[Carrie Meyers, Resource Specialist, Aging and Disability Resource Center, Northwest Wisconsin]

At our Fourth Annual Final Affairs Conference we have Susan Sharp Miley, Attorney at Law, here to talk about estate planning. Please welcome Susan Sharp Miley.

[applause]

[Susan Sharp Miley, Attorney at Law, Hayward, Wisconsin]

I’m Susan Miley, and I’m going to present a class on the basics of estate planning, okay?

First of all, a little bit of background on myself. I went to the University of Virginia and Harvard Law School; I worked for 10 years at international law firms based in Washington D. C. and New York. Then I moved to the Twin Cities.

[Carrie adjusts microphone]

[Susan Miley]

Thank you.

Then I moved to the Twin Cities, and I was general counsel for a company there. I was then general counsel for a company in Wilmington, Delaware. And in 2000, I got sick of corporate America, and I moved to my lake place in Hayward, Wisconsin, and opened up my own practice.

So since then, I’ve been doing, essentially what I do is estate planning and administration. That’s pretty much all I do, okay.

What I do now is certainly less rewarding financially, than what I used to do. There’s no question about that. But it is very rewarding in other ways; I don’t have to wear suits; I can take my dog to work with me. [laughs]

[laughter]

I have a whole shelf in my pantry that’s dedicated to maple syrup and homemade jams that appreciative clients have brought to me. So, it is very rewarding in other ways, I’m helping people, and I enjoy that.

And also, I’ve been teaching classes through W.I.T.C. for about 10 years now. The class that I’m about to give to you, I now teach in Hayward, Rice Lake, Superior, and Ashland, and I’m broadcast to New Richmond and Lady Smith.

Now, I understand that, because we’re being televised, you’re not allowed to ask me questions, or I’m not allowed to respond to them, because it will ruin the presentation. So normally, I do have a very interactive class. If I start to answer a question, stop me and tell me to wait until the end, okay?

Okay, enough about me.

There are two objectives to our class today. The first is to help you figure out what your estate plan currently is. Each of you has an estate plan, whether you know it or not, because if you haven’t written one, the State of Wisconsin has written one for you.

So objective number one, let’s figure out what would happen if you died tomorrow.

Objective number two of our class today is to teach you how to save money, that’s something that everyone is interested, and I’m going to show you some ways you can do that, okay?

Okay, so basically a will is an instruction to the probate court as to what you want to – want to have done with your assets. But a probate has to be initiated before anything can happen with respect to a will. Will equals probate, okay?

True or false? Estates can be arranged during lifetime, so that no court is involved at the time of death.

[audience member]

True

[Susan Miley]

Very good, yup. In fact, that’s what I do; I try to set things up for you when I’m assisting you with estate planning, to ensure that there is no court involved at the time of death. You want to stay away from court. My entire legal career has been dedicated to keeping people out of court. So that’s what I do. And this is true.

True or false? Only estates over $100,000 are large enough to warrant estate planning.

[audience member]

False

[Susan Miley]

That really is false. If you’ve spent all of your life, and you’ve managed to save up $20,000, it may be even more important for you to do estate planning than somebody who’s saved up $20 billion.

And the reason is because you don’t want that $20,000 to be eaten up in probate costs and legal fees. So, regardless of the size of your estate, estate planning is warranted.

Okay, some of the potential costs that I’m going to be talking about, minimizing or eliminating, today are probate costs. There are costs associated with the probate. In theory, you’re supposed to be able to do it without an attorney. It very rarely happens that you can get through one without an attorney.

There are also court costs associated with a probate. We’re also going to be talking about taxes.

And finally, we’ll talk briefly about nursing home costs. So those are the costs we’re gonna be focusing on minimizing.

Okay. Remember I told you that one of our objectives was to determine what your estate plan currently is? Well, this is the way you do it. You divide your assets into probate assets, which are generally, again, individually owned assets without a beneficiary designation on them.

Those will be distributed in accordance with your will or with Wisconsin state law if you don’t have a will. And what Wisconsin state law says is basically that your assets go to your closest relatives, okay? If you’re married and all of your children are of that marriage, they all go to your surviving spouse. If you’re married and you have children from a prior marriage, half of your assets go to your spouse, and half go to the children from the prior marriage. If you are single and have children, it all goes to your children. If you’re single and have no children, it goes to your parents if they’re still alive. If your parents are gone, it goes to your siblings. And on and on and on. The statute goes on for several pages.

So, probate assets, again, individually owned assets without a beneficiary designation, are distributed in accordance with your will or state law. Non-probate assets, jointly owned assets, or those with a beneficiary designation on them, go to the joint owner or the designated beneficiary.

So, now each of you can look at your assets, analyze them, and figure out what would happen if you died tomorrow.

So, ways of avoiding probate.

Can everyone hear me?

Okay, good.

We’ve talked about several of these ways. Joint tenancy avoids probate. The asset will go automatically to the surviving joint owner without probate. Beneficiary designations like on life insurance and retirement plans. Now, you can actually put beneficiaries on nearly every financial asset that you have. With respect to bank – bank accounts and certificates of deposit, for example, you can put a payable-on-death beneficiary on those. And then that asset will go to the designated beneficiary without probate.

You can even put beneficiaries on real estate, using something called a transfer-on-death deed. So, if you do a transfer-on-death deed naming beneficiaries and have it recorded down at the register of deeds, the real estate will go to the designated beneficiary without probate, okay?

Other ways to avoid probate. Gifting is a way. If you give something away while you’re alive, then obviously it doesn’t have to be probated, because it belongs to someone else.

And finally, living trusts are a way to avoid probate. What a living trust is, is a trust that you create during your lifetime. You are the trustee of the trust and the beneficiary of the trust. You continue to manage and control your assets just like you do right now. But what happens when you pass away is that your successor trustee, who is the person that you’ve named in the trust, has the immediate legal authority to step in and wind up your affairs without going to any court, without getting – getting anyone’s consent. And all of the assets held by the trust are not probate assets. And we’ll talk a little bit more about living trusts a little later.

But right now, let’s talk a little bit more about probate.

The purpose of probate is to change legal title to property from the person who died to the people it’s supposed to go to. Let’s assume that John Jones, Senior had a bank account worth $60,000. And he’s a widower, and he only has one child, John Jones, Junior.

John Jones, Senior passes away. And Junior goes to the bank and says: “Hey, I’ve got to get Dad’s money out of the bank. I need to pay for his funeral, and there are some bills that I need to take care of. And the bank’s gonna say: “Uh-uh. We can’t give you that money. You have to give us proof from the court that you are legally entitled to access your father’s money.” And what that proof consists of in Wisconsin is something called domiciliary letters.

What those do is give the personal representative of the estate the legal authority to access the assets of the dead person, okay? And you can only get those through initiating a probate. So, again, the purpose of probate is to get assets out of the name of the deceased person, into the name of whoever it’s supposed to go to.

Probate is a legal process by which title to property is transferred to heirs by a court. And, essentially, probate is a lot of paper shuffling, okay? When you die, if a probate is required, then basically all of your assets are frozen. Well, your probate assets, your individually owned assets without a beneficiary designation, are frozen until the probate has been initiated.

And what you’ve got to do is file an application down at the courthouse. You’ve got to submit something called a Proof of Heirship that shows who all the closest surviving relatives are. And each of those persons or heirs needs to submit to the court a consent to the appointment of the personal representative. If one of the heirs does not consent, you get thrown into formal court hearings in front of the judge. And your delays and expenses have just gone through the roof, okay?

You also need to publish a notice in the newspaper to creditors, identify any known creditors, notify any known creditors of the fact that the probate has been initiated so that they can file claims against the estate. You’ve got to notify the Wisconsin Department of Health and Human Services, so if the person ever received Medicaid, the – the State can get paid back before anybody gets their money. And on and on and on. It’s a lot of paper shuffling.

The purpose of probate is to protect two groups. It’s to protect creditors, to make sure that they get paid before anybody else gets any money. And to protect the closest family members of the person who died, who logically would be the beneficiaries. Let me give you an example. Grandpa is 85. He’s got a big family, children and grandchildren, and a few greats in there too. And he’s very, very wealthy. And he’s also very lonely.

So, Grandpa meets Blondie. No offense to all you blondes out there. Blondie is 22. And they start a passionate affair. And Grandpa marries Blondie and changes his will to leave everything to Blondie, disinheriting all of his family. And then Grandpa passes away. Well, maybe his children and grandchildren would like to have an opportunity to challenge Grandpa’s will. They might claim undue influence. They might claim incompetence. And by requiring their participation in the probate process, probate gives them some protection. It gives them an opportunity to object. So, that’s what probate is about.

Probates can take a long time, and they can be quite expensive. It’s hard for me to complete even the simplest probate for less than a few thousand dollars.

I have had probates that have cost upwards of $30,000 in legal fees. So, probates are somewhere where we don’t want to be, and we don’t want our family to be if we can find a way to avoid it. They can also take a long, long period of time. I have a probate that I’m working on now that’s been open for seven years. So, it can take a lot of time depending upon the circumstances to complete a probate.

Okay. Let’s look at a case study.

Agnes Smith, she’s 79 years old. She’s got a net worth of about half a million dollars, made up of stocks and real estate and bank accounts. She has two children who live out of state. And she wants to avoid probate.

But before she comes to see me, Agnes does put her children on as beneficiaries of her accounts, okay? She knows to do that, but she’s not familiar with any probate avoidance techniques, and she passes away. So, her two children come in to see me. And they say: “Well, Mom died. This is what her assets were. What have we got to do?” And I say: “Well, you know she didn’t have a will. ” I said: “And even if she did, we would have to go through a probate, because you’ve got this commercial building here.” And they say: “Well, what’s that gonna cost?” And I say: “Well, you know what? Probably two to three thousand dollars, assuming we don’t run into any problems. And then, because you’re both out of state, the court is probably going to require that whoever of you is a personal representative post a bond to ensure your performance as personal representative.” This happens all the time with out-of-state personal representatives.

And so, I said: “I don’t know that will cost you. It might cost you another 500. It might cost you 1,000.” And they look at me and they say: “You know, you’re crazy. We’re Mom’s kids. Everybody knows she wanted us to get everything. If you think we’re gonna pay you two to three thousand dollars to do this, you’ve got another thing coming.” And they walk out of my office. And I go: “Oh well, that’s okay.”

So, three years later they come back to me, and they say: “We’ve got a problem. We’ve got a tenant who’s not paying rent at the building. And we want to evict him and collect back rent.”

I say: “Well, you’ve got a problem there. Because title to the building was never transferred to you, you have no legal rights to evict or sue any tenant in the building. So, before you could sue anyone, you’d have to have that probate done that transfers title under your names.” And then they say: “Oh, we don’t like being in the real estate business anyway. We want to sell it.” And I say: “Uh-uh-uh, can’t sell it. You don’t own it. Before you can sell it, you’re gonna have to probate the building and get it transferred into your names.”

And then they sigh, and they say: “Okay, well, so it will be what, two to three thousand dollars? or something like that to do the probate. And I say: “Uh-uh, not anymore. Because the estate, technically your mother’s estate, was earning income in the form of those rental payments for the past three years. The estate should have been filing an income tax return reflecting those rental payments. So now we’re gonna have to go back and do tax returns for every year since your mom passed away. And that’s going to add quite a bit to your cost.” And they shake their heads and they say: “Ugh, I don’t believe it. Okay, go ahead and do the probate.”

And the point I’m making here, one point I’m making here is that if you have to do a probate, do the darn thing. Don’t wait. I – two years ago I completed a probate for a man who died in 1988. And what had happened was, he had an account with about $40,000 in it. His son was his personal representative and never bothered to probate the account.

So, what happened, when the son died, and his sister, who’s a client of mine, came to me and said: “What do we do?” We had to go back and file tax returns for 25 years, okay? And between the tax return preparation fees, the taxes and penalties that were due, and my legal fees, each of the five kids ended up with about $400 at the end of the day. So, if you’ve got to do a probate, do the probate.

All right, the other point I’m making here is, what could Agnes have done to get to a different result?

Well, one thing she could have done is to do a transfer-on-death deed, okay, naming her two children as beneficiaries. Then the property, the commercial real estate, would have transferred to them without probate. Another thing she could have done would have been to put her assets in a living trust, naming one or both of her children as trustees. That would have ensured that there was no probate required at the time that she passed away.

Now, living trusts can be single or joint. A single person can set one up, or a married couple can set them up.

In the context of joint trusts, the way it works is that it works a little bit like a joint bank account. In phase one, when you set it up, both you and your spouse have management rights with respect to the assets in the trust. When one of you passes away, the survivor has management rights with respect to the assets in the trust. And when the second of you passes away, your successor trustee steps in, pays your bills, and distributes your assets in accordance with the plan of distribution in the trust.

Now, if you do do a living trust-based plan, it is critical that the trust be funded. And what that means is that you transfer title to all of your assets into the trust. If you don’t transfer title to your assets to the trust, you may as well not do a trust-based plan, because a probate is going to be required to get the assets into the trust. So, funding the trust is a critical part of the process of establishing a living trust. And I can’t tell you how many people I know who have come to me with a trust that they had somebody prepare for them and they say: “Well, I’ve got a trust.” And I look at it and I say: “Well, how are your assets titled?” And they haven’t transferred title to any of their assets to the trust. So, the trust doesn’t accomplish anything for them. So, if you do a trust-based plan, funding the trust is a critical part of that process.

So, we’ve been talking about ways to avoid probate.

Well, why not use joint tenancy between spouses to avoid probate? You can disregard these bullet points down here, because I do use joint tenancy between spouses all the time to avoid probate. It’s an excellent probate avoidance tool. Why not use joint tenancy between parent and child to avoid probate? Please do not do this. Please do not make your children co-owners of your assets. It is a really, really bad idea for a lot of reasons.

If you make your child a joint owner, you don’t own it anymore. They are a partial owner of the asset. So, you can’t sell it if you need to sell it without their cooperation. What if your child goes bankrupt? Guess what. They’re an owner of that asset, and their creditors can come after it. Similarly, if the child gets divorced, that asset would be subject to division in the event of divorce. And then think about what happens if your child dies. Who would that ownership interest go to? So, you can also use – lose the ability to use certain tax exclusions if you make your child a joint owner. And I just think overall, it’s a bad idea. Now, I do make children beneficiaries on assets all the time. The difference is that that doesn’t give them any current legal right to the asset. They’re simply entitled to it upon your death. And that is an effective probate avoidance technique. But please do not make your children joint owners.

One thing I see a lot is where, well, two examples I’ll give you where people have put someone on as a joint owner for convenience, okay? I had a gentleman come to me a few years ago, who was very well off. And we talked about his estate plan. And he wanted everything to go to his brother. He had a girlfriend that he lived with. But he said that she was taken care of, and he didn’t want anything to go to her. Well, before we put his estate plan in place, he went down to the Mayo Clinic and he never came back. And before he went, he had put his girlfriend on his account as a joint owner so she could pay the bills.

He died. The account was worth $300,000. And of course, we ended up in court, because legally the girlfriend was entitled to it as a surviving joint owner, although we knew that was not what the man’s intentions were. So be very, very careful in putting people on your accounts as joint owners.

And the second point I want to make in this connection is, do not rely on anyone else to implement your wishes. And what I’m talking about here is, what I often see is a family with four or five kids. And the mom, who’s a widow, comes in to me, and she says: “Well, I’ve put Johnny on as a joint owner on all my accounts. He’s my oldest, and I know he’ll be fair to those other kids. I don’t have any question about it.” And I say: “Well, you know, legally he’ll be entitled to those assets if you die. He won’t have to share them.” And the mom says: “Eh, I’m not worried about it. Johnny is just the best.”

So, then mom passes away. And Johnny and his wife Susie come in to see me. And I explain to Johnny that legally he’s entitled to these assets. I say: “I think your mom believed that you would share them with your siblings. But youre not legally required to do that.” And Johnny looks, thinks about it, and Susie chimes in.

[laughter]

And she says: “Johnny, you know, we’ve done so much for your mom these past few years. We’ve taken her to church every Sunday. I take her to the hairdresser. We’ve taken her to her medical appointments. And I really believe that we deserve more than just a fifth of these assets.”

And so, again, the point I’m making is, don’t rely on anybody else to do what needs to be done. You set up your estate plan, so it accomplishes what you want it to accomplish.

Okay, so let’s get down to brass tacks now.

We’ve been talking about, kind of vaguely, about these living trusts. And we’ve talked about other probate avoidance mechanisms. So, should you do a will-based plan using other probate avoidance mechanisms? Or should you do a trust-based plan?

When I do a will-based plan for a married couple in Wisconsin, it includes a number of elements. It includes, of course, your will. It includes an analysis of ways to avoid probate by using titling and beneficiary designations. It includes your Durable Power of Attorney for Finances. That’s a very important document. It puts someone in charge of your finances if you become incompetent. And if you don’t have one of those and you become incompetent, your family will have to go to court and be appointed your guardian in order to manage your affairs. And that’s time-consuming and expensive. You avoid all of that by having a Durable Power of Attorney for Finances.

The will-based plan also includes your healthcare documents. There are four that I prepare for my clients. There is a Living Will that says what your wishes are with respect to the use of feeding tubes. A Power of Attorney for Healthcare. That puts someone in charge of your healthcare decisions if you are no longer able to make them. A H.I.P.A.A. form. And what that does is authorize your doctors to share medical information with your healthcare agents. And finally, something called an Authorization for Final Disposition. What that does is put someone in charge of your funeral and memorial arrangements and tells them what you want to have done. And then the final part of a will-based plan for a married couple is a marital property agreement.

Wisconsin is a marital property state. And there are tax benefits to holding your property as marital property. Your property may all be marital property already. I have three volumes in my bookcase, each of which is this thick, that tell me whether your property is marital property or not. It depends on how you acquired it, where your acquired it, when you acquired it, okay? It depends on all kinds of factors. If we have a marital property agreement that characterizes all of your property as marital property, we know you’ll get that tax benefit associated with that without ever paying anyone to open those three volumes.

So, a will-based plan that I prepare for a married couple in Wisconsin includes all of those elements. And my base price for doing that is $900. I consider that the deal of the century. I think you’re getting a lot of bang for your buck there.

Now, if I do a trust-based plan for a married couple in Wisconsin, it includes everything that is part of a will-based plan and your trust and everything you need to make it work. And my base price for doing a trust-based plan is $2,500. So, there’s a lot of sky between $900 and $2,500.

So, who should be considering doing a trust-based plan? And let me – let me tell you that I do many more will-based plans than I do trust-based plans, because I seriously don’t believe that everyone needs a trust. I think wills work – wills with beneficiary designations work just fine for most people. And also, I recognize that I have a conflict of interest in advising on the trusts in that, frankly, I make more money if you do a trust. So, as a result I try really hard not to oversell them, okay?

But who should consider a trust? Well, I’m a primary example of a person who needs a trust. And the reason I need a trust is because my children are 21 and 23. I had them later in life. And although they’re wonderful children, they are not financially responsible. And if I were to make them beneficiaries on my accounts, that means – not that I’m incredibly wealthy or anything, but that would mean that they would get a considerable amount of money outright if I passed away. I think that’s a terrible idea. I could see it all being gone in two years. You know, there’d be Lamborghinis and whatever.

[laughter]

So, my estate plan is set up so that when I die, the assets in my trust will go into trusts for the benefit of my children. Those trusts will be managed by a guy I trust, okay? Who’s my successor trustee. He’ll manage the assets for them until they reach, well, they’ll get half at 30 and half at 35. I might change those ages. I might lower them if they start showing some signs of responsibility. I might raise them if they don’t.

[laughter]

But until they reach those ages, the trustee can spend the money on whatever he thinks is appropriate. He can pay for their college or help them fix their car or whatever he deems appropriate. But the money isn’t handed over to them until they reach the specified ages.

So, if you want to do that kind of planning, the only effective way to do it is in a living trust-based plan.

If you’ve got young or minor beneficiaries, you’re gonna want to look at a trust-based plan.

If – if you have disabled beneficiaries who are collecting disability that would be impacted by their receipt of an inheritance, there are special kinds of trusts that you can set up that will allow them to have access to an inheritance without disqualifying them from receiving their disability benefits. It’s called a special needs trust or a supplemental needs trust.

Those can only effectively be set up within a living trust-based plan.

If you have assets that you can’t put beneficiaries on, you may be thinking about a trust-based plan. For example, you cannot put beneficiaries on a small business. There’s no way to designate a beneficiary. You can’t put beneficiaries, in most cases, on individual stocks. You can put beneficiaries on a brokerage account. But, in general, individual stocks, you can’t put beneficiaries on.

I have a client who has a large herd of bison. They’re very expensive. They’re worth a lot of money. But you can’t stamp their hoof with a beneficiary designation. So, we transferred all of his bison into his living trust, okay?

If you have real estate, remember we talked about how there’s a way to put beneficiaries on real estate? It’s called a transfer-on-death deed. Well, that is a great tool to use in estate planning. However, if you have children who don’t get along, or, frankly, if you have more than two, you’re gonna want to think long and hard about using a transfer-on-death deed. Because what happens when you do that is that your children become co-owners of the real estate. And if there’s ever a situation that’s likely to result in family disharmony, it’s co-ownership of real estate. So, that transfer-on-death deed is a great tool, but it needs to be used very judiciously. It might be better to use a living trust-based plan and put someone in charge of administering your affairs, okay?

Living trusts are also valuable if you have real estate in more than one state. Generally, you have to go through a probate in every state where you own real estate. So, if you transfer all of you real estate into a living trust, you’ll avoid probate in all states. And living trusts are also valuable in the context of avoiding problems, okay? Living trusts are virtually impossible to break.

As long as I’ve been practicing in this area, I have never seen a living trust broken. I’ve never seen one drafted by me even challenged. So, if there are family issues, a living trust is something you might want to consider, oaky?

But again, not everyone needs – if I were to, you’re – youre probably familiar with these seminars that people put on and they want to buy you breakfast or lunch at the local hotel. Go and eat breakfast or lunch, but don’t listen to a word they say.

[laughter]

They – they come in, and they’ll say: “Everybody in this room needs a living trust.” And I’m just like: “That’s just simply not true.” I’ll tell you a funny story about that a little later. They kind of blocked me from attending their a – their presentations.

[laughter]

Okay. So, living trusts are appropriate for many people. But they’re certainly not necessary for everyone. The other thing that a living trust does that could be important to some people is it does allow you to plan for contingencies. And what I mean by that is, what if one or more of your children dies before you, okay?

When you’re relying on beneficiary designations to avoid probate, what happens in those circumstances depends on the rules of the financial institution. And they’re all over the place. Some of them say the asset goes to the surviving beneficiaries. Some say – say that the share of the deceased person goes to his or her children. But you don’t know what’s gonna happen under those circumstances until you check the rules of the financial institution. With a living trust-based plan, we know what’s gonna happen, because we’ve said what’s gonna happen in the plan. So, it does allow you to address prospectively contingencies that are unexpected, such as the death of a child before your death.

So, if these trusts are so great, why doesn’t everybody have one?

Expense, that’s the main reason. None of these others are a big deal, frankly. But it is the expense associated with doing a living trust that keeps people from – from having living trust-based plans. And again, you may not need one. An-another issue with living trust-based plans is that they’re not only more work for me, they’re more work for you. Because, although I do the real estate transfers for you as part of my base price for preparing the plan, you have to take the lead in transferring your financial assets into the trust. Now, that’s something I help you with by giving you form letters to use with your financial institutions. But there’s no question that it’s more work for you.

So, now we’re gonna talk briefly about taxes.

We’re gonna talk about estate taxes.

We are not going to talk about inheritance taxes, because Wisconsin doesn’t have one. So that’s not relevant to you in this room.

We’ll talk briefly about gift taxes and then about income taxes, which are relevant to everyone.

Okay, estate taxes.

Actually, this slide hasn’t been updated but the – the general point is reflected in this slide. Wisconsin has no estate tax now. It expired in 2008. Federal estate taxes don’t kick in until you have more than $5.45 million in assets, okay? And if you’re married, it’s double that that you can pass along to your children without there being any estate tax payable. So, as a result of this change in law, estate taxes are not relevant to most people. And that’s why I’m gonna skip some slides here, because I could go in and out. I know all the ways that you can help to avoid it, but unless you’re really rich, it’s not relevant to you. And I don’t want to bore the rest of you.

Let me just clarify that there is no estate tax on transfers between spouses. You can leave $20 billion to your husband or wife without there being any estate tax payable. It’s only when you go to the children that it becomes payable. And there is no estate tax on estates under the applicable exclusion amount, which is currently $5.45 million. You can give up to $14,000 per person per year to anybody you want to without there being any gift tax consequence whatsoever. If you’re married, you and your spouse each can do that. So you can give up to $28,000 per person per year without having to do anything, okay? That’s the free gift. That’s the one you get to give away. And the gift is not income to the person receiving it, either.

If you exceed that $14,000 per person per year, then you have to file a gift tax return. Now, that does not mean that you have to pay gift tax. It just means that the I.R.S. is going to keep track of those gifts that exceed the $14,000 per person per year. Gift tax does not become payable until the total of your reportable gifts exceeds $5.45 million. So, gift taxes are not going to be relevant to most of you either. Now, what happens is, when you pass away, your exclusion amount is reduced by the amount of reportable gifts that you’ve made. So, if during your lifetime you’ve made a million dollars in reportable gifts, when you die, your exclusion amount would be reduced to $4.45 million. But again, that’s not gonna be relevant to most of us here.

Now we’re gonna talk about income taxes, which is relevant to everybody here.

Let’s assume that Dad bought a piece of land for $50,000. And he holds onto it for a while. And it appreciates in value, and now it’s worth $150,000. Well, if Dad turned around and sold that land, he’d have to pay capital gains tax on the $100,000 in appreciation, okay?

Now, let’s suppose instead that Dad held onto the land until he died, and then it was inherited by his son. His son will get a step up in basis on the land to its fair market value as of the date of Dad’s death. So, his son can turn around and sell it for $150,000 without paying any capital gains taxes. This is a huge tax benefit to inheriting assets, this step up in basis. It eliminates billions of dollars in capital gains taxes that would be payable did this not occur. But it does under current law, okay?

Now let’s assume that instead of holding on to the property, Dad’s sitting down at the coffee shop with his buddies. And they’re all getting a little old, long in the tooth. And his friends start telling him: “You know, Bill, you really need to get that land out of your name, because if you go into a nursing home, they’re gonna take that land from you. And there’s not gonna be anything left for Junior.” And so, Dad mulls it over, and he decides to give the land to his son. So, he signs it over to his son. And two weeks later he dies of a heart attack. Now, because the land was given to the son instead of inherited by him, Son’s basis is the same as Dad’s basis. Son’s basis is $50,000. And when son turns around and sells that land for $150,000, he will have to pay capital gains taxes on that $100,000. That would have been eliminated had Dad simply held onto it and let Son inherit it. So be very careful with giving appreciated assets, okay, because you are eliminating this tax benefit on appreciated assets when you give them away. And I can’t tell you how many times I’ve seen where parents have given their home or whatever to their children in the context of nursing home planning, and then one of them dies of a heart attack and the other one dies of a stroke. And the kids have a couple of hundred-thousand-dollar capital gains tax bill, because they didn’t get the step up they would have gotten had they simply inherited it.

Okay, let’s talk about the way that this works for marital property.

A husband and wife buy a piece of land for $50,000. It’s now worth $150,000. If the land is owned jointly by them but not as marital property, which is the only way you can own it in Iowa or Illinois or Minnesota, because those are not marital property states, this is what happens. One of you dies. The survivor’s basis in the land is $100,000. They get the initial 50 that was paid for it. And they get a step up on the half that they inherited when the first spouse died. So, if the spouse turns around and sells it for 150, they still will have capital gains taxes payable on that 50 that didn’t get a step up.

Now, if they had held it as marital property, which we can do because we live in Wisconsin, a marital property state, then what happens is this. They bought it for 50. It’s worth 150. One spouse dies. The other gets a step up in basis to full fair market value as of the date of death of the first spouse to die. They get a step up not only the half that they inherit but also on their own half. And therefore, they can turn around and sell it without paying any capital gains taxes. Now, how important this is depends on how much you have in appreciated assets and whether they’re sold by the survivor, frankly.

But I’ll tell you, I had one case early on when I started my practice in Hayward, where a woman and her husband came in to see me. And she had inherited an interest in a large farm long, long ago. And she had a very low basis in that interest. And it had appreciated exponentially since then. Now, that interest in the farm would not have been marital property under Wisconsin law, because she inherited it. And typically, inherited things are not marital property. We did a marital property agreement for her that characterized her interest in the farm as marital property. And a couple of years later, her husband passed away. As a result of that, she got a step up in basis on her interest in the farm to fair market value. When the farm was sold a few years later, she saved over $800,000 in capital gains taxes by virtue of having taken that step. So, it probably isn’t that significant for everybody. But it can be really significant. And that’s why we always do a marital property agreement as part of our estate plans.

Another tax provision that you should be aware of. There is a $250,000 exclusion on the sale of a primary residence. And it’s $500,000 for a married couple. You have to have used it as your primary residence for two out of the past five years, okay? And it’s just important to be aware of this. This is an exclusion that you will lose the ability to use if you make your children co-owners of your property or if you transfer the property to your children. If it’s not their primary residence, then they can’t use this exclusion.

The other context in which to be aware of this is, there have been several cases in Hayward recently where I’ve had elderly clients who have lovely lake places, but it’s just become a little bit too much for them. And so, they’ve moved into town. And, not thinking about this, they’ve been in town for three or four years now. And now they want to sell their lake place. Well, because they haven’t lived there two out of the past five years, they can’t take advantage of this exclusion anymore, okay? So, they’re stuck holding on to it until they die unless they want to pay big bucks in capital gains taxes. Just something to be aware of.

Okay, now we’re gonna talk

Oh, am I running out of time?

We’re gonna talk briefly about long-term care issues. There are three ways of paying for nursing home costs. You can pay for them yourself, obviously. Nobody’s gonna complain if you do. There’s private insurance, or long-term care insurance, that you can get. And there’s Medicaid and limited payments by Medicare.

Now let me distinguish between Medicaid and Medicare. Medicare is available to everyone who is 65 or older. But Medicare only makes very limited payments for nursing home costs. And there are all kinds of conditions on them. I think that the maximum that they’ll pay is about 100 days. And you have to go directly from the nursing home – TO the nursing home from the hospital. And there are other restrictions too. So, Medicare doesn’t pay for much. Medicaid pays for the vast majority of nursing home care in this country. Unlike Medicare, which is available to everyone 65 and over, Medicaid is a welfare – welfare program. That means that you have to prove that you’re poor enough to qualify for it, okay?

Now, let’s assume that your spouse goes into a nursing home. They don’t take everything from the spouse who’s not institutionalized. They let them stay in the home and keep the home, although they’ll probably put a lien on it at some point so they can recover when the spouse at home passes away. They let the non-institutionalized spouse keep some assets and income. They basically let them keep half the combined assets up to a total of about $130,000. And they let them keep income up to about $3,000 a month. Everything else you have has to be used for the care of the spouse who is institutionalized.

If you’re single, it’s even worse. They will not pay for your care unless you’re worth less than $2,000. And they will let you keep an income allowance of $45 a month. Everything else has to be used for your care.

So, naturally this is something that keeps people awake at night. I mean, I have a lot of clients who are worried about this. “What happens if I go into a nursing home? My kids won’t get anything. All my money will be eaten up. And, unfortunately, I don’t have a good answer for you.

You can – what people do who are concerned about this is, the only way to plan for this is to basically either give away your assets and not apply for benefits for five years. Because if you give them away, you’re disqualified for five years from receiving benefits, okay? Or tie your assets up into something called an irrevocable trust, which limits your access to those assets.

I think that’s a really bad idea, both of those, for a lot of reasons. First of all, I would never do it. And so, I can’t recommend in good faith that my clients do it if it’s something that I would never do. When you give your assets away, you don’t own them anymore. They’re owned by whoever you gave them to. You can’t have a claw-back provision in there. And if one of your children goes bankrupt, or if they get a divorce, that asset is certainly subject to division or the claims of creditors.

Dependency on others. I don’t ever want to be in a situation where I have to go to my children and ask for my money. That just doesn’t sit right with me. So, I – I just wouldn’t want to be in that situation. There is a disqualification period, as I said. When you apply for Medicaid benefits, they will ask you whether you’ve made any gifts in the past five years. And if you have, you need to disclose them. And they will compute a period during which you will be disqualified from receiving state payment for your care. So, you’ve got to be aware of that. You might give everything away, thinking “Oh, I’ll last five years.” Then you have a stroke and you need care, and you’ve got no way to pay for it.

Dealing with the government is not always a fun thing. There are many people who work for the government who are wonderful and helpful. There are others who act like you’re trying to reach into their own pocket when you try to qualify for benefits.

There are tax negatives associated with giving away assets. We’ve talked about the fact that you lose that step up in basis that occurs when assets are inherited. That can be huge. That can be really big. Also, if you give away tax-deferred assets, like assets in retirement plans, the gift will trigger an immediate tax on those assets. So, that’s not a good thing.

Potential changes in law. You know, you might give away your assets, now there’s a five-year look back. They might change that to eight years tomorrow.

And availability of beds. What I mean by that is that if you’re paying for your own care, you can decide what kind of care you want. You can have somebody come in and help you stay in your own home for a few hours or however long you need them. If you’re relying on the government, you have to take what they give you. And that may not be what you want. In Hayward, we have one absolutely lovely assisted living nursing home facility that’s relatively new. And it’s gorgeous, and I’m gonna go put in my reservation on the way home. It’s gorgeous. And then we have the others. And some of the others are really, really grim. I’ve been to all of them. I know. The one that is really nice will not take you as a patient on Medicaid. You have to be a private-pay patient to go to the one that’s nice. Now, I think if you go on Medicaid after you start off as private pay, I don’t think they throw you out. But if you’re starting out on Medicaid, you’re not gonna get in the nice one. So, I am not a fan of Medicaid planning. I don’t even do it for my clients anymore.

I have this vision of my basement filled with cots with old people in them, who I helped give away their assets, and now the state won’t pay for their care, and so I’m taking care of them.

[laughter]

So, it’s not, if you really want to do Medicaid planning, there is a guy I will send you to. Hes a guy – and he can fill his basement with the cots. So that’s – thats fine. So again, there isn’t a good solution to this. Long-term care insurance – if you’re really worried about it, look into long-term care insurance. The only caveat there is that it tends to be quite expensive. It also is not available, generally, if you’ve had any serious health issues, they won’t cover you. And what a lot of people I know have experienced is that they keep raising the rates so much, that by the time you might need it, you can’t afford to continue paying for it. So, if you’re really worried about it, look into long-term care insurance. I – I don’t know if there’s anybody selling that here. I don’t want to offend you, but I don’t – I dont personally consider it a really good investment, but there are always circumstances where it could be, okay?

Okay, so, important documents in your estate plan. Not only your will, of course, but your Power of Attorney for Finances, your healthcare documents, your marital property agreement, and if you do a trust-based plan, the documents creating, funding, and implementing your plan.

So, now each of you has enough information to figure out what your estate plan currently is. You just divide your assets into probate assets that will distributed in accordance with your will or state law and non-probate assets that will go to the surviving joint owner or beneficiary. Now, does your current plan carry out your wishes? Does it minimize costs? Does it reduce time delays? Does it minimize tax liability? Does it maximize privacy if that’s a concern for you? Probates are public proceedings. Trusts are private documents. I wouldn’t want everybody in Hayward to be able to go down to the courthouse and see what my kids were inheriting if something were to happen to me. Does your plan provide for management of your assets in the event of your incapacity? It should do all these things.

So, who should prepare your estate plan?

You should go to an attorney who specializes in this area of the law. If your attorney also does D.U.I.s and divorces, they’re not the right attorney. As you can probably tell form this class, there are enough ins and outs to this, enough technical issues, that you really want someone who’s an expert to assist you in putting it together properly. So, go to an attorney who specializes in this area.

And beware of the people who want to buy you breakfast or lunch.

[laughter]

I – I have just seen so many, they send out these little cards that have all kinds of lies on them and try to get you to come to breakfast or lunch so they can sell you something, okay?

For example, they’ll send out a card that says: “If you have more than $50,000 in assets, you’re gonna have to go through a probate. And that’s gonna miserable and expensive, and it’s gonna take years and years, so everybody needs a trust.” That’s just a lie.

That takes me back to one technical point I want to clarify, okay? There is – if you’re doing a will-based plan, if the value of your probate assets is less than $50,000, you don’t have to go through a probate. There’s a short-form procedure that you can use called a transfer by affidavit to transfer those assets. So, when we’re doing a will-based plan, we try to keep the value of the probate assets below $50,000 so we won’t, now, what are probate assets? Assets you can’t put a beneficiary on. Like your car, for example.

As long as the value of your probate assets is less than $50,000, we won’t have to go through a probate. We can use a short-form procedure to wind things up, okay? That’s something I forgot to mention earlier that I just wanted to bring up.

In any case, obviously when they’re telling you that anybody with over $50,000 is going to have to go through a probate, that’s a lie. That’s an out and out lie. When they tell you that everybody in this room needs a living trust, that’s a lie. There’s – theres no truth to that. I can’t know whether you need a trust until I get to know you and know more about your specific circumstances.

I went to one of these presentations once in Hayward. And it was just one thing after another that they were spouting out. And then so I started raising my hand and saying: “Well, you know, that’s not true. That’s not true.” And I got an invitation the next year to the same thing, but the invitation said: “Members of the general public free. Attorneys and financial advisors, $1,000 to attend.”

[laughter]

That was pretty funny.

Okay, I think I’m gonna wind up now, because I need to leave some time to take some questions.

Would anybody – does anyone have any questions?

[applause]

Thank you.