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Q:

What is the point of having an Attorney FAQ section in MyHealthDirective.com?

A:

The point is education.

I've been writing on this subject for many years now, and I am constantly amazed that I keep getting the same questions over and over! My thinking is that if I could get a permanent resource bank out there for everyone's use and reference, then at least the "basic" questions might be answered, and everybody's education level would be enhanced.

To be honest, much of what we lawyers do in this area is very basic and straightforward. It involves simple concepts like naming the right beneficiary on your life insurance. What happens if you add somebody's name onto a bank account or a house? What does probate mean? How do I avoid probate? How do I minimize inheritance taxes?

These are basic questions, and they have basic answers.

If you would like more information on this topic, please visit my website at www.willsandtrustshawaii.com.

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Q:

Can you make estate planning as simple as buying a computer? I bought my daughter a computer, took it out of its box, plugged it in, turned it on, and it works. I don't want to know about megahertz and gigahertz--I just want something that works. Can you do the same for me?

A:

I can try. But instead of plugging what I give you into the wall socket, you'll have to sign your name four or five times. You can then put this stuff on the shelf and pretty much forget about it.

You're going to need three documents, or maybe four. (Just like you need a mouse, a keyboard, a computer, and a printer.)

Here are the three or four papers you will need to get completely squared away.

1. Living Will. This is the paper that tells the doctor what your wishes are in the event you cannot communicate, and then further in the event you become terminally ill. Who should speak for you if you cannot speak for yourself? If you become terminal, do you want to be hooked up to a machine, or do you want to simply "pull the plug"?
   
   
2. Power of Attorney. This paper allows someone else to pay your bills, and take care of your business affairs, in the event you become incapacitated. Like the paper just above, you would sign this one, and then put it on the shelf and forget about it until the time came.
   
   
3. A Will. This document takes effect when you die, so you can certainly sign it and forget about it. But it will designate, when you die, a person to take care of all of your affairs (your executor) and will then designate who gets your wealth when you pass away. This one can certainly prevent a lot of squabbling and fighting.
   
   
4. A Living Trust. This is the "optional" one and it can do two positive things for you. First, it will avoid probate when you die. That means your executor and your heirs will not have to go through the probate process--which no longer is that expensive or that big a deal, and so you may decide that you don't need or want to pay for this "optional extra". The second thing it can do for you, which is much more important, is this: if you are married, a separate living trust for each of you will mean that your children will be able to inherit $3,000,000 without paying any inheritance tax. If you don't have the two trusts, the children will be able to inherit only $1,500,000 without paying any inheritance tax.
   
   

That's all there is to it. There's no need to know "how" these documents work--only that they "will" work. No megahertz or gigahertz; just a nice clear picture.

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Q:

I am single with no immediate family. In my will, I leave everything to my boyfriend, with whom I have lived for ten years, and I have decided not to leave anything to any other family members. I have granted my boyfriend power of attorney. I do not want any sort of wake or funeral and would prefer to donate my body "to science". I've written up a letter stating such and have had all forms notarized, but I'm not sure if the final arrangement directive will pass muster. I also am concerned about my boyfriend's legal rights to make healthcare decisions on my behalf, although I think I'm covered with the power of attorney. Can you advise?

A:

Glad to hear that you have a will, because that will take care of your wealth when you die. But, incidentally, if you think that any member of your family might challenge the will, you might want to talk to a lawyer about how you can do things now to protect it from attack later. For instance, you might want to videotape the signing of a new will in order to show that you were of "sound mind" when you signed it.

The same answer goes for your funeral arrangements: if you think they might be challenged, see a lawyer to get your wishes protected. I would think that videotape again would suffice.

Finally, as to your healthcare directions, instead of a power of attorney, which might or might not include these directions, you should investigate an "Advance Healthcare Directive". This is the form recommended by our legislature, which allows you to designate who will make healthcare decisions for you if you cannot.

One final comment: if you really are anticipating a fight between your family and your boyfriend as to a) your will, b) your funeral, and c) your healthcare, then no matter what protection a lawyer can give you, I have found that the best arrangement is for you to speak with your family ahead of time and try to work it out. That will prevent surprises and hurt feelings and anger for everyone concerned.

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Q:

My estate totals about $600,000. That includes everything. When I die, it is to go to my granddaughter. Someone told me that the government would take 50% of my estate before it goes to her. Can this be right?

A:

Happily, it is wrong. But I think I know where your friend got confused.

There are two taxes that could apply to your granddaughter. The first is called the inheritance tax; the second is called the second generation skipping tax.

Let's talk about the inheritance tax first. The inheritance tax applies to anyone who passes away, and who leaves (this year) more than $1,500,000 of wealth. Since your wealth is below that threshold, there will not be any inheritance tax when you die. So far so good.

The second tax, which is completely separate, is called the generation skipping tax, and it applies whenever somebody dies and leaves wealth to grandchildren, great-grandchildren, great great-grandchildren, etc. This is what you are doing. Happily, however, the deceased person is allowed to leave $1,500,000 down to these heirs, collectively. If you attempt to leave more than that, then the tax is 55% of the amount in excess of $1,500,000 that you are leaving to these kinds of heirs.

So does the second tax apply to you? No, since you are leaving less than $1,500,000 to these kinds of heirs.

Although you have escaped both of these taxes because your wealth is below the exemption, let's make you richer for a moment so we can see how these taxes would work if you had more wealth. Let's assume you have $4,000,000, and you want to leave it all to your granddaughter. At your death, there would be an inheritance tax and also a generation skipping tax. The inheritance tax would be figured by subtracting the $1,500,000 exemption from your estate, leaving $2.5 million.  That amount will be taxed at about the 40% rate, for an inheritance tax of about $1,000,000. We send that amount to Uncle Sam. That leaves $3 million out of your original estate. But since that $3 million is going to your granddaughter, then there will be a generation skipping tax. The generation skipping exemption is $1.5 million, but you are leaving $1,500,000 more than that to your granddaughter. That $1,500,000 will then be taxed at 55%, for a tax of  $825,000. We send that amount to Uncle Sam. That leaves $2,175,000 going to your granddaughter out of your total estate of $4,000,000.

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Q:

I understand that I'm allowed to give $11,000 per recipient per calendar year. I don't intend to make any gifts this year, so I'd like to double the amount next year. Can I do this?

A:

The brief answer is no, so let's run though the rules.

The law allows you to give $11,000 worth of wealth, to each of as many different people as you like, each calendar year. For example, I could write a check for $11,000 to my daughter, and give a $11,000 car to my son.

As long as the gift is at or under $11,000, you don't even need to let Uncle Sam know. There is no tax, and there is no tax return.

This exemption applies every calendar year. If you do not use it by the end of the year, then you cannot "carry it over" to the next calendar year. Therefore, if you really want to give your child $22,000, you could give $11,000 this calendar year, and then another $11,000 next year.

There are a few wrinkles. The first is that the $11,000 exemption applies to any recipient--not just your child, but any person at all. Therefore you could give $11,000 to each of your grandchildren, your in-laws, even your next-door neighbor.

The next wrinkle is that if you are married, then your spouse can allow you to use her exemption. That means that out of your own bank account, you could give $22,000 per recipient per calendar year, assuming your spouse allowed you to use her exemption for each of those recipients. In other words, the money does not have to come from your spouse--it could be your money, but you can use her exemption.

The next wrinkle is the one that is most overlooked: if you give $11,000 of assets away in a given year, that is the limit. That means if you additionally give away a Christmas gift, a birthday gift, or an airplane ticket, then you have exceeded the limit, and need to file a gift tax return reporting the cumulative amount of the gifts in excess of $11,000.

If you do give in excess of $11,000, then you have to report it, and Uncle Sam will subtract the excess amount that you have reported, from her death time $1,500,000 exemption. For example, if I give my daughter $18,000 this year, then I would report to Uncle Sam that I have given her $7,000 over the limit. Uncle Sam would then reduce my death time exemption from $1,500,000 to $1,493,000. This means that if I then die, I can only leave $1,493,000 of wealth, without tax, instead of the normal $1,500,000.

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Q:

I am single, and my will leaves everything I have to my three children, one of whom is 16. I have named my daughter as beneficiary on my life insurance, and my son is named on my bank account. Doesn't the will override everything, so that all I have will go equally?

A:

Nope.

A will only controls assets in your sole name and on which you have not named a beneficiary. Since your daughter is named as beneficiary on your life insurance, she is going to get it no matter what your will says. Further, since your bank account is not in your single name, but is in joint names with your son, he will get that and your will does not have anything to do with it.

The same would be true if you have a retirement account and have named a beneficiary.

The only things your will would control will be your other assets, in your single name, without a named beneficiary. For example, you might have a stock, or bond, or bank account, or house, in this category.

You might be amazed at how often this problem comes up, and the sad part is that often the children will not voluntarily "even things out" after you die. This can cause a lot of intra-family grief and discord, so if you are going to name people as you have done, just be aware of what you are doing.

One final point. Since your youngest son is a minor, his share will have to be held for him by an adult, called a "guardian," until your son reaches 18. At that age, it is turned over to him for him to do with as he wishes.

Do I need to point out the obvious? Well, let me say only that when I was 18, it is possible that I was not fully responsible with money. If you feel your son might not be responsible at that age either, you should amend your will to put his share into a trust, where you can delay the age at which he will get it to a more responsible and mature age, like 30 or so. In the meantime, the trustee can give your son money, at the trustee's discretion, for his day-to-day living and educational and medical necessities.

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Q:

I have a will, but I do not have a living trust. My friends tell me I am going to go through probate when I die. What is probate, and if it's expensive for my heirs, how do I avoid it now?

A:

When you die, we have to take your name off your house, banking accounts, stocks, bonds, etc. We have to put the name of the proper heir onto those things. This is what probate does--it simply takes the asset out of the name of the dead person, and puts the live person's name onto the asset.

Probate will not apply to life insurance benefits where you have named a beneficiary; retirement benefits where you have named a beneficiary; or assets that you own together with somebody else.

Probate will, however, apply to any asset that is in your single name--for example, a bank account, house, stock, etc.

Probate will take your heirs several months, and (if they have to use a lawyer, which they probably will) will cost them some money.

The nice news about probate is that it is now shorter in duration and cheaper in cost than it used to be three years ago, after the legislature changed the rules. However, it is still a little bit of an encumbrance.

If you would like to avoid probate, then your neighbors have it right--you need a living trust. You can get one of these documents from the lawyer who helped you with your will. After it is signed, your lawyer and you would then change your assets into the name of the living trust. Of course you will be your own trustee, which means that even after you change the name on your accounts into your trust's name, you are still completely in charge.

When you die, nothing is in your name, (it's all in your trust's name) so there's nothing to probate. Therefore, you have saved your heirs the time, trouble, and expense of a probate.

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Q:

What's the deal with life insurance? Is it taxable or is it not? I'm getting different answers from my friends, so I thought I would ask.

A:

There was a very popular band in the 1920's that had a hit single entitled "Sometimes It Is, and Sometimes It Isn't." And that title is the answer to your question: sometimes life insurance is taxable, and sometimes it's not. Let's explain.

When you die and the policy gets paid out to (let's say) your daughter, she does not have to pay any income tax on the life insurance money. She does not add it into her income for the year, she does not report on her April 15 tax return. There's no income tax paid at all.

However--and here's where we run into the song title--there could be an inheritance tax that has to be paid by your estate. The quick way to determine whether this inheritance tax might apply to your estate, is to do the following: add up your wealth, including the life insurance policies death pay out, and if that total value is under $1,500,000, then when you die there will not be any inheritance tax at all, not on your estate, not on your life insurance, not on anything.

However if the total value exceeds $1,500,000 and you die this year, then there is going to be an inheritance tax on the amount over the exemption of $1,500,000. The amount of that tax is about 40% of the excess.

In other words, the bottom line is that life insurance does count towards your $1,500,000 exemption, and if it forces you over that exemption, then there's going to be an inheritance tax on the excess.

But there is a way to make your life insurance not inheritance taxable. What is involved is giving away all the ownership rights in the policy, and then living three years. The "ownership rights" include the right to change the beneficiary, the right to borrow against the policy, the right to change the policy, etc. If you give all of these rights away and then live three years, then when you die the insurance will not be included in your taxable estate, and you will have avoided any inheritance tax on the life insurance policy.

You can give these rights away to the beneficiary of your policy--your daughter--or you can give them away to an irrevocable trust that you create (for example, if your daughter is too young to handle the policy or the proceeds if you die).

So by giving away the ownership rights and then living three years, you can eliminate the inheritance tax on the policy, and since there never was an income tax, you will have completed a clean sweep.

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Q:

My husband and I have separate revocable living trusts. We set them up some years ago, and at the time, we deeded half the house into each trust. Now someone told us that if either of us is sued, that person's half of the house could be taken. Can we take the house out of the trusts, and still get the tax advantage we are looking for when we are both dead?

A:

Good news. It is now possible to have your cake and eat it too.

Let's remember what the rules used to be. The rules were that if a husband and a wife set up separate living trusts, then they could each "lock in" their separate $1,500,000 estate tax exemptions. In other words, by setting up separate living trusts, a husband and wife could leave $3,000,000 of assets to their children, without any inheritance tax.

The only "catch" used to be that while both spouses were living, they had to take care that each trust had assets in it worth $1,500,000. In other words, Dad's trust would have wealth in its name worth $1,500,000; Mom's trust would have the same amount in her trust's name.

The "problem" with this is that once assets are put into a trust name, they are vulnerable if the trust owner gets sued. That vulnerability could be avoided if you didn't put any assets into a trust name, but instead held them as "tenants by the entirety" with your spouse. The reason for this is that under Hawaii law, a home (for example) held as tenants by the entirety between husband and wife, would not be vulnerable if one of the spouses were to be sued.

Therefore, the rule used to be that a husband and wife were on the horns of a dilemma: if they held their assets in their personal names as "tenants by the entirety" then at least they would avoid creditors if one of the spouses were to be sued. However, holding assets this way means that you do not hold them in the living trust name, so when one of the spouses died, his trust would be empty, and his $1,500,000 exemption would be lost.

Happily, about three years ago the Internal Revenue Service caved in, and agreed that spouses could hold their assets as tenants by the entirety while they were living (therefore getting creditor protection), and that after one of the spouses died, the surviving spouse had nine months to begin the paperwork to transfer the deceased spouse's half of the properties back into the deceased spouse's trust. In other words, you didn't need to fill up the trusts while you were both living--you could do it after one of you has died. (While it's true that the surviving spouse has to run the deceased spouse's half of the assets through probate, probate has lately become so quick and inexpensive that this seems like a minor annoyance.)

As a consequence, more clients are, today, leaving their assets as tenants by the entirety, and waiting until one of them passes away before filling up the deceased spouse's trust.

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Q:

My mother is beginning to get very forgetful, to the point where she is not taking care of her financial responsibilities. She is not watching after her stocks, the rental apartment, nor is she paying her bills on time. What can I, as her daughter, do?

A:

This is really a two-step process. First, we have to be sure you have the right papers in place so that you can take over if need be. Second, we have to figure out a way to break this gently to your mother.

First of all, let's look at the papers that need to be in place. If your mother has added you on to her bank account, then you can have access to that, and can use it to help pay her bills. If she has written a general power of attorney and named you, then you can use that to have access to her various accounts and assets. (But be sure to read the power of attorney carefully, as it may only be triggered if a doctor writes a letter declaring that your mother no longer has the capacity to carry on her business affairs). Finally, your mother might have made a revocable living trust, and named you as successor trustee to take over the trust assets in the event she becomes incapacitated.

If your mother does not have any of those three things--she has not added you to the bank account, she does not have a power of attorney, and she does not have a living trust--and if she is no longer competent to create any of those papers, then you may have to go to court to get a guardianship over your mother's assets. This would allow you to have legal authority over those assets, and use them for your mother's benefit.

Now for the second problem, which in many cases is the bigger problem: gently telling your mother that it is time for her to move on to other things in life, and that you will take over her finances for her. If you approach this the right way, then your mother may agree to it happily. On the other hand, in some cases no matter how you approach this conversation, your mother will not take in a happy way: "You're trying to steal my assets!" If that is your mother's response, and if indeed she is incapacitated and needs financial help, then you might try to enlist her friends and other relatives to help persuade her that you are only doing this for her own financial good. In most cases, that will work. And finally, remember that while you are dealing with mother's assets--whether because you are on her bank account with her, you are using a power of attorney, or your are the successor trustee of her trust--you are doing all of this for her exclusive benefit. Also please remember to keep accurate accounts of what you are doing, because later on, when your mother dies and her estate goes to her heirs, the heirs may ask you what you have done.

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