Month: January 2010

Does a Beneficiary Designation “Trump” a Will?

January 24, 2010 /

Does a Beneficiary Designation “Trump” a Will?

I recently noticed that someone was directed to my website from a google search for that exact phrase, “does a beneficiary designation trump a will?”  Hmmmm . . . if people are asking the question, sounds like a good thing to address in a blog post.

So, here you go.  Yes.

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That of course is the short answer.  Here is a little more detail.  Beneficiary designations are commonly used for life insurance and retirement accounts.  They designate who you want to receive the benefits of the policy or account upon your death.  In most cases I see that the spouse is designated as the primary beneficiary (first person designated) and the children (in equal shares) are designated as the contingent beneficiaries (basically, the backups), that is if they even named contingent beneficiaries.  There are a many considerations that go into a beneficiary designation, however I will save those for a future post.

Beneficiary designations are a means of non-probate transfer – they bypass the probate court process when someone dies.  Because they bypass probate, they are not subject to Michigan’s intestacy distribution laws (the laws that determine who gets what) or what a person’s Will says (the Will serves as a “roadmap” for the probate process).  So do they “trump” a will?  I don’t know that I would say that . . . it’s more like they thumb their noses at the will and do what they please.

Caring for Others and Caring for Your Children

January 17, 2010 /

As I was reading about the recent disaster in Haiti this past weekend, I started thinking about all the nurses, doctors, firefighters, police officers, and teachers I know – some of the many occupations that are dedicated to caring for others.  I consider it a privilege to have many of them as clients.  Even so, I see a gaping hole in the protection of those who protect others.  For example, take nurses and teachers (I pick them because I know many personally).  Their life’s work is to care for and/or educate those around them.  What a truly giving and noble calling.  And yet I know several such individuals whose own family is left incredibly exposed to a tragic event.  This exposure takes several forms: no life insurance, inadequate savings, no retirement planning, and yes, no estate planning.  And beyond that, I see them spending so much time caring for others that they neglect taking care of themselves, whether it be a nice dinner with their husband/wife, a special day of pampering, shopping, or family time, or just some time to relax or exercise.

So I encourage those of you who are in these great professions . . . take the needed time to take care of yourself and your family.  It will give you an amazing amount of peace of mind.  And if I can help in any way, please let me know.

Honda, a Big Screen TV, and Estate Planning

January 14, 2010 /

They all have something in common.  What could it be?  They are all items that are chosen based on the value each individual places on them.  For example, if having a big screen TV is not all that important to you, you’ll settle for an “average size TV,” or none at all.  If you want to watch your favorite sporting event, movie, or play a video game like you are in it, then you spend the money to get one.  You value it above other items you could have spent that money on.  Why do folks spend more to buy a Honda than a Kia?  Because they place value on the reputation Honda has for making quality vehicles that are comfortable and reliable (and I’m not saying that Kias are not).  If they want a car to get them from point A to point B, they may not find as much value in Honda’s reputation.

Estate planning is the same way.  I have found a misconception among some estate planners I talk with – they think that certain groups of people are not interested in estate planning.  What I’ve found in my practice is that it is all about the value folks place on estate planning.  Many of the people they don’t think will move forward with estate planning because of cost, leave the meeting in their nice car, drive home to their nice house, and watch their favorite show or movie on their big-screen TV with an impressive surround sound system and fancy 1 billion function remote (ok, the last one was an exaggeration).  So it all comes down to value . . . if you value something at or above the cost to acquire it, you get it, unless you truly don’t have the funds to do so (and we’ve all probably done it even in that situation).

It is encouraging to me to see how many families I meet with value estate planning.  Sure, I believe it’s a critically important life item, but it’s what I do for a living so I’m expected to say that.  However, the families I meet with are not required to think, believe, or say that, and yet they do.  And I’m grateful to be a part of it.

I honestly don’t even know why I’m posting this other than to share a good thing in a world full of so much bad news.  I would love to hear your comments.

So What If I Form My Company With Legal Zoom?

January 9, 2010 /

It could be a big “so what” or a little “so what.” Let me explain. I was recently given the privilege of working with a couple of great guys who started a new company to launch a quite remarkable product. The company was already formed as a Michigan Limited Liability Company (LLC). My job is to write a disclaimer/terms of use for the website. Consistent with my practice of bringing added value to my clients, I took it upon myself to look at their state filings to see how they were formed. While doing so, I noticed that their 2010 state filing listed the title of the filer as “Partner.” Hmmm . . . I wondered to myself what lawyer they worked with to form the company (more later on why that matters). Turns out they didn’t work with a lawyer – they formed the company via Legal Zoom (according to the Articles of Organization).

So, why does that matter? Well, as any business lawyer will tell you, one of the main benefits of forming a LLC (or a corporation) is the liability shield it provides (hence “limited liability” company). The idea being that the LLC members are not personally liable for the debts and other liabilities of the company. The liability shield doesn’t come without effort. There are certain things business owners should do to ensure maximum liability protection (a topic for another post). If they don’t, it may be possible for a creditor to “pierce the veil” – that is, bypass the business entity and go after the business owner’s personal assets.

And what does that have to do with listing your business title as “Partner?” Well, a partnership is not a LLC (or corporation) and typically has no liability protection. Generally, all partners are personally liable for the actions of all the other partners. You can quickly see why not many businesses form as partnerships. I sure wouldn’t want to be personally liable for what someone else did! But Mike, my CPA said that I am a partnership – that’s how the IRS will tax my business. Assuming you didn’t elect otherwise, you are correct . . . for tax purposes you are treated as a partnership. If you formed as a LLC, you do NOT want to be treated as a partnership for liability purposes – it would defeat the point of forming the LLC.

Now it may seem trivial or overly protective, but listing your title as Partner could be used as evidence (albeit small) to “pierce the veil” and go after the owner’s personal assets. How does Legal Zoom (and other companies like them) come into this? Well, they say themselves that they are not lawyers – they are a document preparation company. Because they provide documents based on a questionnaire and not counsel, they are able to offer it at a much lower price than you would likely get working with a qualified lawyer. But at what ultimate cost? Losing your personal assets? That’s why I mentioned earlier that I wondered what lawyer they worked with. Every business lawyer I know would counsel the business owner about what liability protection means and how to ensure it protects them. For example, listing yourself as a Member or Manager . . . not a Partner.

Now I’m not faulting the guys who formed the business . . . not at all. Just like me – you don’t know what you don’t know. I surely don’t have the knowledge they do about how to create their product. And I’m looking forward to helping them maximize their growth while minimizing their risk. We all have our roles, and I hope by sharing this information with them (and you) I’ve helped fulfill mine.

What Is This Carryover Basis You Speak Of?

January 5, 2010 /

So you may have read my post about the estate tax leaving us for 2010 here, and wondered, “what on earth is this carryover basis thing he’s talking about?”  And if you weren’t wondering that, pretend you were (or leave the page), because here is the (relatively) short answer.

For estate planning purposes, carryover basis means that when you sell an asset you must use the basis (typically the “cost”) of the person you received the asset from, to determine your gain (e.g. “profit”).  So, if  Great Uncle Joe purchased a 1957 Chevy BelAir Hardtop for $5,000 in 1957, it’s worth $45,000 when he dies, you inherit it from him when he passes, and then you sell it for $50,000 a couple of years later, you will pay tax on the difference between what you sold it for and what he paid for it . . . $45,000.  I’m not an appraiser of classic collector cars, so these number could we way off.  This is considerably different than how it used to be (see my previous post “Hasta La Vista, Estate Tax” to learn more).

Congress, in an effort to “soften the blow” a little bit , amended section 1022 of the internal revenue code to allow for a basis adjustment (i.e., increase the basis) of $1.3 million for non-spouse beneficiaries and $3 million more ($4.3 million total) for spousal beneficiaries (the first number is only $60,000 for a non-resident who is not a citizen of the US).

Clear as mud, right?  If you would like to know more or would like clarification on any of this post or the previous one, just let me know via comment or the Contact Us section of our website.  Here’s to an exciting 2010!