Step #4: Suze Orman's "The 9 Steps to Financial Freedom"

(Hope we do justice to this 80 page chapter summary)

Topics in Step #4:  Wills and trusts, durable power of attorney for healthcare, life insurance, long-term care insurance, and estate planning.  This posting is about the first topic, wills and trusts >>

What is a will? It is simply a piece of paper, either drawn up by a lawyer, purchased at a stationery store, a computer program, or written by yourself. All of these can be contested in court after you die because all wills must go through the court system. First, a judge has to authenticate the will to make sure it is valid, and this process is called probate. After the judge probates the will, a court order will be signed by the judge to transfer property to those intended to receive it.  This process can take anywhere from six months to two years or more, while the ownership of the property is in probate limbo.

This is not cheap because probate fees are based on a fixed-by-law percentage. For example, a home mortgage of $175,000 minus the $15,000 paid in mortgage payments, making the house worth $160,000, but the worth of the house is $300,000, the equity in the house is $140,000, and the bank owns the rest. Probate fees is not based on the equity of the house, but on the fair market value of $300,000. In one state for example, California, probate fees would be $15,000 plus $1000 or more for court costs, just to claim the title of the house from a deceased spouse. Probate fees vary from state to state, but no matter what state you’re in, probate fees takes time and money. Wills can be contested by anyone who thinks they should have received something that the deceased left to someone else, and the judge has to decide. For example, specified guardians for children is not binding. It can only express the deceased’s wishes because legal guardianship of children always rests in the hands of the court, not the biological parents. The court will decide based on whatever it feels is in the best interest of the children.

Trusts: The name of the trust that you want is called a revocable living trust. While a will says where you want your assets to go after your death, a revocable living trust takes the steps while you are alive, to sign the title of your property over to the trust for your own use and benefit while you are alive. You also specify in the revocable living trust where you want each piece of property to go when you are gone.

Most important with a revocable living trust, there is no probate--the courts are never involved in the transfer of your property. Think of a trust as a suitcase where you put the title to everything you own into it. You carry the suitcase while you were alive and you can put new things in and take things out, and when you die it gets handed directly over to the beneficiaries at which time they open it and take out what is theirs. No courts. No attorneys. The deceased’s wishes would have been carried out smoothly (including guardianship for minor children, which has more details about that below). When is the best time to get a revocable living trust? As soon as possible because the sooner you set one up, the easier it will be to accumulate assets in the name of the trust.

Protection of a revocable living trust:  Suze gives the example of a widow with the daughter she could trust, but a son who had received tens of thousands of dollars from them over the years to bail him out, who turned to elderly abuse as the parents got older. The parents owned a house in Florida and kept their stock money in a brokerage account, which the husband handled it by himself, with the wife not being involved with it, forgetting that if her husband might die before her, she'd have problems getting caught it up. The statements from the brokerage firm in Florida would arrive in the widow’s mail, and she would file them away never opening them. Suze opened them, and the account assets had added up to more than $3 million. The abusive son had made it his business to know about the brokerage account since he was living in the Florida home.

Suze transferred the entire account to a reputable broker in California where the widow and her daughter were living. They put the assets in a revocable living trust, and because of the widow’s age and frail health, they also gave the daughter what is called durable power of attorney for healthcare. Because the assets were so large, Suze took an additional precautionary step by videotaping the widow talking about the revocable living trust and what she wanted to have happen to her property when she was gone. The widow stated in the videotape that she wanted her abusive son to have $10,000 cash, that was all since he had already received a huge amount over the years, and his name was not to be put on any titles. 

Everything went fine until the widow was ill, and wanted her trusted daughter to become the new trustee. All institutions were notified including the abusive son.  Two weeks later, the abusive son came to California. He had been at his mother’s home, and he had changed all the locks.  The daughter had to get the apartment supervisor and a locksmith to get in, found her mother, her suitcase, and her checkbook, all gone.

The daughter flew to Florida and learned that her brother had gone to the bank in California and tried to close out the account, but was not able to because the sister’s name was on the trust. However, he did clean out the safety deposit box that had been full of cash as an emergency.  When they were back in Florida, he had his mother sign a new power of attorney with his name on it.

When the daughter was bringing her mother home to California, during the trip her mother died. When the abusive son found out about the $10,000 being left to him, he became furious, claiming that the mother had promised the Florida house to be transferred into his name, plus a lot of other bogus claims, and he threatened to sue. But when his attorney saw the copy of the revocable living trust, and a copy of the video, it ended all claims and threats.

The revocable living trust protected the widow’s property, but if she had had a will, the probate fee on $3 million would have been $82,000, in addition to the attorney fees for the daughter to pay in fighting her brother’s contesting of it.  Another plus in having a revocable living trust was that the trust was not a public document, and their privacy was protected, without anybody being able to go down to the courthouse and look it up  as they could have if it had been probated as a will. With trusts, only the people you want to see them can ever see them.

A revocable living trust means this: The word trust means you are trusting the entity to take care of your assets for you and to carry out your wishes when you are no longer here; the word living means that the trust is going to be set up while you are alive and will also live on after your death to carry out your wishes; the word revocable means whoever is in charge of the trust, which is usually you, can change it at any time.

Suze recommends that you set up a revocable living trust through a reputable attorney, which could cost between $500 and $3,000, plus a little more when you have the attorney transfer your assets into it (example: a couple who owns a house together would change the name on the deed to read John and Jane Doe, trustees for the John and Jane Doe revocable living trust; the couple would then also change the titles on their stocks, insurance policies, bank accounts, etc. the same way—the trust by itself means nothing until the trust assumes ownership of the things you intend to put into it).  Making any simple changes would cost about $100. These fees are quoted from 1998 and could be changed by now. 

The word trustor or trustee means it is the person who creates the trust and owns the property. The word co-trustee means someone who also has authority such as, married couples, or parents choosing their children to be co-trustees upon the deterioration or disability of the parents.  The words successor trustee means that someone who becomes the decision-maker when the owner of the trust no longer once the burden. The words current beneficiaries means the owner of the trust. Remainder beneficiaries means those who will inherit everything in the trust after the owner of it dies. 

Pretend that you have a certificate of deposit at the bank worth $100,000—put that CD into your trust, and though there might be estate taxes for your beneficiaries to pay, there would be no probate. Forgetting to put it into the trust would cost you $5,000 in the state of California. Every institution has a form they use to make this transfer easy, but it is better to have an attorney take care of all of this paperwork.

Retirement accounts cannot by law be held in the trust, and if you are married, do not change the beneficiary on the retirement account to match that of the trust. Upon your death your spouse can take over the retirement account as if it was their own, and can take the money out or leave it in, whatever they want to do.  However, if the retirement account lists the trust as the primary beneficiary, instead of a spouse or other beneficiary, by law the retirement account would have to be closed out, and taxes paid on it. Make sure that if you are married that your retirement account has your spouse as the primary beneficiary, and not the trust, but the trust can be the secondary beneficiary that would get everything if the primary beneficiary has died.

If you die with a will, say in an automobile accident, and you’re expecting your best friend Joe to take care of your children because you have a nice size life insurance policy to cover the expenses, remember the sooner you get a trust the better.  Without the trust, the court always has the last decision when it comes to appointing a legal guardian for your children, but the judge can also take charge of the funds that you want your children to have for private school, camps, music lessons, prom dresses, etc., by appointing a guardianship over the assets of the life insurance policy, and each year the Guardian has to go back to court to account for money spent on behalf of the children during the past year. When each child reaches 18, their share will be legally signed over to them, but by that time, there will not be as much in there as could’ve been because of Guardian fees and lawyer fees to do the guardianship reporting to the court. 

If you die with the trust, you will assign your own chosen guardian of the assets (the court still assigns a guardian for minor children, but your chosen guardian will be in charge of your assets), and poof, it’s done. No yearly reporting, no extra fees, no nothing.

Trusts are not for old people who were going to die. Trusts are for people who are lucky enough to live among people they love. Trusts are for people who are responsible to those they love.

The question has been asked as to why so many people think they should have a will in addition to a trust and the lawyer does not tell them anything different. Guess who gets probate fees for the wills? The lawyers. If you were an attorney, would you rather make thousands of dollars in probate fees, or just a few hundred dollars to set up a trust?

Revocable living trusts are even more important for the people with fewer assets than those with tons of money, because the less you have the more probate fees hurts.  If you use the will at all, it would be as a backup to cover any assets you did not put into your trust such as, furniture, personal items, and items of strictly sentimental value.

Also, since the trust does not address guardianship for under age children, your designation in the will as to who should serve as their guardian will be made clearer to the court as your wishes.

Word-of-mouth is the age-old way of finding a reputable attorney to draw up a revocable living trust and a backup will, for the sentimental assets listed above, and be sure to find one who is well-versed in estate planning.  You could also ask a reputable attorney to refer you to one who specializes in revocable living trusts, or if there is a law school close by, you can call one of the professors and ask for their recommendation.

Interview at least three of them which is expected by the attorneys and no fee is charged. Be sure to take your spouse or family members with you to these interviews. The questions you need to ask in the interviews follows:

• How long have you been specializing in estate planning? (Should be at least 10 years);
• How many people have you drafted wills and trust for in the past five years? (Should be at least 200 people);
• Will you be drafting the documents yourself, or will someone else be doing the paperwork? (If someone is supervised to do it correctly, it’s okay because it could cost you less in the long run, you just need to know one way or the other);
• How much do you charge? (Should be a flat fee that includes drawing up the documents, explaining them to you, and transferring the titles of your property and assets into the name of the trust);
• If I have other questions will you charge me if I call and ask? (Should be no charge for simple questions over the phone).
• And what if you don’t have a will or trust? No problem, as long as you don’t die. If you have no will or trust when you die (either from age, disease, or suddenly in a car accident), the laws of the state go into effect (called intestate succession), and the beneficiaries will need to come up with the attorney and probate court fees, with none of your wishes ever heard or heeded.