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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Business Entities 101

As your side hustle starts to grow, it is important understand how the structure of your business affects you personally. It’s not just about the bonus income — it’s about how you pay taxes and whether you are personally liable for anything that goes wrong. There are benefits and drawbacks to each type of entity, so let’s talk about them.

There are four basic types of business structures:

1. Sole proprietorship

2. Partnership

3. Limited Liability

4. Corporation

A sole proprietorship is the default setting. If you start selling scarves that you knit out of your home, then you have a sole proprietorship — even if your business doesn’t have a name. The income from your sales should be reported on your income tax return, and the costs of doing business (for example, the cost of the yarn and needles) are deducted. This is as simple as it gets. You don’t even need to register with the State of Washington. But — and this is a big drawback — you are personally liable if something goes wrong. If someone decides to sue you, your loss is not limited to the income and expensive of your scarves. Rather, everything you own — your house, your car, your bank accounts, even if joint with your spouse — are all available to satisfy the person you have wronged.

Partnerships are very similar — two or more people (usually not married to each other — the only person who can co-own a sole proprietorship is a married couple) agree to contribute money, skills, or labor to a business, and each partner shares the profits, loss, and management of the business. Like a sole proprietor, however, each partner is personally liable for any debts. There is also no requirement to file with the Washington State Secretary of State.

There is a partnership variant called a Limited Partnership, where the agreement between the partners also limits their liability to the value of their investment. This kind of partnership must register with the Washington State Secretary of State.

Limited Liability organizations can include Limited Liability Partnerships (LLP) and Limited Liability Companies (LLC). For businesses requiring licensing, such as doctors and lawyers, the Professional Limited Liability Company/Partnership is required (PLLC, for example). These entities protect the investors from neglience on the part of their partners, and additionally limit liability to the value of their investment. All of them must file with the Washington State Secretary of State. Partnerships will always require at least two owners, but an LLC can be owned by one or more people, which makes it an ideal alternative to sole proprietorships — so long as the business is not banking or insurance (which cannot be LLCs). Limited Liability Companies may elect whether to be taxed as a pass-through entity (like a sole proprietor) or like a corporation (and you should talk to your accountant about which tax structure you want, as it depends on your current and projected revenue and expenses).

Corporations are complex business structures. Legally, they exist separate from the people who own them, and they are run by a board of directors on behalf of the owners (who are called shareholders). Corporations file their own taxes, separate from the individuals who own the corporation, and the owners are almost never held responsible for the liabilities and debts of the corporation. You must file with the Washington State Secretary of State to form a corporation.

Nonprofit corporations are just that — corporations. The first step in seeking exempt status is to form a corporation with a nonprofit purpose (as opposed to a for-profit purpose). They are structured in the same way: a board of directors runs the organization on behalf of the… well, public (or membership). Nonprofits are not owned by shareholders, but are considered to be “owned” either by the public or by members of the organization.

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.