Probate Alternatives: Totten Trusts and Pay on Death Accounts

One issue which comes up often is whether certain accounts must go through probate – or not. Stripping away everything else, a probate is a lawsuit which resolves the ownership of property. If you do not appoint an owner of your property when you pass away, a judge will do it. Probate has some benefits, but it is also a costly and time-consuming process. Sometimes it is simply unavoidable.

Many misunderstand pay-on-death accounts and so-called Totten Trusts. Both are similar: Both allow the owner to designate a beneficiary, upon death. The beneficiary (such as, a child) does not have a present right to withdraw money from the account. However, upon the account owner’s death, the beneficiary can go to the bank, or institution, and claim the account by presenting a death certificate.

This type of account avoids probate because ownership immediately vests upon the original account-owner’s death. There is no need for court intervention unless the beneficiary dies first (which of course can happen).

So, this is one way to avoid a probate proceeding.  But there is a BIG difference between a pay-on-death account and joint tenancy account, when you place your intended beneficiary on the account as a co-owner. It might seem the same, but the legal effect of a joint tenancy account is very different.  I will deal with that issue in a later post.

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Life Without a Cellphone

I haven’t achieved living life without electronics – although I sometimes leave it at home on purpose (and in the provess, irritating some family members).  But this video is worth some thought and a few minutes of time:

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Have a Great Holiday







Merry Christmas to all!

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Who Owns What? Titling Your Assets

Asset titling is a misunderstood but important part of estate planning. It is easy to believe that the so-called experts like banks, investment companies and escrow companies automatically place property into the “proper” name, but that is not always the case. What is “proper” may or may not be good for your particular situation.

The question is: Who owns the property?  If a name is added to an existing bank account, you are not simply adding a name, but you are gifting property to the other person (for instance, if you add your child’s name to the account).  If so, your child may now access the funds.  However, those funds may also now be levied upon by your child’s creditors.

Here is a brief summary of some of the most common methods of holding property in California, and some of the main advantages and disadvantages of each. This list is a rough guide and is not comprehensive:

Sole ownership. You have sole title to the property. It is yours and no one else’s.

  • Advantages: The title is completely in your name, and there is no co-owner to worry about. There is no co-owner to take your money.
  • Disadvantages: Unless there is a beneficiary designation, assets in your own name may need to pass through your probate estate after your death. However, if the total relevant assets of the deceased are less than $150,000, California’s small estate procedure may apply — avoiding a full blown probate proceeding.

(California does not yet allow transferring real property through a beneficiary transfer. However, that may change: There is legislation pending before the California legislature which would authorize a “transfer on death” deed.)

Joint Tenancy with Right of Survivorship.  This is a form of joint ownership. Assets are jointly owned, with each joint tenant having a property interest which survives the other tenants. Upon the death of one of the owners, ownership transfers to the other joint owner(s) by operation of law. If there are only two joint owners, the property is fully owned by the survivor.

  • Advantages: This is a “probate alternative” at death, with the property automatically transferring to the other owner(s). “Joint tenancy” owners do not need to be related to each other.
  • Disadvantages: If real property is involved, you might still have to hire an attorney to take the deceased joint tenant off of title. Also, as indicated before, a joint tenancy account allows the other joint tenants access to account funds. Your joint tenant’s creditors may now be able to reach the account even though it is all “your” money!

Community Property with Right of Survivorship.  This method of ownership is like joint tenancy with right of survivorship, but is only available between spouses and domestic partners.

  • Advantages: Like joint tenancy, the transfer of property is automatic upon the first death. There are also some tax advantages to ownership held as community property as compared to property held in joint tenancy.
  • Disadvantages: The disadvantages are very similar to property held in joint tenancy. This is also worth mentioning: Transferring separate property into community property after marriage is, in effect, a gift to your spouse. Once you do this your spouse arguably owns half of the account, asset, etc. So if you divorce, you may have the unhappy surprise of handing over half of that asset.

Revocable Trust.  This is a very flexible method of ownership, but make sure that the property is in the name of the trust.  Many people have trusts, but sometimes their property – including real estate – is never transferred into the trust. This defeats the purpose of having a trust.

  • Advantages: The property is “owned” by the trust, and the trust’s terms control the distribution.  If the trust is revocable, the settlor(s) (i.e., creator(s) of the trust) may make changes in the trust without revising the title of the account.
  • Disadvantages: There are few disadvantages.  However, the integrity and diligence of the trustee is supremely important.  You should never appoint an untrustworthy person as your trustee.

Finally, periodically review your bank and other accounts to make sure that they are properly titled, and to make sure that your beneficiary designations are current.

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Financial and Estate Planning for Possible Dementia

I remember the doctor’s appointment I made for my mother when I first began questioning whether she had dementia. I sat and listened to his questions testing her cognitive loss.  The questions, which I later discovered were fairly standard, were like: “Who is the President?” and “what year is it?” etc.

(I don’t recall her answer regarding the year, but I do remember that she could not recall President Obama’s name. However, she did say: “Well, I know that I don’t like him much”). Unfortunately, her answers pretty clearly established that she had dementia.

According to an April 24, 2015 New York Times article, answers to such standardized questions are less revealing than asking the elderly to do math-related problems, like counting backwards from “100” by the number “7.” The fact that math and abstract concepts are the “first to go” is not good news from a financial and estate planning perspective. It means that an elder may be susceptible to financial abuse well before she is diagnosed with dementia. It also shows that the inability to handle finances may be the very first sign of early dementia. The elder may be a prime victim for abuse during this early period. Here is a quote from the article:

The signs, while perhaps not surprising, are subtle, making them easy to miss: It may become more difficult for people to identify the risks in a particular investment, and they may focus too much on the benefits. Completing various tasks on a financial to-do list may start to take longer, such as preparing bills for the mail. Everyday math may become more laborious or prone to errors, whether that’s figuring out a tip in a restaurant or doing a calculation that requires two steps. Financial concepts, like medical deductibles and minimum balances required in savings accounts, may also become harder to grasp. Naturally, these behaviors should represent a significant change: If a person was never adept with personal finances, this won’t serve as much of an indicator.

Obviously, all of this makes an elderly person a likely target for elder abuse. According to the article, problem solving (called, “fluid”) cognition starts declining in the 20s, but it is offset by experience-related mental abilities, until we reach our 70s. At that point, in most of us, the decline in “fluid” cognition overtakes our ability to offset the loss through experience.

Being proactive, here are some approaches to combat this:

1. Combat potential elder abuse by simplifying your financial life as you age. As you age, consolidate your accounts; keep your finances in only a few mutual funds or accounts.

2. Hire a financial adviser, estate planner and/or financial planner to assist you.

3. Be honest and proactive. Recognize the trend in your abilities, and take steps to deal with it.

4. Surround yourself with trusted people who will be able to see and respond to potential elder abuse. The article calls this a “protective tribe.”

5. Be honest. Listen to your “tribe.”

6. Prepare estate planning documents, including powers of attorney, wills and/or a living trust. Take care when appointing your agent. You should always be cautious to only appoint someone you trust to act as your executor, trustee and/or agent.

7. To repeat: Be honest when appointing your agent, executor or trustee. Be less concerned about hurting the feelings of a family member, and more concerned about appointing the best, most capable, and most honest fiduciary.

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Oh, Thank You Mr. Bobrow: IRA Rollover Rules Have Changed

In 2008, Mr. and Mrs. Bobrow made a series of single-day transfers from several Individual Retirement Accounts (“IRA”) to others. Unfortunately for all of us, one of the transfers occurred more than 60 days after the corresponding withdrawal, which the IRS deemed late and assessed a 10% penalty. Instead of simply “taking the bullet” on a late rollover-transfer, the Bobrows appealed to the United States Tax Court.

By statute, there could only be one rollover per year without penalty. The IRS historically applied this limit on an IRA-by-IRA basis, meaning that if you had 5 IRA accounts, you could conceivably have 5 rollovers in any one 12-month period. Obviously, this method could be used to borrow from one retirement account to get some “quick cash,” as long as the funds are reimbursed to a different IRA within the 60 day grace period. The more IRAs you had, the more “rollover-borrowing” opportunities you had.

Apparently, neither the Bobrows nor even the IRS saw this overall rule as an issue. But the Tax Court did. In deciding this case, the Tax Court incidentally decided that Mr. and Mrs. Bobrow could not avoid penalties by making a rollover from one IRA to another if there was a rollover from any other IRA in the preceding 1-year period. This rule does not apply to trustee to trustee transfers, where the taxpayer does not touch the funds. As of this year the IRS changed its rules to conform to this court ruling (Source: Bobrow v. Commissioner, T.C. Memo 2014-21 (2014); IRS Publication 590-A (2014)).

One moral of the Story – If you ever go to court, expect the unexpected. In this case (as sometimes happens) the Tax Court took a little “jab” at Mr. Bobrow, mentioning that he “is an attorney specializing in tax law.” He has now made some new tax law for all of us.

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Protecting Your Estate from “Social Engineering” Fraud

One aspect of estate planning is keeping your assets, and not having them stolen.  This came to my attention this weekend, when I received an automated “social engineering” call on my cellphone, something like: “This is ATT.  It has come to our attention that the security on your cellphone account may have been compromised. To avoid service interruption, at the tone please provide the last 4 digits of your social security number…”

I hung up.  My later research into that “800” telephone number disclosed a number of internet posts from individuals who had received the same message.  One post claimed that ATT denied leaving such a message.

Common sense is your best protection.  Here are a few guidelines:

1.  Never provide any personal information to an unsolicited caller or e-mail.  Never.  If you believe that it might be legitimate, call the provider.  They will invariably deny making an unsolicited call asking for information.  The more urgent the demand for information, the more likely it is fraudulent.

2.  Elderly people are particularly vulnerable to this type of manipulation, because they tend to be more trusting and are often starved for companionship.  Con-men and women target this risk group.  If you have a loved one living alone, measures should be taken.

3.  Always beware when accessing public wi-fi “hot spot” points.  Some predators set up hot spots and pass them off as public — for example, in a hotel lobby.  Never pass off private information through a public wi-fi access point.  Double check the name of the access portal, which might offer a clue as to whether you should use it.

4.   Disable the auto-connect feature of your phone, so that it does not automatically connect to the strongest wi-fi signal.  You should choose the access manually.

These are only a few thoughts.  Be safe during the summer.

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Don’t Forget to Review Beneficiary Designations

Even a well tuned estate plan can be defeated by failing to update beneficiary designations for bank accounts, brokerage accounts, and qualified plans (such as IRAs). Here are some points to consider:

  1. If a designation is made, it will ordinarily pass outside of your trust or will. Therefore, even it your will says something like “I hereby give my ABC brokerage account to my beloved daughter, Sheri Doe,” if your account designation gives the account to your ex-spouse, your ex-spouse probably receives the gift.
  2. The preceding point also shows that account designations should be regularly reviewed.
  3. If an account designation gives money to a minor, it may be necessary to open up a court supervised guardianship (which is the case in California). In such a case it may be less costly to set up a trust to manage the funds on behalf of the minor, and make the trust the beneficiary.
  4. If the beneficiary has a disability and meets needs requirements for governmental assistance, a gift under a beneficiary designation may cause disqualification for the benefit. However, creating a third party special needs trust, making the trust the beneficiary, may circumvent this problem.

In short, you should review your designations regularly, and make sure that they blend in with the rest of you estate and financial planning. Otherwise, your intended and unintended beneficiaries may end up being surprised – sometimes pleasantly surprised, but often times unpleasantly.


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“How to Spot a Liar”

This subject may not seem to be explicitly about the subject of estate planning, but it is intertwined with everything an estate and financial planner does.  Your attorney can prepare the most wonderful documents, which are easily undone by an untrustworthy, lying trustee.  There is  an important root word in “Trustee” which many forget when selecting the person who will manage their affairs when they are disabled or gone.  Truth in these personal relationships is far, far more important than the words written on paper.

Pamela Meyer’s overarching theme in the following video that lying is a “cooperative effort” applies to a wide range of estate planning subjects, such as —

  • Selecting a truthful trustee, executor, or agent;
  • Selecting and monitoring your financial planner, and investment adviser;
  • Making sure that your home care worker is acting in your interest, and not for her own interests.

These are only examples.

(Source: TED Talks)

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Lessons from “Little Sweetie’s” Estate

Most of us live pretty mundane lives.  But not Hong Kong billionaire Nina Wang, who died in 2007 at age 69.  Wang, nicknamed “little sweetie” because she liked dressing in traditional Chinese clothing and wore pigtails, was the heiress to Hong Kong’s Wang Chinachem Group and was at the time of her death arguably the world’s richest woman, with a net worth of over $4 billion (US).

Her husband Teddy Wang was kidnaped twice – the second time occurred in 1992, and when he was never released, in 1999 he was declared legally dead.

Wang sought out feng shui master Tony Chan in 1992 to help find her husband, and then the two reputedly entered into a romantic relationship.  According to a New York Times article, Chan was a pretty “sketchy” fellow.  According to the article, at the time “Chan was already married and had a patchy resume as a waiter, bartender, machinery salesman and market researcher, making him an unlikely match for Wang.”

When Wang died in 2007, there were two competing wills.  One gave $387 million to Chan, but the bulk of her fortune went to Chinachem Charitable Foundation.  The other “will” gave the entire estate to Chan.

One will was obviously a fake.  After years of legal battles, Chan has now been convicted of forgery and use of a false instrument, and was sentenced to 12 years in prison.  Calling him a “beguiling charlatan,” High Court Justice Andrew Macrae said that “Instead of benefitting mankind as Nina Wang wanted, the only one to benefit would have been you.”

Who says that estate planning is boring?  The lesson to learn from this is: Protect that will or estate planning document.  Also, if you have an old or superceded document, make it clear that it is superceded and revoked in the new planning documents.

Of course, it is much harder to protect against forgery, as happened in this case.

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