September 25, 2023 – On today's Lifetime Planning segment, we discuss the essentials of an estate plan with Adam Sherry, an attorney specializing in estate planning, trust administration, and probate at Spector & Sherry. Adam and Financial Sense Wealth Management's Jim Puplava cover basic estate planning documents, situations that people will likely encounter and how an estate plan operates in each circumstance, and some of the most important things people can do if they haven't already set-up a will, trust, or durable power of attorney.
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Transcript
Jim Puplava: Welcome, everyone. Today's topic is estate planning. Whether you're talking about a will, trust, durable power of attorney, why are these documents essential and important? Joining us on the program is Adam Sherry from the firm Spector & Sherry.
Jim Puplava: Adam, let's talk about some of the basic estate documents. Everybody knows you should at least have a will it. And let's talk about why a will is important. Then I want to move on to things like trust conservatorships, property titling, et cetera. But let's begin with the will, because whether you're newlywed, even if you don't have any assets, maybe you have kids, or maybe you're in retirement.
Jim Puplava: Why is a will important?
Adam Sherry: Jim, thanks for having me. I'm always glad to get a chance to talk. So I tell my clients sometimes that if you don't have a will or a trust or something like that, you still have an estate plan. But the problem is it's been provided to you by the default laws of the state that you live in. So if you don't have a document like a will that directs where you want your property to go, ultimately it'll be distributed according to the default laws that govern transfers of assets post death.
Adam Sherry: So a will is a proactive step that you can take where you remain in control of your assets and you get to designate where they go in what proportions. And so it's really important because it's not like if you just don't take any steps, it's all going to work out. You need to be part of that process by directing where your assets will go.
Jim Puplava: Now, I want to talk about something that may interfere with the will, and that's property titling. So let's say I own a home and it's in joint tenancy with my wife, but let's say it's a second marriage and that the house is to go to my children. So in my will, I say, if something happens to me, the house is to go to my children. But this is the second marriage, and when we bought the house, we put it in joint tenancy. Let's talk about the issues that arise because of that.
Adam Sherry: I like that you bring this up. So a will is going to direct where property goes. That's subject to the power that a will can exert over certain property. However, like you mentioned, a title to a home that might be held in joint tenancy or a bank account that has a beneficiary designation on it. Those tweaks or directions that are associated with a specific asset will result in what's called a non probate transfer.
Adam Sherry: And a non probate transfer is, in effect, an instruction that you gave that's specific to that particular asset. And so you mentioned title to a home held in joint tenancy. So joint tenancy comes with it, a right of survivorship. And as your hypothetical points out, that's going to result in it passing to the surviving spouse to the exclusion of children from a prior marriage. And so your instructions in a will will apply to.
Adam Sherry: And really, you can only use those to effectuate a transfer of assets that are not subject to some sort of other instruction. So beneficiary designations on bank accounts, beneficiary designations on retirement accounts, holding title with a right of survivorship, like a joint tenancy, those things will result in a non probate transfer, which effectively occurs in a level above a will. So your instructions in a will will not necessarily apply to those assets. So that's a really good point as far as taking a more holistic view and thinking about a lot of the different factors beyond just a will, I.
Jim Puplava: Want to bring up another issue relating to this as it applies to property titling. We live in California, and there are things like community property states, and when one spouse passes away in a community property state, the entire assets get stepped up to market value. So let's say you bought a house in California at a quarter million dollars. Today it's worth a million and a half dollars. Those capital gains are forgiven at death.
Jim Puplava: But talk about the problems of step up when it's held in joint tenancy.
Adam Sherry: Right. So the community property aspect is really important. As you point out, it's a way of getting a full step up in basis which disregards those capital gains tax. Now, the community property designation is important because you get this tax benefit not simply as a result of being married. You get it as a result of being married and the property being clearly community property.
Adam Sherry: So we talk about community versus what. What's the other way that a property might be characterized, and it would be separate property. This example that you brought up with a blended family, second marriage property that you bring into a relationship that you held previously would be separate property. And on the death, you'd only get a step up as to, with a husband wife combination, you'd only get it as to a one half interest in it, usually when it's separate property. And so a simple act of joint tenancy is worth taking a look at, because by adding clarity, thinking about this more broadly, and saying, this is community property with a right of survivorship, it does the same sort of thing that a joint tenancy transfer on death would do as far as avoiding the need for a will or sidestepping some sort of a restriction there.
Adam Sherry: But clearly designating it as community property with a right of survivorship just makes such a big difference. Like you're pointing out, when it comes to limiting reducing capital gains tax, it's big.
Jim Puplava: I want to talk about something else that comes in, and this probably applies to families starting out. So let's say maybe they own a home. They haven't accumulated a lot of assets yet because they're a young couple. But let's say mom and dad have life insurance. So let's say dad has, between personal life insurance and life insurance at work, a million dollar policy.
Jim Puplava: Adam, talk about something called the testamentary trust, where maybe the assets aren't there now, but at death because of insurance, all of a sudden a large amount of money comes into play and you want to be able to protect the surviving spouse and the children.
Adam Sherry: Great question. So you just mentioned that we're both in California, and so testamentary trusts are something that are available in, you know, within the range of options that you can avail yourself of. But one of the things for your other listeners that might be interesting is that testamentary trusts are extremely popular and in some states, the default approach in some states on the East Coast. And so a will can be used to establish a trust after death. So there's two types of trust that we commonly think of.
Adam Sherry: And so one is an intervivos trust, and that's a trust that you can establish during your lifetime, and it's up and running. It's something that you can transfer assets into and you're able to list the ways in which you want to provide for your family, avoid problems, et cetera. A testamentary trust is a trust that has the instructions in something like a will, and it doesn't actually get created until post death. So after the person passes away. And so the testament part of a testamentary trust references a document that lists kind of your final wishes.
Adam Sherry: And so positive thing. The pros is that, just like you point out, it's a great way to provide some protection, guardrails, instructions for your family after you pass away. One of the downsides can be that it takes some extra effort to establish post death. Now, the example with a life insurance policy plus a testamentary trust is a good one because, again, that's a non probate transfer. Plus these instructions contained in a will, so it reduces the harm associated with probate.
Adam Sherry: But if we're relying on a testamentary trust, and there's other types of assets. We still may find ourselves in a probate situation before we can establish that testamentary trust.
Jim Puplava: We've been talking about the importance of a will and how property tithing can take precedent over will or a trust. Let's talk about some of the supplemental documents. Durable powers of attorney. Durable medical powers. I remember during COVID our healthcare provider always wanted to see our durable medical powers.
Jim Puplava: What do these documents do and what do they allow, let's say, the spouse or successor trustee to do this is.
Adam Sherry: So valuable for your listeners. So as an estate planning attorney, I prepare those documents as part of an estate plan. Right? So an estate plan. We're working on a whole set of documents so that we can address these different things.
Adam Sherry: But if I get a call from a prospective client, and for one reason, he or she doesn't want to move forward, I say, fine, no problem, but I don't do sales. But please get a advanced healthcare directive and a durable power of attorney for asset management in place now, and I'll send them a free form that the state of California publishes. So what exactly do they do? They enable you to, number one, express your wishes. So in a healthcare document setting, that allows you to say things like, I'd like to donate my organs, or, I definitely do not want to donate my organs, or, cremation is important to me, versus, I would like to be buried, and you can also give more direct instructions regarding, I'd like to receive life sustaining care for as long as possible, or please give it to me for a reasonable period of time, and then I would like for it to be withdrawn.
Adam Sherry: So, number one is instructions. You're able to give instructions. Number two, you designate an agent, a proxy. This is somebody you trust who can advocate for you when you're not able to. So quick follow up is, hey, I'm healthy, I feel great.
Adam Sherry: Why do I need these documents? That's me, right? I advocate for myself. I give instructions. Yes, and that's ideal.
Adam Sherry: But these documents are triggered and they go into effect and are most useful when we lose capacity. Now, a loss of capacity as a result of something like a coma. Right? So you just literally can't communicate or a loss of mental capacity. Sometimes our bodies are outliving our mind, so we have Alzheimer's or dementia.
Adam Sherry: These documents are so key because they empower the people around you to help you to maintain really important functions about your life. But the key is, at the time that you need the most, you don't have the legal ability to execute the documents because you lack capacitY. So it's one of those things that just requires just a little bit of proactive work, and it's a great safeguard.
Jim Puplava: All right, I want to move on to another document called a trust. And a trust can do a number of things. Number one, it avoids probate. Number two, for a married couple, you're Larry, lots of bucks, and you have a large estate, you can double the estate tax exemption. It avoids things like conservatorship.
Jim Puplava: So let's talk about a trust, its advantages, and then the necessary things that have to be done when you have a trust. A lot of times, Adam, I've seen people reluctant to get a trust, especially if they're much, much older, because they think if they set up a trust, they're going to lose control over their assets. So let's get into trust and talk about their advantages and disadvantages, if any.
Adam Sherry: Okay? Yeah, happy to. We can't talk about trust without talking about probate. So probate is a four letter word in our office because it involves a significant amount of attorneys fees. It involves court processes and real serious delays.
Adam Sherry: So trust is one of the ways that people are able to sidestep probate. And at its most basic level, a trust enables you to list your wishes, identify who it is that you want to supervise carrying them out, and then transfer ownership to the trust that you created, that you control, that you can usually amend or revoke. But that act of transferring ownership, just updating title, which you've already mentioned, enables you to sidestep the entire probate process for every asset that you update and put in that trust. And that is such a big deal. So in California, for example, if you had a million dollars that was subject to probate, the attorney is going to get paid over $20,000 in fees.
Adam Sherry: And for a standard approach with a trust, et cetera, there's no way you're paying $20,000 to an attorney to set up a trust. And so the cost savings is just really big. Now, a question as far as losing control. So your clients, are they concerned that a trust is going to be something that separates them from their documents, that they put it in? And that, what do you see when we're talking about that?
Jim Puplava: Sometimes they'll come out, well, gosh, if I put my assets in a trust instead of my name, I lose control over it, which is not true. You actually have more control. It's just a myth or misperception that's out there sometimes will be brought up.
Adam Sherry: Absolutely agree. Absolutely. So these trusts, by and large, are, it's an extension of you so you still file taxes the way you did previously under your regular Social Security number. The person who establishes it. So an individual, they are the trustee of their trust.
Adam Sherry: They are the trustor, which means they're the person who established it. And as trustor, they retain power to amend the trust. They can revoke the trust if they feel like it. They nominate successor trustees who are going to step in for them after they're not able to act, but that's only after they want to step down or if they lose capacity. And then even if they step down, let's say they resigned, but say, oh boy, I have capacity, but I've worked hard time for my kids to deal with this.
Adam Sherry: Right? Or I paid a bill twice and I'm just going to be cautious and I just want to make sure that somebody is helping me so they can call in somebody as a successor trustee or a co trustee to assist them. And I would be concerned about losing control in that context. But that's where one of the key features of being the person who established it really comes in, because you retain the ability to revoke and replace that trustee. So you can say, you're not making me comfortable, I don't appreciate the way that you're communicating with me, or you made a bad decision.
Adam Sherry: Thank you for what you've done, but you're done. And then you can revoke that power and then step back in yourself as the trustee or appoint an alternate to act who you think will do a better job. So I appreciate you raising that issue because it's just not the case. And so I would hate for people to miss out on the benefits based on a valid concern, but one that can just very easily be addressed.
Jim Puplava: The other thing, too, it's a way to protect a surviving spouse. So let's say we know that women outlive men, so let's say you're the husband, you pass away, but you want to protect your wife. Maybe she did not handle the finances and you want to be able to protect that spouse. You and I worked on a case where the surviving spouse, in this case, it was a woman and where we had children involved in trying to remove her as trustee and move the assets over to this new bank startup to manage the money, which would have deprived her of the ability to oversee her assets. So let's talk about protecting a surviving spouse.
Adam Sherry: That's such a great point, and that's a good real life example. All different relationships approach different things, different ways. And so it's very normal for us to kind of divide and conquer with our spouse. Right? Say you deal with this, I'm going to deal with that.
Adam Sherry: And then as we're married for decades, et cetera, we really kind of get entrenched in those roles. And it can be really disruptive for a surviving spouse who is grieving, who's dealing with a major life change just on a day to day basis to suddenly have to assume all of those responsibilities. And so sometimes the concern is overly opinionated children who may be well meaning but just are not paying enough attention and may just be wrong. It could be the sinister Bimbo girlfriend or beautiful pool boy or whatever it is. But establishing a trust in advance and then identifying somebody who can help supervise it as far as a successor trustee, is a great way to, again, provide guardrails, bring in people who are objective, who can keep an eye on things, to assist.
Adam Sherry: And that could be a trusted friend. It could be somebody in the family who, you know, is not going to get pushy and is going to be focused on the wishes of the surviving spouse. It could be a professional fiduciary. It's just a way of kind of expanding the community that's going to assist the surviving spouse in a way that you cared for your spouse while you were living. And then if we're more concerned, and I use the silly example about the sinister second spouse or girlfriend, whatever it is, but sometimes we just want to give them extra breathing room.
Adam Sherry: Right? So we're not saying that you want to. Maybe it's great for your spouse to move on, find a new relationship, but by establishing a trust, maybe it's an irrevocable trust after death. You give them this really nice cover and they're able to say, I love you, I enjoy spending time with you. But you know what?
Adam Sherry: There's a trust in place, and it's, legally speaking, I need to leave it here, and I can't mess with it. And I've seen in my practice that that gives people enough room to maintain their lifestyle, to continue to move forward while still having the protection and safeguards associated with that relationship that they spent.
Jim Puplava: So much time building and also the flexibility. In the case you and I worked on, where the son in laws were trying to get at the principal, we were able to bring in an independent trustee, which kept them out of the picture. But also later on, when she developed Alzheimer's and was incapacitated, that trustee stepped in. So there was no disruption of services or anything. And that trustee assured that she was taken care of.
Jim Puplava: I want to move on to something else, though, if you set up a trust, because I just recently came across a case. Dear, dear friend, quite wealthy, second marriage, set up a trust. The account with us was set up in the name of the trust, but there were other assets because this person served on the board of many companies. She had stock in these companies, that she was a board trustee, but they weren't in the trust. And unfortunately, she was too ill.
Jim Puplava: And we assumed and when we were talking and having the conversation that everything was in the trust, it was one of the things I discussed with her. But apparently that did not turn out to be the case. And her surviving husband has gone through probate for two years. So let's talk about if you have a trust, the importance that the things that you own, investments, property, things like that, are held in the name of the trust.
Adam Sherry: This is key. Jim, I'm so glad that you raised, you know, an early step, or one of the preliminary steps, of course, is establishing that trust, but a necessary step afterwards is to fund the trust. Now, attorneys, professionals like you, use a shorthand phrase, and we say funding, right? So you got to fund the trust. But what exactly does that mean?
Adam Sherry: And how does that relate to the example that you just shared? So a trust is a document and it lays out what happens and it has all of your wishes in it and who's going to help where it goes. And that's great, but it functions a lot like a box. And so until you put an asset inside of the trust box, it's not going to be subject to the terms of the trust without a whole lot of extra steps. Probate.
Adam Sherry: Like you mentioned, a two year process. So funding the trust is the process by which we take those assets and put them into the trust box so that on death or incapacity, the trustee can just pick it up and keep moving forward to maintain your regular life. And so it takes a little bit of work, but it's really not that difficult compared to what it could be if you don't take that step. So it's a matter of updating title on a home so that where you previously owned it as X and Y as a married couple or X and Y as individuals, you now hold it as trustees of your trust. And that's it.
Adam Sherry: It's such a small thing, but it makes all the difference. You need to take the same step with bank accounts, stock, all of your different assets. You should be asking your financial advisor, your attorney you say, I have this, I have that. Does this need to be held in the trust? Do I name the trust as a beneficiary?
Adam Sherry: Because that's how you finish strong. It's essential.
Jim Puplava: Let's talk about another advantage, and I'm talking here about very large estates. The estate tax exemption right now is about 12,000,009. So let's say you were very successful, you had a business, yoU're worth a lot of money. Let's just take a $30 million estate. Let's talk about the estate tax advantages of having a trust for a married couple when there are large assets in the estate.
Adam Sherry: Yeah. So we're in a really interesting time. Jim, you have so much experience, and you've been taking care of your clients for such a long time. I'm sure you can remember a time when the exemption amount was $600,000 at the federal level, and it's really increased since then. So we have, as you said, $12.9 million per person.
Adam Sherry: So by preparing a trust, you can clarify the fact that we want to be able to take the full advantage of the exemption amount for each spouse. And a trust can help you max out the benefit, the exemption amount of the first spouse when they pass away, and then ensure that you get as much as possible from that first spouse's exemption so that on the second spouse's passing, he or she can apply their own exemption amount to the remaining person. And so your example with the couple that has a $30 million combined estate, if they don't have a trust in place or they have a trust that, let's just say, transfers everything from the husband to the wife or the surviving spouse holds control of all the assets. Well, you just gave up on almost $13 million of exemption, and that full $30 million minus the wife's exemption is going to be subject to the estate tax. So where you could have covered almost the entire estate, you're instead going to be experiencing the estate tax on 1314, $15 million simply as a result of not taking some initial pretty simple planning steps.
Jim Puplava: And there are a lot of advantages of that. I've got a case right now. The gentleman was a high level executive at one of the technology companies, and of course, with stock options, his company stock has got a $10 million capital gain. So we've got it now in a trust, and basically he's in his middle eighty S. And so the idea is it's in California, it's a community property state.
Jim Puplava: And the idea is we're just going to sit on this. It'll be put in a trust, A B trust. In other words, the trust will split to take advantage of the exemption to get it out of estate taxes because his health is failing him. But more importantly, the thing that we're going to be dealing with, Adam, is we're going to get rid of $10 million of capital gains. So he wanted to diversify for his wife, but with $10 million of capital gains, you're talking about almost 24% federal tax and his tax bracket 13 three, state of California, you're almost talking close to 40% would be taken by the governor and basically the federal government.
Jim Puplava: So in this case, we're not only going to shelter that stock from further estate taxation, but we're also going to get rid of the capital gains.
Adam Sherry: And so, you know what you just humbly illustrated there, Jim, and you're so great at this. This is something where you were able to have an open conversation. Your client shared all this information with you, and this is an encouragement to your listeners. If you trust somebody to work with them, share all the information so that they can think about this in a more global sense. And so, Jim, you were able to serve your client there by saying, hey, let's think about all of these things.
Adam Sherry: Let's identify some opportunities here. Right. And then you're going to have the chance to be part of the process where you say this highly appreciated asset regarding the stock for the company that he worked for, let's allocate it to this portion of his estate after he passes away. And let's treat it over here. Let's put these other assets in the other trust bucket because we don't have the same opportunities, we don't have the same ability to experience these wonderful tax savings.
Adam Sherry: And that, to be real honest, is not simply a function of the trust document. An attorney didn't do that. Right. That's a financial advisor who was able to look at it, who was familiar with the law, who understood the tax code and understood his client. And I'm an attorney.
Adam Sherry: I think attorneys do great work. Some of them are not. Everybody loves attorneys, and tHat's fair. Right. But that's not attorney work.
Adam Sherry: Right. That's somebody who understood what was happening and was really smart and was able to take an approach that amazing benefit to your client. So Bravo. I think that's great.
Jim Puplava: So in summing up, let's take three situations. Let's take a new couple. Let's say they finally bought a home. They've now have two children. They don't have really an estate other than maybe the equity in their home, but they have life insurance policies on mom, life insurance policies on dad.
Jim Puplava: So that's case number one. Case number two is a couple heading into retirement, maybe with their pension plan, the equity in their house, they're worth three or 4 million. And then let's take, Larry, lots of bucks, the $30 million case, each one.
Adam Sherry: Of these couples that you've just identified can benefit from a trust. And if I'm getting a chance to talk with any of these couples, as I mentioned earlier, durable powers of attorney, healthcare and asset management to make sure that if they have an accident, they can keep life moving. But when it comes to the trust aspect, a single document can address the needs of each of these couples, even though they have really different profiles in very similar ways, by identifying who they want their assets to go to, identifying trusted persons to keep an eye on the estate after the first spouse dies or after one or both lose capacity or something like that, and then also to maximize the available tax benefits. And believe it or not, you identified the three major stages at which I get to meet clients. And believe it or not, the trust that we might prepare for the new couple, two children, some minimal equity in their home, life insurance, the trust that we prepare for that couple, we're going to build in, just by default, a lot of potential extra benefits options, et cetera, knowing that this couple is likely going to grow into the one that you described, secondly, or hopefully into the third.
Adam Sherry: And so when working with an attorney, it's worth saying, this is where we are now. This is where we anticipate we might be, and this is where we hope to be, so that you can establish a document that's flexible enough to grow with you and take full advantage of whatever is available. Because I know that when I get to work with the first couple that you described, I know it's entirely possible that they'll get busy with life, soccer games, clubs, whatever it is, and I may not get to see them again. And so we build it all in at the beginning. Knowing that they're going to grow.
Adam Sherry: These different people in this scenario kind of highlights the flexibility of these sorts of documents.
Jim Puplava: The other thing, too, and we'll just kind of conclude on this. It's important. One of the things we know about politicians, they change the tax laws. The exemption that you and I talked about reverts to a lower exemption after 2025. So in 2026, it'll go back.
Jim Puplava: It's estimated somewhere around 6 million. So just bear in mind the tax laws change. So that's why it's very important when you're working with an advisor, because that advisor is probably going to know more about you than, as you pointed out, Adam, somebody comes in, you do their estate plan, you may not see them for another 510 years where the advisor is aware that tax laws are changed so that person is in a position to advise the clients, hey, tax laws are changing. We need to do something now.
Adam Sherry: Absolutely. And you get to shepherd people throughout the course of their life. And I'm jealous of that to a certain degree because I meet people episodic, it's sporadic. Right. So they'll come to me, just like you said.
Adam Sherry: I won't hear from them again for ten years. But during that time, a lot of things have changed. And a tip to your listeners, attorneys don't have a duty, a legal duty in that circumstance, to reach out to every one of their clients and say, paragraph three relates to this law, to this party or that party in Washington, just changed everything. And we need to talk about maximizing it. Your attorney's not going to do that for you.
Adam Sherry: It's not part of the relationship. It's not part of their legal duty. So an advisor is somebody who you get to touch base with two times a year, three times whatever it is that you figure out. And they're the ones who are going to walk alongside of you and keep you in the loop when it comes to this stuff, because as much as I'd like to be able to do that, I don't have that same sort of relationship or access with my clients. And so I know that I'll do the best when they're with me.
Adam Sherry: We're going to deal with everything we know at the moment. But you're exactly right. Nothing's constant. People are going to change it for this reason or that reason. And so it's nice to know that there's other people looking out for my clients so that they can clue them in when we need to revisit things.
Jim Puplava: Well, listen, Adam, as we close, if our listeners tuning into this broadcast would like to find out more about the services you provide here in California, tell them how they could do so.
Adam Sherry: Gladly. So I suppose the easiest way is our website, specterShary.com. That's Spectorsherry.com. We work with clients throughout California regarding establishing estate plans, and we also do post death administration. So when people do end up in a probate situation, we can help people with that as well as administering trusts after death.
Jim Puplava: All right, well, listen, Adam, thanks so much for joining us on the program. I want to have you back again. And next time, let's talk about some advanced planning techniques. If you own a business, you have a lot of money. You have particular needs, like a special needs trust for a child and get into some of the more advanced topics in estate planning. But thanks so much for joining us today.
