Peace of Mind with Estate Planning
MARTHA SHEDDEN
Why did you decide to go into law? How do you interface with retirees or soon-to-be retirees?
ALLISON CRUZ
I always knew I wanted to go into a helping profession, but I also wanted to be intellectually challenged. So, law seemed like a good avenue for me. With estate planning, retirees, or soon-to-be retirees, are very common clients. My clients range in age from 40 to 65ish. Often, they have had an elderly parent who needs assistance or is passing, and they’ve realized they need some planning.
Sometimes I have younger clients. I’ve had clients who got divorced and didn’t want their child to go to the father or the other parent because of domestic violence or abusive situations. So, they’ve created a will to make sure that can’t happen and to appoint somebody to be the guardian of their minor children. I deal with a lot of emotions, and I feel good about helping people. I give them a lot of professional information and hold their hand through the process.
MARTHA SHEDDEN
What are some of the tangible benefits you provide to people as they approach retirement? Are there any tax implications you're working with?
ALLISON CRUZ
People do not want to pay taxes and try to control that from the grave. The exemption rate right now is incredibly high. It's $11.7 million for an individual or double that for a married couple. That means your estate can be worth $11.7 million and your heirs will get it tax-free. Many people feel, and legitimately so, that their heirs shouldn’t be taxed for the inheritance because they already paid their taxes when they earned the money. On the other side, people argue it’s inequity built into our system to keep the upper-class rich allowing them to pass down wealth to their children with no consequences.
There are tax benefits to estate planning. Prop 19 is one that affects people in California It allows you to pass down a house to a child, a grandchild, or a spouse, without having any changes in the assessment of the property taxes if the spouse, child, or grandchild lives there as their primary residence. If they're going to use it as rental income or even a second home, then it will be reassessed to the fair market value. It’s a little more complicated than that, but the property will be reassessed.
MARTHA SHEDDEN
You touched on the exemption rate. Are you talking about probate or having an estate plan? How can people avoid probate and why do they want to?
ALLISON CRUZ
Probate is a lengthy and expensive process. Administering a trust can be wrapped up within a year, probate can go on for much longer. Probate lasts, at minimum, one year. The financial implications for going through probate are significant. If your estate is valued at $1 million, which is not that difficult to achieve if you own a house in California, your heirs will pay approximately $24,000 in court fees, statutory fees, and attorney fees. It leaves less to your heirs and more to the professionals going through the probate process for the heirs.
MARTHA SHEDDEN
If people don't have many assets, do they need to create a will or have an estate plan?
ALLISON CRUZ
Not everybody needs a trust, but everybody should have a will. You want to have a trust if you have assets that are sizeable. The probate small estate figure right now is about $166,000. If the entire estate is worth less than that, you can file a very simple form stating you have a small estate and avoid probate. If your estate is more than that amount, you probably do want to have a trust to make sure you can avoid probate, and you're choosing who you want to oversee your finances and make sure they follow your instructions as to who gets what you want them to have.
Everybody should have a will because it takes care of your personal effects. Otherwise, it's your next of kin rummaging through your stuff. You might be estranged from that person or aren’t comfortable with them being the person to handle your estate. All your personal effects, meaning your artwork, your jewelry, your furniture, your clothes, everything can be covered in a will. You can also include pets and minor children in a will so you can ensure they're taken care of the way you want them to be taken care of by the people you want to be their caregivers.
MARTHA SHEDDEN
When people are approaching retirement, why is estate planning part of a well-thought-out retirement planning process?
ALLISON CRUZ
When you're making your retirement plan, you're looking at all your finances. You should be meeting with a financial advisor to give you some information about prudent investments. This sets things up both for your heirs and yourself if you’re not capable. If you suffer from dementia or any type of memory loss later in life, and you lack the capacity to function and deal with your own finances, your trust will kick in and it would go to the successor trustee, so they can pay your bills for you, and find long-term care if need be. It's important to create it during your lifetime so you have it as a safety net.
MARTHA SHEDDEN
How does it help you while you're still alive? Can you talk about the directives for health care and those documents that are created?
ALLISON CRUZ
There are two medical forms that should be included in every estate plan. One is the HIPAA waiver, which allows your health care practitioners to speak with whomever you name as representatives or agents. You can list as many people as you want. That avoids them having to say, "I'm sorry. I'm not allowed to disclose how your mother went through surgery because I don't have a HIPAA waiver." Usually, they'll try to get that from the person ahead of time.
If they're in a car accident and they're unconscious when they arrive at the hospital, they can't sign a consent form. If you have this in advance, then it's taken care of. You give a copy of it to your primary care physician. The other document that has to do with your health care is an advanced health care directive. This provides you the ability to give directions to whomever you name to make health care decisions for you if you're not able to.
If you're incapacitated, unconscious, but still alive, then somebody can make decisions about your medical treatment. Then if you pass away, you also can put in the form whether you want to be cremated or buried, or if you want to donate any body parts, organs, or tissues. It’s one of the most important planning tools that people have a hard time dealing with. It’s easier to deal with it when you’re healthy and less emotional than when somebody is in the hospital, and you’re faced with a crisis.
MARTHA SHEDDEN
Would you draw up those two documents along with the will?
ALLISON CRUZ
Yes. There's also a power of attorney, where if you're still alive but not able to make decisions or handle your own affairs, then your financial affairs will be handled by whomever you name as your agent in the power of attorney. They can continue paying your bills, your mortgage, or your rent, so when you get out of the hospital, you have a home to come back to.
MARTHA SHEDDEN
Do people come to you with questions or issues involving their Social Security benefits?
ALLISON CRUZ
People sometimes are unsure of when they should start collecting and I then suggest they call you. I can offer them some information to help them. It does take teamwork. It takes somebody with expertise in Social Security as well as a financial planner, financial advisor, and an estate planning attorney. Some of the decisions you make now can affect your life later, as well as your heirs. You don’t know what will happen in the future. You don’t know if you will have a long and healthy life or if you’re going to need a great deal of expensive long-term care.
When you're looking at how much you have for Social Security, it's always good to look at how much is left over after those things. I might suggest getting long-term care insurance if you have some known issues in your family history or for yourself. I had a client who was diagnosed with Parkinson's, and so they knew what was going to be coming down the road for them later in life, and we talked about planning for that type of care.
MARTHA SHEDDEN
Do you see any retirees who consider their taxes when making their Social Security withdrawal strategy?
ALLISON CRUZ
It's a little outside the realm of what I do. When it has been brought up, we discuss what they've been told by their financial planner or somebody else, and I look to see if it makes sense for the plan they're making. Some people want to give a specific dollar amount to a certain person.
Sometimes that's not advisable because they might end up having to take out a reverse mortgage on their house and then there's no equity in their house. They thought they were going to have this million-dollar house and then they end up not having that. When you must give a specific dollar amount to a beneficiary that leaves a lot less for the residuary beneficiaries or a beneficiary who is receiving a percentage. In that case, it might be better to have every beneficiary receiving a percentage.
MARTHA SHEDDEN
When should people start planning? What would help people be prepared as they reach retirement?
ALLISON CRUZ
Staying organized is one of the most important things. If you make your estate plan early in life, you can expect you're going to make some modifications over the years. You might change your mind about want you want certain people to get, or who you want to be the trustee. Having everything in one place and easy to find so you can make amendments as you need is an important thing. It’s also important for your heirs, so they know where to find things. One of the most important things is for people to have a discussion with the person they're naming as a trustee or backup trustee, which we call successor trustees, and help them to know what's involved.
I've spoken with potential trustees to let them know what it entails, so they can make an informed decision of whether they want to accept that responsibility. You're handling the person's affairs in lots of different ways and it's quite a bit for anyone to deal with. The more organized you are the easier it is for others to pick up the pieces. It leaves a lot less questions and lessens the possibility of going to court because there's a conflict among beneficiaries.
I try to avoid having co-trustees for that reason. If I have a client who's insisting on having both of their children act as co-trustees, I'll ask them questions that include, "How do they get along with each other? How often do they talk with each other? Are they estranged or do they get along really well?" That helps to determine if they are going to get along as co- trustees because they're going to have to agree on every decision, or else they're going to need to go to arbitration or probate court, which is what you want to try to avoid with the trust to begin with. It's all about counseling and educating I would say.
MARTHA SHEDDEN
It’s a difficult topic. Many of my clients living on Social Security are reluctant to face estate planning.
ALLISON CRUZ
When people have two children or more, and they're trying to be equal to both of their children and fair, I might suggest having the more organized person who is good with numbers be the trustee to your trust and the more artsy and compassionate child be the agent for your health care. Have one child deal with health care and have the other deal with your finances. Then they're feeling equal with respect to responsibility, but only one person is making decisions in either capacity.
MARTHA SHEDDEN
Do they talk to their children about that?
ALLISON CRUZ
They tell me they do. I hope they do. I've had two clients who asked if they could bring in their kids and have me talk to them. I've done that. I have a handout sheet to give to my clients if they want to give them to their trustees or successor trustees, so they know what the duties are involved. I have a basic form that explains everything they must do.
MARTHA SHEDDEN
What are some mistakes people make as they approach retirement?
ALLISON CRUZ
One of the biggest mistakes is getting an online fill-in-the blank will form or trust form. Every single time I've seen one of those I've seen problems with them. There are areas they don't address that are legally required in California. They neglected to fill it out, or they didn't understand it. They don't understand the ramifications of, for example, the co-trustee situation. They want to just put down both children. They really need to speak to a professional to find out the consequences of filling in a blank that way. That’s the biggest mistake people make.
Another mistake is some people don’t want to give all the money to a beneficiary who they think might not be responsible until they're much older. They might say the beneficiary gets half at 35 and the other half at 50. That is fine, but in doing so, the trustee must act as the trustee until the child turns 50. They’re on the hook to be responsible for your assets for a long time. They have a fiduciary duty to keep the assets in a functioning way, so they’re adequately and properly invested, and the money is not divested. That can be challenging, especially if there is a house that is sitting empty. The trustee might have to sell the house to fund the trust until the child turns 50. People need to consider the consequences of their decisions when making their trust or will.
MARTHA SHEDDEN
I’ve heard of people waiting until 35, but never 50. Is that something you commonly see?
ALLISON CRUZ
It's not very common. I gave an extreme for the example, but it is common for people to make the beneficiary wait until 25 or 35 years old. Hopefully, the person creating the trust will not pass away that early and their children will be over the age of 35 when it happens. As an attorney we must think about the worst-case scenarios. Maybe one of your children dies at a young age when they have a child themselves who's only one or two years old. Then, again, the trustee must continue as trustee until the grandchild is of the age you designated.
MARTHA SHEDDEN
Do the same ages go on to the child’s beneficiaries, the grandchildren?
ALLISON CRUZ
Most people do it by right of representation, which means if I'm giving 50% to this child, and that child dies before me, then I want that share to go to the deceased child's heirs. Another way of doing it is per capita, which means if you have four children and one of them dies before you, then instead of each of them getting 25%, the three remaining children get thirty-three and a third percent, and that fourth child's children get nothing. Some people create their trusts that way.
MARTHA SHEDDEN
Is there anything else you would like to add when it comes to leaving assets for your children?
ALLISON CRUZ
Some people want to be fair and then others say, "This child doesn't do anything for me, and so I don't want to leave them anything." If they say that, I tell them to tell their child now because otherwise they’re setting up both a fight amongst the children and a court fight. It gets ugly. The only winners are the attorneys because they make money off the estate. It’s a hard conversation to have, but if someone feels strongly that they want to cut somebody out who probably is expecting to inherit from them, then they want to make sure the child knows about it so that conflict is avoided later.
Sometimes it's not out of anger. The child might be a drug addict who isn’t responsible and can’t be trusted. If that is the case, you can still set up a special needs trust, so somebody doles out money, like an allowance, or pays their bills and makes sure their health, education, maintenance, and support are taken care of.
MARTHA SHEDDEN
What changes would you make to Medicare or Social Security if you could?
ALLISON CRUZ
Most people fear Social Security is going to run out before they get to use it. That could be the case, because according to the 2021 annual report of the Social Security Board of Trustees, the money will be depleted by 2034, which means the system will be able to pay out only what it takes in year to year. They won't have a slush fund, which is in a trust. They'll only have enough to pay out about 75% instead of 100% of the full benefits.
The experts say we need to either change tax policies to steer more money into the trust funds which pay out Social Security, or tinker with the benefit formula to reduce costs. Either way, the people must bear the costs, and no one likes paying more in taxes or losing monthly income during retirement. Those are both hard pills to swallow.
From an estate planning perspective, people want their children and their grandchildren's futures to be secure, which is why they pay for an estate plan while they're alive rather than having their heirs sort it all out after they've passed away. One way that won't hit people in their pocketbooks would be to raise the age when a person becomes eligible to receive Social Security or full Social Security retirement benefits to 65 or 70. We must keep in mind the Social Security system was created and designed to provide benefits to retirees for 13 to 15 years.
MARTHA SHEDDEN
Are you saying that in 1935 we thought people would be retired for 13 to 15 years?
ALLISON CRUZ
Yes, and now people are living longer, so they'll need it for a longer period. They might need to work longer to be able to do that. I believe the raise in age should depend upon the type of work you did, such as heavy labor versus white collar. If somebody's in a white-collar profession they're going to be able to work longer. Everyone isn’t equally living longer. It's known people who have stressful jobs or heavy labor jobs tend to die earlier than those with less stressful jobs. It seems like there should be an equitable way of doing it because it’s not fair to presume everyone should be able to work until they’re 70 because that might not be the case.
MARTHA SHEDDEN
When they do stop working, they might not be able to wait to collect it. It depends on how much they have saved for retirement. A lot of people need to start at an early age. I've heard of raising the early age from 62 to 64 or 65. It's so often confused with the Medicare age of 65. Many people think that is when their full retirement age is for Social Security. There are a lot of options out there that could be made to strengthen the program, and hopefully it'll get done before 2033.