cosigner, the person with power of attorney for finances won’t get mixed in to your credit ever. You are totally separate, but with access in case of an emergency.

Lastly, your advance directive is a statement about which end-of-life treatments you do or do not want. While your power of attorney for health care is the one who consents or revokes consent to treatment, this document is a guide to help them follow what you would want. It is a gift for the people who love you, to spare them from trying to figure out what you would’ve wanted.

4. That all makes sense… for someone who’s old! I just turned 18! I don’t need to think this yet.

When I left home for college, my mom cosigned on my first checking account. At the time, it seemed prudent — she could check-in on my finances and help me move funds around more easily. In retrospect, this was a terrible idea. What if I had signed up for a bunch of credit cards and racked up a lot of debt? She (and my father) could’ve been on the hook for that debt too, and it could’ve affected their credit score. Luckily, I didn’t, but I will never cosign on my kids’ bank accounts so long as a power of attorney for finances is available.

Similarly, while we don’t like to think about it, accidents happen in college. In fact, the leading cause of death for people ages 15-24 in 2017 was unintentional injury (for example, car crashes, poisoning, drowning, etc). While a person in this age range may not have substantial assets, it is a chance for him or her to articulate what should happen with those assets, as well as explaining end-of-life preferences.

5. I think I will do this… but I don’t think I need an attorney to help me.

This one is tricky — because there are a lot of things you can do by yourself using self-help resources available on the internet. The American Bar Association recommends hiring an attorney if any of the following circumstances are true for you:
1. Complications with previous marriages, divorce, or blended families.
2. You (or your spouse or children) have international citizenship.
3. You own or have interest in property in another state.
4. Your assets exceed a certain amount (this varies state-to-state and changes each year. In Washington, right now, it's $2.129 million, and that includes real estate and life insurance). 
5. You (or your spouse) are getting married and could have complications with trusts, property ownership, or guardianship for your minor children.

But this is a list of estate planning mistakes for unmarried people without kids — and most of those reasons won’t apply. So why is it a mistake to do it yourself?

Well… because you probably won’t do it.

According to a study reported on by the AARP, 6 out of 10 adults in the United State do not have an estate plan. If you’re under the age of 54, that percentage is even higher (72% of people over the age of 73 and 58% of those between 54-73 have an estate plan).

Every estate planning attorney has a story or 20 about the almost-client who decided to write their own will. When we run into them years later, the first thing they say is “I still haven’t written my will.” Yes, we know. Most people do not write their own will.

So if you are going to write your own, try giving yourself a deadline by when you will write it or hire an attorney to help you. The peace of mind and feeling of accomplishment that you will have when you are holding your signed documents is worth both the effort and the expense.

Estate Planning: Which documents do you need?

“I want a will. What are all these other documents?”

A good estate plan includes 4 basic documents: a will, a power of attorney for health care, a power of attorney for finances, and an advanced directive. For families with minor children, it also includes an appointment of temporary guardianship, and the will should (at minimum) include a testamentary minor trust. For families with assets above the Washington State Estate Tax Exemption, or families with special needs children or adults, it may include a special needs trust, revocable living trust or other tax-planning documents.

Will

This is what most people imagine when they first first come to me. It is the document that names who your beneficiaries are, details what you want to happen with your property, and nominates your personal representative (sometimes referred to as an executor of your estate). For families with minor children, it often includes the creation of a trust benefiting the children and naming a trustee, and the appointment of permanent guardians. This document comes into effect after you pass away. If you die without a will, your property will pass to your heirs through intestate succession — which may not divide your property in the way that you would’ve wanted.

You must sign your will in the presence of two uninterested people, who can testify that you are of sound mind and judgment in your intent to create your will. Often, a notary public will certify the signatures of the two witnesses.

Power of Attorney for Health Care

This document comes into effect when you are alive but incapacitated. In it, you can name the person you want to make health care decisions on your behalf if you are unable to make them yourself. This document needs to be notarized, but not witnessed, for a hospital to accept it.

Power of Attorney for Finances

While the best practice is to list your spouse on all of your financial accounts, sometimes we forget or simply run out of time. This document allows the person you name to have access to your financial accounts — whether trusts, bank accounts, credit accounts, etc. It can either take effect if you are incapacitated, or it can take effect immediately upon signing. I always recommend that it take effect immediately, as it can take time to get a doctor’s statement of incapacitation and the mortgage still needs to be paid on time. This document needs to be notarized, but not witnessed. In addition, while not strictly legal, many banks will refuse to honor a Power of Attorney that is not recent, under the assumption that it could’ve been revoked in the intervening years. To avoid hassle, I recommend resigning this document every 3-5 years.

Advanced Directive

This is the document that details what kinds of medical care you would like to received at the end of your life. The provisions do not take effect unless you are incapacitated and your condition is terminal, with little likelihood that you will survive without life support or other significant medical interventions. We go line-by-line through the conditions that would need to be present for the document to take effective, and line-by-line through the kinds of treatments you would want to refuse should those conditions be present. For it to be effective, you must sign this document in the presence of witnesses who can affirm that you are of sound mind and judgment in making these decisions. This document is one of the best gifts you can give your loved ones — it is hard to talk about end of life issues, and the people who love you want to honor and respect your wishes. This is one way to make your desires known and understood.

Trusts

For families with assets above the Washington State Estate Tax Exemption, a trust can be a good vehicle for ensure that assets are used for the benefit of your children, and not paid as tax to the state. For most of my clients, the vast majority of assets are community property, which means they automatically transfer to the surviving spouse upon death. There is an unlimited tax exemption for property that transfers to your spouse. However, the tax kicks in when that property transfers to your children. By transferring the first spouse’s property into a trust for the benefit of the children and administered by the surviving spouse, those assets pass directly to the children under the exemption limit, and are not included in the estate when the surviving spouse passes. This is a basic testamentary trust, which is written into the will for most families with minor children.

However, if your assets are above the tax exemption, it may be beneficial to create a trust now, rather than waiting for the first spouse to pass. The biggest factor in making this determination is whether your family needs the financial flexibility to use those fund right now, or whether it would work to lock the property into a trust. The more certainty in your financial situation, and the greater your total assets, the more viable a living trust becomes.

Estate Planning in the News

Estate planning is a common new year’s resolution. If 2019 is the year for you, let me know! If you’re still on the fence, check out these article about the importance of putting a plan in place now, even though you may not have a lot of assets or any children. Estate planning is about making life easier for the people who love you when the inevitable happens.

• Estate Planning Checklist from The Motley Fool

• The Most Valuable Gift You Can Give: A Good Estate Plan by Forbes

For more information, schedule an appointment today

Estate Planning in the News

It’s fun to read about estate planning for the rich and famous! Here are some recent articles that were fun and informative!

• The Washington Post: You’ve Won the Mega-Millions Jackpot! Time to Hide.

• Forbes: Where not to die in 2018

• The Seattle Times: Paul Allen’s death leaves many questions around what’s likely the largest estate in Washington history

• Forbes: Aretha Franklin Left An $80 Million Estate. And No Will. Here's Why That Matters To You

Interested in creating or revising your estate plan? Make an appointment today!