The Problem With Wills

Probably the most significant recent change in estate planning was the 1997 Taxpayer's Relief Act. This new law for the first time in over 12 years raised the exemption from Federal estate taxes from $600,000.00 to $1,000,000.00 to be phased in over the 10 years after its passage. The problem with this number, a million dollars, is that probate attorneys are using it as the amount to convince the average uninformed layman that if their estate is under a million dollars they don't need a living trust but instead a simple will is just fine. Just fine for who? Its just fine for the probate attorney to get their hands on the estate of the unsuspecting client after he or she dies. How do you know if you are dealing with a probate attorney instead of an estate planning attorney? If the attorney tells you that a living trust is not necessary but instead a will is good for you, it is a probate attorney that you are talking to. By law, ALL wills must be probated.

So what is the real exemption from probate and how does this exemption work? If you are married, have a will and the will names your spouse as the sole heir of your estate AND your estate in under $85,000.00 in probatable assets your estate can receive what is called release from administration of probate. If you are single and regardless of who you leave your estate to, you will receive release from administration of probate only if your probatable estate in under $35,000.00. Now I think that you can imagine that most people have estates over $35,000.00. Certainly $35,000.00 is a far lower amount than the $1,000,000.00 that probate attorneys are running around telling their clients is the exemption amount.

I've heard many probate attorneys brag about their vaults full of client's wills that they are waiting to probate. The potential value of these vaults full of wills can be in the millions of dollars that the probate attorney gets and not the legitimate heirs of the client's estate. Probate is a multi-billion dollar a year business. Probate is also totally unnecessary.

There are ways to keep the probatable estate under the listed exemption amounts of $85,000.00 and $35,000.00 but the consequences may produce results that are even worse than probate. One method that is often recommended by probate attorneys is to use joint ownership of assets. However, as every probate attorney knows, when a husband and wife use joint ownership of assets it does not eliminate probate, it merely postpones probate. When the first spouse dies the assets held in joint ownership pass to the surviving spouse without any probate. However, when the surviving spouse dies the assets will then go through probate unless another joint owner is named. If you name, for example, an adult child or children as your joint owner you then have entered into a partnership with this child or children for that asset. Unfortunately your partnership with is for everything that can go wrong.

Now let's see how a probate attorney's advice turns out. Mary, a recent widow has put her house in joint ownership with her son Robert and her daughter Rebecca so that it would avoid probate when Mary dies. About a six months from now Mary will be applying for a consolidation loan from a bank so that she can pay off the medical and funeral bills of her husband. When Mary goes to the bank to apply for the loan, the loan officer tells Mary because her children's names are on the deed that the bank will need her signature and her children's. Mary tells the loan officer that it won't be a problem because she gets along very well with the children and they will be happy to sign. The loan officer then explains that the bank also needs the signatures of Mary's children's spouses because under Ohio law there is a rule called Dower Rights. Under Dower Rights, any transaction involving real property that could affect the interest of the spouse of a property owner must be approved by that spouse. Now Mary is horrified. You see, Rebecca's husband Dan is a prince, but Robert's wife Vanessa could be better described as the Wicked Witch of the West. Vanessa has hated Mary from the first day they met and Robert would never go against Vanessa's wishes or try to convince her to sign the loan papers. Now Mary has some real problems.

Because Mary could not get the loan she had to significantly cut back on her living expenses but with very tight money management and a drastic lowering of her lifestyle she manages to scrape along. Mary's son Robert is a very good son to Mary, however, Robert tends to be a little absent minded. Vanessa has been after Robert for years to let her pay the bills but Robert likes to be in charge (or at least pretend he is). Unfortunately, Robert just got into a car accident that was clearly his fault. That's the bad news, the good new is that Robert forgot to make his car insurance payment and the policy lapsed. Now how could that possibly be good news? Its good news because the attorney for the owner of the other car won the lawsuit against Robert and then was able to get a lien put on Mary's house because Robert is a part owner. Is this really good news? Well, it is not good news for Mary or Robert but it is good news for the other driver and his attorney. Remember, joint ownership is a partnership through good and bad, but mostly bad for Mary.

Rebecca always fancied herself as a good businesswoman with excellent entrepreneurial skills. Rebecca has spent the last 10 years building up her cosmetics distribution business and things have been going very well until recently. Because of falling demand and intense mail order competition Rebecca's business has suffered from a cash flow problem. Rebecca was very confident that things would pick up soon. Rebecca felt that she could "borrow" the money she needed by not paying her employee withholding taxes, just for a little while until things got better. The IRS, not being amused, slapped a lien on Rebecca's share of Mary's house to satisfy part of the back taxes owed. Good news again? Only if you like to see Mary suffer. Now Mary is in a partnership with the one of the biggest organizations in the world, one with a lot of clout, power and employees. Mary is now a partner with the IRS.

Well, it was bound to happen sooner or later. Vanessa is leaving Robert for a "younger more caring man." Vanessa's divorce attorney is very clever and well aware of good lawyering tactics when negotiating the settlement with Robert. The attorney for Vanessa is going to use the tactic of claiming "Vanessa's share" of Mary's house as part of the divorce settlement. Hope springs eternal for Robert so he basically gives into all of Vanessa's demands thinking that this will please her and she will come back to him. Now Vanessa's name is also on the deed for Mary's house. Will things ever look up for Mary again?

After Mary dies, the house will be sold and the proceeds will be distributed to the surviving owners of the house. One third for Rebecca, one third for Robert, and one third for Vanessa to share with her live-in boyfriend. Because the house was in joint ownership with the children there will be a small amount of taxes to be paid. Mary and her husband bought the house in 1947 for $12,000.00 but the house will sell for $225,000.00. There will be no capital gain for Mary's share but for the rest of the owners the capital gain will be $142,000.00. The resulting capital gain tax to be divided three ways will be a mere $28,400.00, enough to put Rebecca's daughter through two years of college if she lives at home.

Had the house transferred upon the death of Mary with a properly drafted living trust there would not have been any capital gain taxes at all. Robert's car accident and Rebecca's business tax problems would not have been a factor because Mary could have set the living trust up so that it by-passed Robert and Rebecca and was held in trust to take care of the grandchildren. Vanessa (and her boyfriend) would have received absolutely nothing because she was intentionally excluded from the estate. Mary would have signed, by herself, for the consolidation loan and would not have had to cut back on her standard of living. There would be enough money left to put all three grandchildren through four years of college and graduate school, and to pay for the two grand-daughter's weddings and the down payments for the three grandchildren's houses.

So the next time a probate attorney suggests that you should have a will or joint ownership simply say "no thanks, I want a REAL estate plan."

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