Thursday Q&A: Estate Planning & Elder Law – July 16, 2020

Each week, estate planning attorney Bill Henry spends time educating the community about their estate planning options.

Thursday Q&A is dedicated to answering your questions. See what Coloradans asked on July 16, 2020. (A transcript of the event is available below.)

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Bill Henry here with Robinson and Henry. First I want to address from last week. Sounds like we had a lot of technical issues so I apologize for that. Tech team assures me that we will not have the same problem today. So I thought this week what I would do is go ahead and cover some of the ground that we covered last time and then if we have any other additional questions from there, I am more than happy to answer those as well. I’m Bill Henry, I am an estate planning attorney with Robinson and Henry every Thursday I answer your questions and as always, this isn’t legal advice, just general advice. If you’ve got some of specific, always talk to an attorney. All right, let’s jump right in. So now these are some questions, like I mentioned, I went over last week, so I apologize if I’m treading or retreading common ground.

How do we handle time shares in an estate plan?

First one has to do with timeshares. And I think it’s a great question because it comes up so often. It’s “How do we handle timeshares in an estate plan?” Well, to really address that, the first we have to decide is, “Do you want the timeshare?” And with timeshares, there’s obviously some timeshares that are great and then other times shares that are not so great. And if you end up with one not so great, you may be more concerned with, “How do I not end up having that timeshare be transferred to my heirs?” And one time a question I always get is, “Well, if I give a timeshare to my heirs, or if I’m a beneficiary and I receive a timeshare, does that make me liable for it?” And the answer to that is no. So just because you inherit something doesn’t mean you are now liable for it, but of course the timeshare is real estate. So to the extent that the company doesn’t get paid or potentially the company can demand that you get entitled to that timeshare, they can ultimately foreclose on the timeshare. So if it’s not paid after you receive it, ultimately there will be a foreclosure action. Just so you know, I personally have a lot of experience with these because I inherited a timeshare from my grandfather who happened to have the exact same name as me causing massive, massive confusion as to who owned it. But nevertheless, I did not own it, did not want it, wasn’t something that I could use. So you can put a timeshare into your estate plan just as usual, but at the same time, if you ignore it, or if you’d say, “Well, I’m not gonna put it into my trust or do anything else like that.” Then your beneficiaries do not have to be saddled with that HOA fee either. All right.

How many contingency errors should I have?

So next question. “How many contingency errors should I have?” And I guess what we’re really talking about there is “How many backups?” So let’s take a typical estate plan I say, “Give all in my will. I might say, Give everything to my spouse. And then upon my spouse’s death, I want it to go to my kids.” So the question would be, “Do we need more beyond that? Or is that sufficient?” The way most estate plans are drafted, and this is very particular to the language that’s actually in the estate plan, they’re drafted in such a way that it says by rights of representation or per stirpes. And all that saying is that, “Hey, if somebody I’m gonna give this property to, whether it’s my house or my other assets and they predecease me, but they have kids or they have descendants, I want it to go to their descendants. So just a quick example there, if I’m married and I have two children and let’s just say, my spouse pre-deceased me, and one of my children pre-deceased me, but they have two kids of their own, where should my property go if I say to my children? Well, in that case, if my one child is alive, then that child gets 50% and then for the child that predeceased me, his children, my grandchildren, would split his share 25% a piece. So there’s a little bit of nuance to that, but generally speaking, that’s how it goes.

What are joint wills?

All right, joint wills. This is a good one, I wanna start this up by telling you that I personally, as an attorney, do not do joint wills. That doesn’t mean that they can’t be done. But I find that- I’ll kind of get into a few of those, but let’s start with, well, “What is a joint will? A joint will, is typically used to create a contract between, normally spouses that say, “Hey, you can have all of our property, but after you die, I want it to go to our beneficiaries that we listed in this joint will.” The idea is great, right? Cause it’s my concern as well. If I die first, you can go change your will; you’ve got all the assets so now I don’t know for sure that my assets are gonna go where I want them to after a spouse passes. So the idea is really a good one, but the problem is in terms of the execution, what oftentimes happens is that most people don’t realize that so many of their assets are transferring by non-probate transfer or put more simply, they don’t go through the will, the will is never used. Lemme give you an example: Let’s say I’ve got a stock account, and on that stock account, I say, “Give a 100% to my spouse, and if my spouse predeceases me, give it equally to my kids, Mary and Harry.” Now over in my will I say the exact same thing, but I do this sort of joint will, or what’s called a contractual will and I’m trying to make it so that way my spouse can’t change things. So she gets 100%, but of course, after she passes, I want it to go to my kids, Harry and Mary. Well, that works maybe for the assets that are going through the will, but as it concerns my stock account, that is not a probate transfer, so it doesn’t matter what I said in my will. My spouse in that example is just gonna get free and unfettered access of my entire stock account. Another way just to make it clear would be, let’s say in my will I say, “Give it to my brother, all my assets to my brother,” and in my stock account, I say, “Give it to my sister.” Well, who gets my stock account? Does my brother, who’s listed in my will get all my assets or alternatively, is it my sister that gets the stock account because she’s listed as the beneficiary? Well, the answer is my sister. So whoever’s listed out in that beneficiary is who gets the property and that’s because it didn’t transfer via a probate transfer. In other words, it never went through the will so to speak. A little confusing there, joint will’s, like I said, I don’t do it, so what would be the solution that I would use, in that case would be a trust. That’s really the classic example for a trust. We think about the Brady bunch for a second. Husband and wife, they each have their own kids from a prior marriage. Well, if Mr. Brady dies first, he wants his spouse to have access to the money, but he wants to be ensured that all of these assets are going to go to his kids after her death. That would be a trust. So we would create a trust that would say that Mrs. Brady gets the assets for life, and maybe she can invade the principle, the kind of money that’s in the trust for her health, education, means and support, but then upon her death, it goes back over to the kids. So that’s what I would do in that case. I would tend towards a trust that doesn’t mean that joint rules are wrong or contractual rules are wrong. It’s just not how I would approach the problem.

Tell me about joint tendency.

Let’s see here, Joint Tenancy. Again, I’m kind of retreading ground from last time. This is just to make sure that whatever I started freezing that I get these questions answered right. So joint tenancy. Question is, if we’re talking about joint tenancy with real estate, is that a good way to transfer property upon death? What are the pros and the cons of that? So why do we put things in joint tenancy? Generally speaking as it concerns estate planning, is we wanna make it easy for the person that dies or I should say for the survivor to inherit the property without having to go through probate. So it typically uses a probate avoidance tool. I mean, there’s other benefits to it in that if I have two people listed as owners on a brokerage account, then they can both of course access the brokerage account. In other words, they can call up and talk to the broker. So is it a good idea? You know, there’s nothing wrong with it, it’s used all the time. It’s really just a way to avoid probate. I’ll tell you between spouses, it really doesn’t come up and there’s not too many issues within. If you’re trying to do some sort of advanced tax plan and because your estate is so large, well then there it can cause problems. But putting that aside, it’s a great way to avoid probate. So if that’s your only goal, if your other goals are say, “I want to ensure,” like we were just talking about a moment ago, “that my step-kids,” or excuse me, “My kids get the property after my spouse passes.” Well then joint tenancy is not gonna accomplish that goal. But if our only goal is probate avoidance, then yeah, why not? I don’t see any issues with doing it. Now that’s with your spouse. When we decide to put our kids on, it changes the entire dynamic substantially. Because if we put our kids on or somebody else or our boyfriend, girlfriend on a child, well now all of a sudden all of our kids’ problems become our problems. So lemme give you an example I often use. Let’s say my daughter she’s up at CU Boulder, and she’s a straight A student, but she loves to party. And she’s at a party and then she comes out she’s been drinking, she gets to an accident and she hurts somebody. Well, now that person that got hurt can sue her, and if she doesn’t have enough insurance, they’re gonna say, well, “What other assets does she have?” Well, if I put her on my house, on the title to it, guess what? She owns a portion of my house, so now I can lose my house. Likewise, she can go to an attorney and get what’s called a partition action, so she can actually cause my house to be sold out from under me. So there’s a lot of bad things. And even if none of that comes to pass, the tax consequence to her can be a lot worse. So if I give her something at death, she gets what’s called a “Step-up in basis.” and that simply means that it’s as if she bought it at the value on the day that I died. So if she sells the next day, she’s not gonna have tax. On the other hand, if I give it to her, she gets what’s called a carryover basis. And what that means is it’s as if she bought it for what I bought it for. And so the number of years goes by and that property appreciates a lot, well, now all of a sudden she has a tax consequences as well. So if we’re trying to solve this problem where I want to avoid probate, and that’s really my goal, I have no other goals than avoiding probate, what are my options? Well, you can put into a trust, there’s nothing wrong with that, a lot of people do that. Or alternatively, you can use what’s called a beneficiary’s deed. That deed does not transfer ownership to, in my example, my daughter, so it doesn’t transfer ownership. And instead of it, it says, If I own this property, this deed hasn’t been revoked, then it’s gonna go to whomever I said. So that might be an easy way to avoid probate if you have never heard of one.

What is the difference between medical and financial powers of attorney?

All right, let’s see here. This is a pretty common one that I get. There was another one that’s posted on our QA, something similar to this. I think it might’ve gone over it last week or the week before, but let’s talk about it again, which is, if I have a medical power of attorney and I… So I’ve got this medical power of attorney over my spouse in this example, and she’s got dementia, why is it that I can’t get into her bank accounts? Or why won’t they let me make financial decisions for her? Well, the answer is simply is because you have a medical power of attorney, it doesn’t authorize you to go and make decisions for your spouse. So power of attorney is something we’ll use during life, it’s something that the principal, the one who’s signing the document signs, to let somebody else do things for them. It doesn’t take away their rights until they become incapacitated then it just really allows somebody else to make decisions for you. So let me back that up a second. So what I mean by that is a power of attorney, we can think of it like an employer, employee relationship. I’m allowing someone else to do stuff for me, and it’s durable, meaning that it continues on after I, the principal, the one that made the power of attorney, can no longer make decisions. So why is it then that a medical power of attorney can’t make financial decisions. It’s just because the rights that were granted to the agent, they’re not in there to allow that agent to make financial decisions. So what’s the solution? Well, the reason we do powers of attorney is really ease of administration and that avoids… A medical power of attorney generally avoids a guardianship; that’s we gotta go to court and say, “Hey, this person can’t make decisions for themselves so I need to make ’em for them, that their body, where they’re gonna go, what medical treatments they’re gonna have.” And on the financial side, it would be a conservatorship, meaning that I need to be able to make financial decisions for this person, and court I want you to give me that authority. That’s a conservatorship. Well conservatorships and guardianships or court actions are more expensive, it can be a lot more complicated, there’s reporting to the court. So oftentimes people want to avoid that, we do that by using powers of attorney, that’s the medical power of attorney and financial power of attorney.

What’s a pour-over will?

Okay. Oh, what’s a pour-over will? That’s a great question. So what is a pour-over will? It’s a will, it is just like any other will, but what it’s referring to is what happens in the rules of that will, and it says, “pour-over my assets,” normally “into a trust.” So it’s used with trust-based planning in almost all people with revocable living trust will often or should often have as well a will. That’s what’s called a pour-over will. So it says, “Upon my death, if something’s not in my trust, because I didn’t change the title and put it into my trust, then hey personal representative,” which is what we call an executor in Colorado, “I want you to take that property and put it into the trust.” Let me give you an example on that. Let’s say I’ve got a house- Well, and then I put this trust, I change the title of it, from my name, my house, from my name and I change it to the name of the trust. I have now funded the trust with my house. So upon my death, that house would never go through probate because the trust owns it. On the other hand, let’s say, after I created my trust, several years later, I go off and I buy a vacation home in Florida, but I never move it into the trust and it’s just in my name, then I die. Well, what happens? Well, my one house in Colorado is in the trust already it does not need to go through a probate. On the other hand, the house in Florida would need to go through probate, and then the question is, well, where’s it gonna go? That’s what the pour-over will is for. The pour-over will is simply saying that, whatever is left, whatever’s going through probate I want you to take it and put it back into the trust for me. So that’s what a pour over will is.

When should I set up a Medicaid trust?

Let’s see here. At what point should someone set up a Medicaid trust? So let’s talk about “What is the purpose of a Medicaid trust?” So people are setting up… They set up Medicaid trust because what they’re trying to do is help the qualification process for applying for Medicaid. The issue with setting a Medicaid trust that you’ll find is, well, it’s a completed gift over into an irrevocable trust, meaning a trust you can’t change. You cannot be a beneficiary of that trust. So you could set one up any time that you want, you can move your assets over into it, but it will continue to be counted against you unless you have no way to access those funds, right. So practically speaking, you cannot get to those funds that you transferred into that trust, If you can, they’re counted. So it is like as if you’re giving it away, all your money to somebody else or whatever you would have put in the trust. So the answer to the question. “When should I set one up?” When you no longer need those assets you might just as well put them into, or give them away to someone else, like your kids. That’s the point whenever most people would say “Yes, this makes sense.” And when you dig into what a Medicaid trust really is, most people are not gonna want to part with their assets, but you have to have a bigger question beyond that is, “Do I even want to try to qualify for Medicaid? Is that even an appropriate something appropriate for me?” And the answer may or may not be yes. If, for example, you need a… you’re like, “Well, I’m gonna run out of money, but at the same time, I need to pay for all these things that Medicaid will cover.” Well, maybe then making it completely a gift would make sense. Other times it just simply works. So I think it’s a really in-depth question on… There’s a lot of misinformation out there. So make sure you talk with somebody that’s qualified that can really help you through that process. It probably don’t make sense for the vast majority of people, this is what I would tell you. Okay. Let’s see what else we have. Let’s see here, anyone else that I think we should cover?

How is a reverse mortgage handled in my estate plan?

Let’s do one more on Reverse Mortgages, I talked about that one last week as well. So the question is, “How does a Reverse Mortgage get handled in my estate plan?” Reverse Mortgages over time have changed so there’s a lot of bad press out there. I’m not a Reverse Mortgage specialist nor broker. So you’d have to go to a real estate or excuse me, a mortgage broker to really handle that, that specializes in Reverse Mortgages. But from an estate planning standpoint, they’re no different than any other house. And that’s because Reverse Mortgages these days are just a loan against a house that doesn’t get repaid until you die or sell the house, that’s how most of them are set up. So for example, let’s say I get a Reverse Mortgage on my house, my house is worth $300,000, but I never take any money out of the mortgage, well, there’s still $300,000 of equity. It just goes to my kids, I never didn’t own that house in Colorado, I still own that. On the other hand, let’s say I get this Reverse Mortgage, my house is worth $300,000, and over the course of my lifetime, I withdraw $100,000 of benefits from the Reverse Mortgage. Now I die. Well, the Reverse Mortgage is gonna want their $100,000 but the $200,000 that’s left, that’s really for your heirs and to whomever you decided to have your estate. So wherever your money and property is supposed to go, through your trust or your will, however else you set that up, that’s where it goes.

Again, I’m Bill Henry with Robinson and Henry. I believe our connection was a lot better this time so great job to the tech support folks on making this all work. If you’ve got any questions, as always feel free to email them over to me, I will answer them every Thursday. If you have something that’s very, very specific, I always recommend that you talk with an attorney on that. Until next time, have a fantastic week. Next weekend I’ll be back, and the weekend after that Lucas Frei, who is a tax attorney and estate planning attorney at the firm will be filling in for me. And I will talk to you.