Why Estate Planning Is So Critical With David Scranton Victor Medina


Estate Planning

DAVID SCRANTON: Welcome back to the Income Generation. The show where we share valuable financial information for that critical period in life when you’re either in or approaching retirement. I’m David Scranton your host and I can tell you from experience that if you have assets of any kind and you have a family, there is absolutely no overstating the importance of today’s topic. Estate planning, there are too main reasons why estate planning is so critical and the first has to do with the very definition of the term. Estate planning is actually defined as accumulating, protecting and ultimately distributing your assets now that surprises many people because they think estate planning is all about where your money goes after you die. But it’s really much, much more than that because it also involves the accumulation and the protection or preservation stages and on today’s show you’re going to learn just how and why that is? The second reason, it’s so important relates to why I mention family right off the bat. Estate planning is as much about protecting emotions and relationships as it is about protecting your money, I cannot tell you how many times that I’ve seen over the course of many years of a financial advisor. Where families are literally torn apart because their parents or benefactors either made mistakes in their estate planning or ignored it altogether, in many of those cases the states and assets usually end up in the courts and loved ones end up pitted against each other. Sometimes a state settlement cases get stretched out for years with attorney’s fees mounting the entire time, it’s never a good situation when some judge ends up deciding your final wishes. And even in those cases that don’t end up in the courts the damage done to families can be permanent, think about it, it’s a very emotional time to begin with. When a parent passes but where is most of the emotional attachment afterward? Is it on financial assets? Or is on personal items such as mom’s jewelry or some family heirloom? Once I had a client named June who had two daughters and they were very, very close but after she died the daughters had a fight and they still don’t talk to each other today. And what was the fight about? Well it wasn’t about the financial assets, it was about who was supposed to get what from mom’s jewelry collection. And this wasn’t expensive jewelry by the way, but it had a lot of sentimental value for both of them and just because June didn’t make her wishes clear, it led to that family feud. And that’s the kind of thing that can happen easily, so protecting emotions and relationships is a huge part of what you’re doing with estate planning. But protecting and preserving your assets you plan to leave behind is obviously just as important in fact, good estate planning does that by helping to identify potential, financial threats that you might otherwise have missed. And it helps to ensure that the protective measures you take remain in place, working on behalf of your loved ones even after you’re gone. There are really three areas where these protective measures are vital in estate planning the first is to avoid unnecessary legal costs as I already mentioned, second is to avoid a situation where declining mental function or long term medical care. The costs for long term medical care deplete your assets and the third is to avoid additional or unnecessary tax loss, that’s a big one, we’ve all read stories about wealthy celebrities whose assets went mostly to taxes after they passed. And in fact, Elvis ended up leaving seventy three percent of his wealth to the IRS. The most recent example is Prince, who died without a will and his state could end up owing almost half of the value to the government once everything is settled. You’re going to learn a lot more about the specifics of asset protection in today’s estate planning, market breakdown. But it really starts with having an estate plan that includes some basic components such as, a clear disposition of assets. Meaning a directive that spells out who gets what? Second, you need strategies or provisions to avoid probate for any assets that you don’t want to go through probate, Third you need directives that make it clear as to whom you want to make financial and health care decisions on your behalf if you become unable to do those on your own. So those are the basic components, but the tools and strategies that you use to execute these things are going to vary depending upon your situation. There are certain tools that are essential however in virtually every estate planning. First, either a will or a living trust, second, durable power of attorney or what’s called a spring power of attorney. Third a designation of a health care agent and a lastly a living will. You’ll learn a lot more about all those in today’s news and views section of the show but for now just be aware that different tools and strategies work better for different people. Depending upon a whole bunch of different factors such as the size of your estate, the type of investments in which you are invested, whether or not you own a business and the list goes on and on and on. Equally as important are family issues and things like whether any of your children have marital problems, drug dependencies or even just bad spending habits. The truth is that one of the reasons people tend to put off or try to ignore estate planning is that by necessity it gets into a lot of these personal life and death issues. And sometimes forces you to make difficult decisions and think about things that you may just not want to think about, the good news is that by working with experienced professionals meeting your financial advisor and a qualified estate planning attorney. The process usually isn’t nearly as difficult or as painful as many people fear and as I’ll talk about more later in the show the consequence of trying to ignore or minimize these estate planning decisions. Can be far more painful in the long run so, now let’s take some time and let’s talk more specifically about how to avoid some of the financial pain in today’s market breakdown. Stay with us, we’ll be right back. Again, welcome back to the show, estate planning isn’t just about what happens to your money you’re gone, estate planning remember as defined as the process of accumulating, protecting and ultimately distributing your wealth. As our regular viewers know we talk a lot on the show about the importance of protecting your wealth from Wall Street and from the kinds of extreme market downturns and volatility that we’ve seen since the turn of the century. But when it comes to Estate Planning protecting your money from things like market losses and erosion of principle is only just part of the equation, there are many other potential threats as I’ve discussed before. Related mainly to legal fees, taxes and medical costs and let’s talk about those one by one starting with avoiding unnecessary legal fees. Basically, the more that your estate has to go through the legal system after you die, the more costly that process is going to be most people know that if you die without a will your assets go through probate. But what many don’t realize is that if you’re assets pass to your heirs via a will there is still no avoiding probate or probate fees. In fact, the word probate comes from the Latin word probare which means to prove, the probate process is intended to prove the legitimacy of the will that’s being presented. How do courts do this? Well by making a list of all your assets available to the public. Now, this carries a risk of more expense, why? Because when you’re assets become public information it means that anyone can look at them and go to the court and say Judge I’ve got a claim or say Judge I’ve got a copy of a will and testament, last will and Testament that says that this money belongs to me. At that point the judge has to consider the claim or decide which final will and testament is actually the last one and there may be other claimants arguing against it also. So, in addition, to the expense probate can actually tie your assets up for a long time if you have not taken steps to minimize or avoid the probate process itself. Perhaps the most comprehensive way to avoid probate is to have something called a living trust, to pass your assets on, you can have this instead of a will and I’ll talk more about this later. But there are other strategies for minimizing your wills exposure to probate and all the probate fees involved. As a general rule, any asset that has a beneficiary designation can avoid probate. Qualified plans such as IRA’s, pensions and 401k’s can all avoid probate if you’ve designated human beneficiaries. Now the same goes for things like life insurance, annuities and jointly held property and even some non-retirement accounts where you designated a beneficiary through what’s known as a TOD or a POD. A transfer on death or payable on death designation, those beneficiary strategies are always of shielding specific assets from probate without having a living trust. Now it’s even better is that by designating, human, primary and secondary beneficiaries on your retirement assets. It could also help you when it comes to guarding against the second major financial threat to your estate plan, excessive and unnecessary taxes. Of course, there are two different kinds of taxes you have to think about when your estate plan which are estate taxes and income taxes. The good news when it comes to estate taxes is that the rule change at the federal level three years ago in a way that exempts most people from owing anything. Federal estate taxes or death taxes today start at estates worth more than five point three million dollars of assets, if you’re married then they only kick in at double that amount which is ten point six million dollars of assets. The bad news is that if you’re over that threshold the tax rate is thirty-five percent and unfortunately, most states have not followed Uncle Sam’s lead to raise their own thresholds. Estate taxes in certain states can kick in as low as one million dollars of assets. As for income taxes, those can impact you regardless of your net worth and the last thing you probably want for your loved ones is to inherit a major tax burden when they get your assets. But again there are proactive steps that you can take to avoid that. One of which is designated human and primary and secondary beneficiaries, as you may know a spouse who inherits an IRA or a 401k can defer the taxes on that money through much of his or her lifetime. But that doesn’t apply to children who inherit these accounts, the exception is if they are named as beneficiaries, in those cases they can keep an IRA intact and they can pay taxes in tiny little bits and pieces over time. In essence, deferring those income taxes so identifying human beneficiaries on your assets especially your IRA’s is clearly a key strategy for avoiding financial pitfalls. But there are two important things to remember, first, some of the things that you put a beneficiary designation on can overrule and override what you say in your will. For example, if you have a beneficiary on your IRA that says everything goes to my daughter. But your will says that half of that is supposed to go to your son, guess where the IRA goes? To your daughter again, the beneficiary designation supersedes the will second, designated beneficiary is not the same as putting an asset in a child’s name that’s actually something you probably never want to do. In an ideal world it might be fine, but let’s face it, life can get messy as we all know and if the child in question gets divorced for example, then half of that asset can go to their ex-spouse. Or if they get sued it’s subject to collection by whomever is suing them, I’ve seen it happen a lot of heartache and a lot of loss can result from this one single mistake. Now, also remember that it’s important to identify all your beneficiaries, primary and secondary beneficiaries because so many different scenarios can occur. Let’s say for example, that you name your spouse as a beneficiary and that’s it no second or contingent beneficiaries. The two of you get killed in a car accident together if you don’t have these secondary beneficiaries, now the thing you thought was going to avoid probate is going to get pushed right back in to probate. Or let’s say for example, that your son is primary beneficiary and you have to consider the possibility that you get into an accident with your son or the worst case scenario that your son per-deceases you. Something that as we all know should really never, ever happen. But are you going to be in the right frame of mind to pick up the phone after losing your son, call your financial advisor and say hey, I need to change my beneficiary, probably not. So, that now gets into a very important aspect of beneficiary designations which most people are not aware of, in fact, most people haven’t heard of it and this is an important distinction between what’s called Per Capita and Per Stirpes designations. This is something that again many financial advisors aren’t even aware of and they end up unwittingly putting the wrong designations on your accounts because they don’t know the difference. This is so important, now I’m going to talk more about this in the news and views section of the show. I’ll also talk about some of the other reasons other than avoiding probate that someone might want to have a living trust rather than a will, in short the main reason for having any kind of trust is typically that you want to have the ability to control your assets from the grave. As I’ll explained in a moment but right now, I want to cover that third major financial threat that you need to protect against in your estate planning. And that is, the medically related threat and the possibility that your deteriorating health or cognitive function and the associate of socio-health care costs can deplete assets that you want to leave behind. Now, this is exactly why a good estate plan needs to include clear instructions for whom you want to make financial and health care decisions on your behalf. If you’re no longer healthy enough to make them yourself, these instructions generally come in the form of a durable power of attorney and designation of health care agent. The first designates whom you want to make financial decisions and the second of course, designates whom you want to make health care decisions. Closely tied to that is something called your living will, which specifies your own wishes for end of life medical care. I tell a story often in my estate planning workshops about a client of mine whose father was on life support and he realized they were at the point where his father would have wanted to pull the plug. So he went to the doctor, initially, the doctor said I’m sorry we can’t do it fortunately the son was able to go and get his father’s living will from a safety deposit box. Come back and show it to the doctor and with that they were able to fulfill his father’s final wishes, the objective behind all these provisions is to help protect your money from costly mistakes that you might make if you’re decision making abilities deteriorate. And from the potential of financial drain of extreme ongoing, prolonged health care costs because again, estate planning is not just about how your assets are distributed after you die. It’s about how you manage to protect and preserve them long term. And, while the prospect of confronting and thinking about some of these issues may not be pleasant for most people in the end, you risk a lot more of potential pain and discomfort by procrastinating or trying to avoid this all together. We’ll be right back after the break with our special guest nationally renowned estate planning expert Victor Medina, stay with us. Welcome back, we’re here today with nationally renowned estate planning and over care expert Victor Medina: and his brand new book entitled, Make it Last. How to keep your legal ducks in a row. Victor, welcome to the show.


VICTOR MEDINA: It’s a pleasure David. Thanks for having me.


DAVID SCRANTON: I know people might recognize you, you were featured in The Wall Street Journal you’re quoted in U.S. News and World Report. So, I’d like to start with a really simple question but a really important question. At what age do you recommend people or what stage in life do you recommend that people get focused on their estate planning?


VICTOR MEDINA: You know I think there are three stages that people really should start focusing on and now the first one is when you turn to be an adult at eighteen and that really is a focus for their parents. Because many times they’re off to college and something might happen on campus and without the right proper legal documentation, turns out that they can’t access that stuff. So that’s the first stage adulthood, the second stage is going to be when you start to have children because at that point in time it becomes really important for you to name guardians and make sure that what you leave for the next generation is something that’s protected. And then one of the next stages after that is really when you’re facing retirement because that’s when you start to encounter your own mortality. So it’s not if you’re going to die but when you’re going to die and you want to make sure you have your ducks in a row then too.


DAVID SCRANTON: Great, but you know I mean I’m in my fifty’s, I’m probably not going to die tomorrow and I don’t want to spend a lot of money on some expensive estate planning lawyer. So can I just go to the internet and can I just print off some generic documents and fill in the blanks and isn’t that a sufficient estate plan?


VICTOR MEDINA: You could certainly do it, but I wouldn’t agree that it’s a sufficient estate plan whatsoever you know we’ve had a lot of situations come into the office where somebody’s done it on the cheap. Doing a website or somebody that isn’t specialized in estate planning and what happens is there’s a mess afterwards, here’s the worst part is that you don’t realize there’s a mess because either your dead or your incapacitated. So what we’ve really found is that this is not a time to go cheap, these are premium dollars that you want to spend because this is not like a haircut it’s not going to grow back if it’s wrong.


DAVID SCRANTON: Yeah, I guess when you’re six feet under you can’t come back and say oops, sorry I made a mistake, I really didn’t mean to say it that way. So it’s a little too late then you know we talked earlier on the show about things like the power of attorney or financial power of attorney or medical power of attorney and so on. Some people think that said it and forget it, you know I just do my power of attorney once I say, I want Victor Medina: to manage my financial affairs when I’m incapacitated and I’m all set. That’s not the whole truth though is it?


VICTOR MEDINA: No, not at all and in fact, one of the things that’s coming out is these financial institutions that are managing people’s money are really concerned about being sued for releasing money on a power of attorney that might be too old or ineffective. So they’re concerned about doing that and one of the ways that they control for this is to look at the date of the document, so we really encourage that at least every three years. Even if you are not changing the underlying provisions that you go ahead and get a fresh date on that because you don’t want to give them an excuse to reject the power of attorney. Because then you’re back into a legal process in order to access that money and you would have wasted everything that you did by putting the power of attorney in place in the first place.


DAVID SCRANTON: And from what I understand the trickiest part about that is there is no law, the government has to come out and said okay, you can accept these if they’re five years or less. But not if they’re five years or more so, it’s really up to the interpretation of each individual financial institution, is that correct?


VICTOR MEDINA: That is correct. And I’ve seen the widest spectrum of application of this you know we have some places that will go ten years or longer and they don’t care about the length of the power of attorney, the date on it. And then we have these other places that are looking at ninety days or less which as an internal policy is ridiculous to comply with. So we just want to make sure that we’re not going to have a failure at the critical point when we need that document.


DAVID SCRANTON: If your recommendation is every three years, do you think that keeps you safe in most cases?


VICTOR MEDINA: I think that’s a good place to start. One of the things that you may want to do, when we make this recommendation for our own clients is that even with the powers of attorney that we draft. We actually recommend that you field test these documents and what I mean by that is actually present them to the financial institution and propose a hypothetical. And you say listen if I’m incapacitated would you honor this document? And have them pre-review what’s going on so you don’t want it to fail not only for dates, but you also don’t want to fail for a lack of provisions on there. Because as you suggested David, there is no standard, there is no way to determine that it is absolutely going to be accepted when you need it.


DAVID SCRANTON: Now, the same philosophy applies to medical decision making, medical powers of attorney also, does it not?


VICTOR MEDINA: It does apply and here you’ve got a little better backing because there are… in each state there is a set of accepted forms for the health care directive and it could be in the form of the living will. What you want to have happen if you become incapacitated or who you name as being the person in charge. And so one of things that we recommend is that you go and grab that state form wherever you reside and use that one because that’s the one that’s been accepted under law. Now there’s an additional recommendation for people that have two different residency, is like my parents they live in Florida and they live in New York. So when we did the estate plan for them, we made sure that they had Florida Health Care documents and they had New York health care documents. Because we didn’t know where they were going to be when they got sick.


DAVID SCRANTON: Good advice. Very good advice so that is state specific got to you. Talk a little bit if you don’t mind about administrative costs you know we discussed earlier on the show how probate costs vary from state to state. Some states are very probate friendly with low cost, others are more expensive but how about other administrative costs that our viewers need to be aware of and look out for?


VICTOR MEDINA: Sure and this is a really under discussed topic in estate planning. A lot of times the focus is on the preparation of the initial documents and clients are just happy to get through the signing process. They’re not asking how is my estate going to be charged when I die. And what do those costs look like? So we like to recommend that you have that discussion ahead of time because there are costs of administration that come up. Whether you’re talking about something that people are being put on notice and you have to deal with warring family members or just the steps that it takes to get through estate administration. And those costs can be controlled, one of the things that we recommend is a living trust in those situations because since it’s private and since the administration is something that is more streamlined. It’s almost a suggestion that you’ve heard it all, the cats in your life while you were alive rather than waiting for that to be something that your kids do after you’re gone. It can really streamline the process after you pass away.


DAVID SCRANTON: We need to take a quick break and when we come back we’re going to talk more with Victor Medina: about his book, Make it Last, how to keep your legal ducks in a row. And one of the things I love the best about his book is very much like my book coming out in September talks about how to interview a financial advisor, what questions to ask. Victor’s book talks about how to interview an estate attorney and what questions to ask that estate attorney, so stay with us we’ll be right back and we’ll talk about those great interview questions. We’re here today with Victor Medina, nationally renowned estate planning and elder care expert and author of the book, Make it Last. Victor, right before we took a break we talked about the differences between living trusts and wills or at least you alluded to it. In your own words, what do you think are the greatest benefits of having a living trust over maybe some other simpler maybe less expensive ways of avoiding probate?


VICTOR MEDINA: Sure, yeah and I think that this is one of those debates that is in the public’s discussion and for our purposes the planning goals are often similar between a will and a trust. You want to make sure that your estate is well organized and efficiently administered after you pass away and one of the things you can do is you can have a will which will cover some of your assets, but not all of them. So if you’ve got IRAs and life insurance they’re not going to get captured by your planning in the will or you can have a trust and when you do a trust. We used the analogy of a bucket and what you’ve done is created a bucket and collected your stuff and put it in the bucket during your lifetime. And this leads to inefficiencies because if you have everything collected in one place and you know where everything is probably better than your kids do. It makes it for an easier state administration after you’re gone and a more complete one.


DAVID SCRANTON: Great. Now I know, you know as we said earlier in the show that one of the major reasons to have any kind of trust is to potentially be able to manage your money from the grave. And we highlighted some situations such as having beneficiaries that are spendthrifts or maybe children that have marital problems or emotional problems or drug problems. So, how does that work? I mean a living trust is revocable, right? So, how does it help…how does the trust potentially help protect beneficiaries or heirs from those types of contingencies?


VICTOR MEDINA: Yeah that’s a great question David. So, one of the things that’s unique about a revocable trust is it has a switch so after you pass away it goes from revocable to being irrevocable. And then the assets that you leave to the next generation if you’d like them to be protected or in a form of a trust that only your child can access. Now you may want to change that if they’re a spendthrift, you may not want to give them the checkbook necessarily. But if you… if they’re okay to be dealing with that money then one of the things you can do, is make sure that it’s just there for their benefit and then one of the things that drives a lot of the planning decision for putting it in this kind of protected inheritance Castle. Is to make sure that it follows a bloodline that what you leave your daughter goes to your grandchildren and not necessarily your son in law.


DAVID SCRANTON: Yeah and most people don’t realize that so I appreciate you bringing that up. In the final minute we have left, I want to talk to you about your book specifically the interview questions. I mean, I think buying your book just to get those interview questions how to find the right estate attorney is so important. So tell us in the final minute or so how do we do that? How do we interview for an estate attorney?


VICTOR MEDINA: Yeah, you know it’s something that people aren’t going to do many times in their life. Whereas there’s an imbalance the estate planning attorney may have had that interview four, five hundred times with their clients. You as the general public’s only going to have it once right, so we want to make sure that you’ve got tool set so that there’s a level playing field between you and the lawyer. And you understand where they’re coming from, now the questions are going to range about how they structure their practice. Some of the detail objective numbers like how many plans do they create? How many plans do they do estate administration on? And one of the things that I’ve done in the book is gone ahead and give you a set of model answers now, those answers are based on how I run my practice. But they are not the only way to answer the question, they are just a reference point so that as you take this and you should absolutely, David by the way. Be interviewing your estate planning attorney, this is someone that is going to be a counselor with you for the rest of your days and help shepherd the transition to the next generation. So it’s super important that you get somebody that you like, trust and who’s knowledgeable to be able to do this work on your behalf. So I guess the final piece of advice for viewers then is they should go out and they should buy, Make it Last, right? How to keep your legal ducks in a row that’s… if they have that they don’t need anything else, isn’t that correct?


VICTOR MEDINA: It’s going to give them a great starting point but they’re still going to need a lawyer where they are in order to do the work for them.


DAVID SCRANTON: And the book is going to help them find that right lawyer. So I love it, Victor thanks so much for being with us today I really appreciate you being here.


VICTOR MEDINA: Thank you, David.


DAVID SCRANTON: And stay with us when we come back Morgan and I are going to be talking more about estate planning with some important points that you need to know before you update your estate planning. We’ll be right back.


MORGAN THOMPSON: Welcome back. David today we’re talking about estate planning and this is a difficult topic and one I know people tend to kind of avoid or put off but it’s so important.


DAVID SCRANTON: Oh, it’s incredibly important and again there’s so many tough decisions we talked about earlier in the show that cause people subconsciously to just kind of push it away and pretend it’s not an issue.






MORGAN THOMPSON: So it’s definitely something we need to talk about. So let’s get right into it, I would imagine the first thing is you have to have a will is that correct?


DAVID SCRANTON: Yes, you know a lot of people would say well you know I know I need to have a will if I have children for example, because I need to make sure I have guardians spell out for my kids.




DAVID SCRANTON: But the reality of it is it’s more than that you know if somebody has assets at all, it could be a home, it could be a car, it could be a few thousand dollars in savings bottom line is that money has to go somewhere.




DAVID SCRANTON: And you have one chance to really explain through a will that this is where you want your money to go and to whom you’d like it to go and that’s why it’s so important to at least have a will for virtually everyone.


MORGAN THOMPSON: So I have to admit, I’m one of those that puts this off and I do not have a will. I don’t have children. Didn’t really see the need for it so let’s say something God forbid happen, what happens if you don’t have a will?


DAVID SCRANTON: That’s a great question, there’s something called the in test to see loss.




DAVID SCRANTON: Laws of intestacy which… each state has their own rules so Florida, has its rules here which basically says that if you should die without a will they’ve got certain rules that spell out where your assets go. And each state is different, there are some states everything goes to surviving spouse and some states it goes to the spouse and partially to the children or other family members. And there’s just an infinite number of ways that drastus could get divided based upon the inflexible will that the state has for you call the laws of intestacy. At the end of the day, you have to think about it you know who’s better suited to figure out where your money goes, the state of Florida or you?


MORGAN THOMPSON: Definitely me. I always just assumed they went to your spouse or if you’re not married to your parents or I didn’t know that it’s really different state by state.


DAVID SCRANTON: That’s a big misnomer, one of the other misnomers is that you can have…you know your money go to the state and your money is not going to go to the state if you don’t have a will. It’s probably just not going to go to the people to whom you’d really like it to go, that’s really the most important issue.


MORGAN THOMPSON: Okay. So, I think a lot of people assume if you do have a will everything’s kind of buttoned up tight, you don’t have to go through probate that’s not necessarily true is that correct?


DAVID SCRANTON: No it’s not true. In probate it’s not a bad thing in fact you know where the word probate actually comes from?


MORGAN THOMPSON: Sounds like probation.


DAVID SCRANTON: Alright, probation. It actually comes from the same root which comes from the Latin word probare, probare in Latin means to prove. In this case it means to prove the validity of a will so it’s possible that after someone dies that you know you get three different last will and testament that come up. And everybody claims that the one they have in their possession is actually the proper last will. The probate through the state, each state has their own probate program is designed to prove which of these is actually the last will and testament. And which one is actually…comprises your goals when it comes to your money.




DAVID SCRANTON: Now, the interesting thing though is a lot of times we think about avoiding probate as having a trust and then you think about all the negatives possibly of a trust. But the reality of it is that avoiding probate can be a lot simpler than that, for example, you probably have some assets that are jointly titled with you and your husband, correct?




DAVID SCRANTON: Well, if they’re jointly titled then that avoids probate after at the first death. If you go everything goes, that asset goes to him, if he goes everything goes to you.




DAVID SCRANTON: If you both go together in a common accident that’s when all of a sudden everything has to go through probate.




DAVID SCRANTON: Whether you have a will and it goes through probate through your will or in the case of as you said in your case you don’t have a will, well then it goes through the intestacy laws which is still part of the probate system. But if something happens to one of you, it’s avoided, makes sense?


MORGAN THOMPSON: But what if one of you has a will and the other doesn’t?


DAVID SCRANTON: Well, it depends who dies first. You know that’s really the issue.


MORGAN THOMPSON: Okay, so once again competent advice.


DAVID SCRANTON: Incompetent advice but also there are things… remember there are some things that you have in your balance sheet I’m sure such as things like IRA’s, where you name a beneficiary or things like annuities or things like life insurance or even a brokerage accounts or bank accounts. In most states you can name was called a TOD, a transfer on death or a POD, a payment on death. Those things where you name beneficiaries directly for example, I’m sure you have some of those types of things where you name a beneficiary.




DAVID SCRANTON: Well, those things actually avoid probate because it goes directly to your beneficiary in fact, if you think about it you’ve got a will. Let’s say you have a will that says that you know you’re husband is going to get your assets but then you put a niece or nephew on as beneficiary. Well the interesting thing is the beneficiary designation supersedes the will, so in that case the person you name as a beneficiary in this case, Morgan’s niece or nephew would become that beneficiary not the person in the will. So it’s important that you coordinate the will and you also coordinate the beneficiary designations accordingly.


MORGAN THOMPSON: Very interesting.


DAVID SCRANTON: Makes sense.


MORGAN THOMPSON: Make sense. But I learned a lot as always but we’re going to take a break right now, but don’t go anywhere because when we come back we’re going to talk about more about estate planning and what you need to know. Welcome back to the Income Generation, today we’re talking about the difficult but important topic of estate planning and what you need to know. Now, David before the break you mentioned something about trust, I’d like to elaborate a little bit more on that, could you explain more why that is important?


DAVID SCRANTON: Yeah, trusts are a tool that a lot of people can use. Although I will say sometimes that they’re over sold because I said there’s lots of ways to avoid probate for example. But…


MORGAN THOMPSON: Beneficiaries.


DAVID SCRANTON: That’s right, beneficiary the trusts are basically a way where you can manage your money from the grave.




DAVID SCRANTON: The purpose for a trust is let’s say you had a niece or nephew that was going to eventually get your money and both you and your husband are gone and the niece or nephew was a spendthrift.




DAVID SCRANTON: Maybe he was financially irresponsible or maybe had a drug or alcohol problem. So you didn’t want to have them have total access to the money or maybe that niece or nephew had a marital problem. A trust is a way that you can manage that money from the grave, where you can actually say this money is going for the benefit of this other person. But they can only take out certain amounts per year or maybe they can only take out money for certain reasons or maybe they can only take out the interest and dividends in the income. But they can’t touch the principal. So again, trust in basic theory are a way to run that money from the grave and manage that money once you’re long gone.


MORGAN THOMPSON: Gives them sort of checks and balances.


DAVID SCRANTON: It does and where it gets confusing as people say there are two types of trusts, there’s revocable and there’s irrevocable.




DAVID SCRANTON: And those are just what they sound like revokable and irrevocable.


MORGAN THOMPSON: You can take away or you can’t take.


DAVID SCRANTON: That’s right, now the revocable ones are the ones that I say often times are oversold because a lot of people, a lot of estate planning attorneys would like to pretend for example, that everyone need to have a living trust to avoid probate.




DAVID SCRANTON: Well, as I mentioned before the break. Yes, living trust are one way to avoid probate because assets don’t go through your will and probate is this process of proving the validity of a will. But as I said before the break there’s other ways to avoid probate, through things that have beneficiary designations through you’re IRA’s and retirement accounts avoid probate. Your jointly titled assets avoid probate, life insurance and annuities avoid probate because you named a beneficiary, brokerage accounts, and bank accounts. We have transfer on death, payable on death they all avoid probate so, in many cases you don’t need a living trust to avoid probate. But it’s one of those tools that’s there and that’s why having our viewers talk to a qualified estate planning attorney. To talk about the pros and cons of a living trust versus other tools if their goal is to avoid probate is something that really can benefit our viewers.


MORGAN THOMPSON: Okay, so you always hear about people who have a trust but their parents are not necessarily gone so that makes more sense. So let’s talk a little bit about estate taxes, it kind of seems to me like unfair like you’re getting doubly taxed and maybe I don’t understand it correctly. So, let’s explain to our viewers a bit more about estate taxes and how they work?


DAVID SCRANTON: Sure. Well first of all estate taxes theoretically, according to our government have a purpose. They’re initial intended that we didn’t become a landed aristocracy, our forefathers their concern was that if people became wealthy and passed everything down to the next generation. And they passed it down to the next generation with time value of money and compounding effects on money that we’d have a society of the haves versus the have nots.




DAVID SCRANTON: And despite estate planning, state tax brackets at fifty percent or higher for a good portion of the history of our country. Still it seems like there’s a big discrepancy here in the United States between the haves and the have nots, but the good news is that estate planning has just been made a lot easier by our government. It used to be that if your net worth was over six hundred thousand dollars you had to worry about giving almost half of everything over that amount to the government in the form of an estate tax or a death tax. And just recently that changed so that fewer of you our loyal Income Generation viewers are affected adversely by federal estate taxes. And as you know Morgan, the reason for that was because they raise the threshold up to five million dollars.


MORGAN THOMPSON: Sorry, big difference.


DAVID SCRANTON: So now it’s not only for people that are over a five million dollar net worth that estate tax are due. Now in your case, you’re married so that means that only on all that money that you and your husband have that’s over ten million dollars, only on that portion of your assets where you have to worry about estate taxes.


MORGAN THOMPSON: Sad to say it will not be affecting me.


DAVID SCRANTON: Not be affecting you.


MORGAN THOMPSON: Unfortunately.


DAVID SCRANTON: And it also doesn’t affect you because you’re here in the state of Florida where there is no state estate taxes but for a majority of our Income Generation viewers be careful. Because just because the federal government has raised the tax free estate brackets up to five million dollars, ten million for a couple doesn’t mean the states have in fact, a lot of the states are still at one million or maybe two million dollars. There’s a lot of people who don’t have a federal estate tax problem but they do have a state estate tax problem. And that’s why I strongly urge all of our Income Generation members to sit with a qualified estate planning attorney to talk about these types of issues. And figure out what they need to do to make sure that they pass their assets on to their loved ones in a more effective and efficient way.


MORGAN THOMPSON: Well you know this seems like I’m a cop topic but it’s actually really quite fascinating I’ve enjoyed our talk today.


DAVID SCRANTON: Well good, as usual it’s… I enjoy your questions you always ask me questions that push me back on my heels and I appreciate that.


MORGAN THOMPSON: Well I look forward to your final thoughts.


DAVID SCRANTON: I always make a point of differentiating between a real financial advisor versus a financial sales person and frankly the relationship between a real financial advisor and a client can be successfully compared to a doctor and patient relationship. Just like a physician who works with you to maintain your physical health by diagnosing problems before they get too serious. And helping you make good, preventive choices an advisor does the same thing with your financial health in both cases ideally, it’s a partnership. And for it to be really successful you both have responsibilities, sometimes it means the patient or client must do things that they might be a little hesitant about. For example, you know for example that after age fifty there are certain medical procedures that your doctor recommends that no one really looks forward to going through. And the number of those such processes only increases as you get older but you follow your doctor’s advice why? Because you know it’s important and because you know that the consequences of not following this advice could be much worse, possibly even fatal. In fact, that’s a great way to think about estate planning by necessity, the process forces you to deal with personal issues and unpleasant topics like death and illness. But those are issues you really have to confront if you want to spare your family and your friends and possibly even yourself from a lot of potential pain, frustration and expense down the road. And the sooner you do it, the better really, because remember that estate planning is as much about accumulating and protecting your assets as it is about deciding where they go after you die. At the same time it’s never really too late to put your affairs in good order as the expression goes, and to give yourself the peace of mind that comes from knowing that you have a good estate plan in place. It all starts with working with your financial advisor who hopefully is a real advisor and one who specializes in secure strategies geared toward protection and income. Odds are that he or she can connect you with a qualified estate planning attorney who can work with you to complete the process. Before we go though, I again want to thank my guest Victor Medina. I also want to thank all of our regular viewers as well as those of you watching for the first time. For more information and to see how you can qualify for a free estate planning screening through Sound Income Strategies go to our website at the address below. I also encourage you to download a copy of my new report, Renewable Retirement Resources, The Case for Fixed Income and you can do this right after the show. You can find it online at the Income Generation dot com and you can also download a copy of my special report entitled, The Income Generation. I’m David Scranton and thanks again for watching.