Jason Parker Interviews John Kenney, Estate Planning Attorney
Announcer: Welcome back, America, to Sound Retirement Radio where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement, and now, here is your host, Jason Parker.
Jason: Seattle, Tacoma, Olympia, Gig Harbor, all the good people right here in Kitset County, welcome back to another round of Sound Retirement Radio, I’m host Jason Parker. As always, I sure appreciate you tuning in to this program. It’s almost five years now that I’ve been running Sound Retirement Radio and my hope, the reason I originally started this program was I wanted to be able to bring experts on to the program from all over the country to help add clarity, confidence, and freedom, ultimately freedom, as you’re preparing for and transitioning through retirement.
I believe that you cannot have a shortage of good information and so the more good information we can provide you with, the more knowledge you have, the more confidence you are going to experience as you prepare this transition. Let me tell you, it’s a big deal. In fact, one of the statistics I found interesting is that we look at the Google Analytics to find out how, what on the blog posts that we’re writing, what is it that people are interested in? How is it that they’re finding Parker … not Parker Financial but Sound Retirement Planning?
What I found is one of the top phrases people type in is “Overcoming the Fear of Retirement.” There’s a lot of people out there that have done a great job saving money yet they still have this sense of dread or this sense of fear as they’re heading into retirement. Again, education, we want to empower people through education. Thank you for tuning in. I’m glad to be here. We’ve got a great guest.
As you know, for the last several weeks or actually months, probably a year now, we’ve been bringing … or starting every program with a joke and so I’ve got something real quick that I just wanted to share with you. What do you call a deer with no eyes? No eye deer. Just cracks me up. The kids will enjoy that one tonight around the dinner table as my wife is rolling her eyes but today I’ve got John Kenney on the program.
Mr. Kenney has 16 years of experience helping families, individuals, and business owners with Estate Planning, Asset Protection, Wealth Preservation, and Transfer and Tax Minimization. He’s a Managing Partner of his 10 attorney firm. He’s a sought after speaker. He’s the author of several articles and has presented nearly a hundred seminars throughout the country to audiences of potential clients and his contemporaries in the legal and tax field.
Mr. Kenney serves as Commander in the US Navy JAG course, currently as an Executive Officer of one of the largest Naval Reserve Units in the county, Naval Reserve Regional Legal Service Office Mid-West. He serves as a Pro-Tem Municipal Court Judge for the City of Poulsbo. He has been a guest Instructor teaching Military Justice for the University of Washington Navy ROTC program for nine years.
John Kenney, boy that was a mouthful. Welcome back to another round of Sound Retirement Radio.
John: Thanks, Jason, it’s a pleasure to be back, as always, and look forward to having a good discussion with you today.
Jason: Absolutely, and I have to tell you, John, it’s been a while since I’ve had on the program. As I read through your bio, boy, it’s amazing the work that you’re doing and that you’re recognized and having these speaking opportunities around the country. That’s really great. I’m glad to see thing taking off for you the way that they have over the years.
John: Thank you.
Jason: You’ve been a valuable resource for our community, especially. I know that we’ve had the good opportunity to have a lot of the folks that we work with meet with you and you’ve helped them with their Estate Planning so we sure appreciate what you do right here in Kitset County, thank you.
John: You’re welcome. I really enjoy working with your client base, Jason, as well and it’s been a pleasure through the years of working with you individually as well as a professional, so thank you.
Jason: Absolutely. John, let’s talk a little bit about there’s some things that have changed recently that you thought our listeners should be aware of. Why don’t we kick the show off with some of these changes that are happening regarding Estate Planning right here in Washington State?
John: Absolutely, Jason, and there are certain things that we’ll talk about later in the show that are tried and true and always have to be on the top of everyone’s mind but in the past year, we’ve had some developments in Estate Tax Laws and the laws in general that I think there’s some time in discussing here. The most important change particularly with respect with the Estate Planning World here in Washington State is that a lot of people are familiar with the Congress’ changing the law in the beginning of 2013 where they actually raise what we call the Estate Tax Credit to $5 million.
People read about this and there was a big to do about Congress not passing the change to the Bush Tax Cuts and at the last minute, actually, it was in the last minute, we rolled into 2013 and the law was I think changed on January second. Congress decided to raise the limit of the credit amount, Estate Tax Credit to $5 million. What that means for Federal State Tax purposes and actually it’s now up to about 500 quarter because it actually adjusts for inflation each year. What that means is that it’s the amount of money the Federal government will allow you or value of assets in wealth that the Federal government will allow you to own before they’ll start looking to tax it for Estate Tax purposes.
A lot of people believe that that was great. It is a great thing because, effectively, you can pass a lot more wealth without fear of being taxed by the government once again for Estate taxes. What I find very commonly though is people did not realize because the publicity is not there for the Washington State Tax Credit which is effectively the same type of thing, the biggest difference being is that that is only $2 million. What I find a lot of the time, particularly now in the last couple of years is this misperception, misunderstanding that, “Oh, I can own $3 million of the wealth and pass away and not worry about having to pay Estate Taxes.” That’s not true at all.
In fact, the Washington State Estate Tax for anything of value over $2 million starts at 10% and goes up to 20% and the Federal government’s Estate Tax maximum amount is 40%. Theoretically, if you had someone who had wealth of over $5 million they could pay 40% to the Federal government and 20% of that to the State of Washington, anything over the $5 million amount. We’re very conscious of this and we want to make sure we educate and inform as many folks that we can get in front of that it requires some extra special planning here in Washington State for those individuals and married couples who have wealth in excess of $2 million.
I know that a lot of people don’t believe that life insurance counts but that’s one thing that we frequently find will add to that and increase that. That’s important and that theme may come up a couple of other times here in our discussion.
Jason: Okay, now before we move on to the next.
Jason: Because I know you’ve got a couple of items here that are relevant that we need to get people talking about but on this Estate Tax, $2 million is not as much money today as it once was. It seems like with the value of people’s properties, their homes, you can get to $2 million pretty quick, $5 million for more people’s a little bit more of a stretch but bottom line is if you have more than $5 million is you’d better start spending some of your money, otherwise you’re potentially looking at giving it to Uncle Sam and I know most people think they could probably spend it better than Uncle Sam can.
I wanted to ask you on the Estate Tax, so that’s a Washington State Estate Tax. Is there any state … and I don’t know if you know the answer to this or not … but is there any state in the country that does not have a state Estate Tax?
John: That’s a great question. I don’t know the answer off the top of my head. I’ve got some resources that I typically look to when a client’s contemplating moving, it can help them determine what the Estate Tax is in that state. There are lower state taxes where they have lower Estate Tax. Arizona and Nevada, I believe have low Estate Taxes. Texas may be one of those states that does not have an Estate Tax but don’t quote me on that because I can’t remember off the top of my head but most states have …
Jason: All righty, folks, welcome back. Sorry about that disruption. John, we were disconnected in the middle of our interview. You were just saying, we were talking about the Estate Tax for Washington State being only, the exemption amount being only $2 million. I guess ultimately the question I have is if somebody’s living in Washington State now and it looks like they want to move to a different state, does that Washington State Tax follow them wherever they go?
Because this, maybe this is where they lived a long time and made most of their money or if they move to a state that has a lower Estate Tax, are they now governed by the rules of that state? In other words, is this a good place to die or should people … Should high net worth people be moving out of the state?
John: Actually, in the relative scheme of things, it’s not one of the better states to die because of that low $2 million amount, particularly for folks of higher net worth above that amount and the rule of thumb for a state to be able levy Estate Taxes is they look at how many connections you have with the state and so frequently I have clients who we affectionately call Snow Birds, have a home down in Arizona or Southern California, Palm Desert or something like that, and they will keep real estate here in Washington.
What will happen in those cases, if they’re higher net worth folks is the State of Washington will naturally want to try to tax them on everything that they own and all the value that they own in their investment accounts, in real estate, etcetera, etcetera. What then they need to try to do is if they’re moving to a state that has a lower Estate Tax, you need to try to establish connections there, such as spending more than six months a year there and also getting a driver’s license there, registering vehicles there or starting to vote there, things that are indicative of someone being a resident of a particular state.
If they leave all that here in Washington State, it’s going to be problematic for them. They continue to vote here. They continue to pay taxes here. They continue to have a driver’s license here and it’s going to be problematic. Ideally, you would also eliminate the real estate here in Washington State if you concern but the rule of thumb is if you can establish residency in another state using some of these commonly used techniques, then the State of Washington will only be able to tax the actual property that you have here in Washington State such as real estate but one has to be really careful because property includes investment accounts.
For example, someone opened an investment account with you or Merrill and Wells Fargo or any of the other investment advisers, and they opened it here in Washington State and leave it here with a local adviser, then it’s considered Washington property so that’s something that’s sometimes concerning.
I’ve seen that happen particularly with the State of California which is even worse than Washington, where they taxed someone’s account that they opened there many, many years before and just left it there for convenience and then they passed away and they were in another country but the City of California was able to tax it because it was still registered to a local California investment adviser and opened in that state.
Anyway there’s a lot of variables but, certainly, I discuss this with my clients when they’re considering moving to another state and advise them of all these things.
Jason: You’ve got a … We’re talking about thousands, potentially hundreds of thousands of dollars of taxes, so obviously this is going to be important for some people. It’s hard to think that you make your decision on where you lived the last years of your life based on how much tax you have to pay. I can’t imagine very many people actually that that’s how they decide where they live, but, John, some people, they just can’t stand paying taxes and so any way that they can reduce this tax liabilities they try to do it so I guess that’s …
John: That’s right.
Jason: That’s okay and what’s interesting …
John: Another thing … Go ahead.
Jason: I was just going to say from a … You would think that some states, if they knew this that they would try to structure their Estate Tax in such a way to attract people, these retirees. “Move here, you won’t have to pay any taxes when you die or pay less taxes when you die and love our state for this reason, plus many others.”
John: That’s right, and one other thing, if I could mention here and I always try to plug this. There’s an organization out there called ALEC. It’s an acronym for American Legislative Council or something like that and ALEC on their website, alec.org, A-L-E-C.org, they have a publication they do every year called “Rich States, Poor States,” and they actually rank the states that are the cheapest states to live in while you’re alive and the cheapest states to die in when you die, as far as taxes go. They go from sales taxes to income taxes to property taxes, the ones that affect you while you’re alive and then also they’ll look at the death taxes.
That’s a great resource for you as an adviser and also for your clients and changes occur in different states and so the rankings change and I know that Washington’s not at the top as far as one of the best states to live in and die in. It’s probably toward the bottom of the list.
John: Very good thing to look at called “Rich States, Poor States.”
Jason: That is interesting. We’ll put a note to that in the Show Notes, for the people that want to visit the site online at Sound Retirement Radio, they’ll have that available to them. John, I was just looking at the time, it looks like we already have to take our quick, our first commercial break we’ll be right back.
John: Thank you.
Jason: All righty, folks, welcome back to another round of Sound Retirement Radio, I’m your host Jason Parker, as always. I sure appreciate your being on the program here. One of the most important decisions you’re going to make as you’re preparing for retirement is understanding how and when to start social security benefits. I’ve learned by working with a lot of retires that this decision can in some instances mean as much as a $100,000 or more of additional lifetime benefits being paid over a married couple’s lifetime, just by knowing how and when to structure your social security.
We’ve set up a website at socialsecurity-planner.com. We have webinars that we’re going to be doing, so if you’re getting ready to retire, social security’s … It’s an important part of a retirement income plan. Visit the website socialsecurity-planner.com. Sign up for our next webinar and we’ll teach you some of these strategies.
Today, I’ve got John Kenney on the program. John is an attorney with Luce, Kenney, and Associates and we’re talking about Estate Tax issues. He just gave some great tips on taxes and specifically the Estate, the Washington State Estate Tax and why some high net worth people need to be thinking about where you die in terms of your tax liability. John, what are some of the other things that are happening that we need to know about?
John: Yeah, so real briefly and this is just something that I think always needs to be on the top of people’s minds is the Right to Life or the Right to Death and there’s a recent case of fire fighter and his wife down in Texas, Sally, she suffered a massive brain hemorrhage and she’s pregnant and she’s being kept on life support and he’s actually sued the State of Texas, or excuse me, the hospital and the State of Texas to be able to remove life support.
You hear these cases, the Terry Schiavo case was one of the most famous ones and this just reminds us all and they come up once every year or two that it’s very important to do planning for this possibility so that you can decide with your family in advance what will happen in case something like this tragically happens to you and your family. We’ll talk about this a little bit later, some of the things you can do to prevent this and help this.
Jason: Yeah, that’s a big one.
John: A couple of other real things real briefly, as many of our listeners here in Washington State know, within the last year, Washington State’s had a law passed that allows same sex couples to marry in the State of Washington. What a lot of people aren’t aware of is that this Estate Taxes in Washington State are going to change for those folks because they’re going to be treated like a hetero-sexual married couple for Estate Taxes. There’s a lot of planning considerations to be done.
In addition to that the Federal government, the United States Supreme Court came out with a case back in July or June of 2013 called the Windsor Case and this is a monumental landmark case that basically said in these states where same sex couples are legal or same sex marriages are legal, the Federal government will pass and allow them to use all the Federal income and Estate Tax rules and laws that apply to married couples. This really radically changes how we do income and Estate Tax planning for folks and these particular categories of folks who are same sex couples.
I don’t personally deal with a lot of these same sex couples but I do have a few of those clients and we’re definitely going to let them know about that and it’s important to know so that’s that.
Jason: Yeah, boy, I tell you, things are changing. Things are changing pretty radically at times, especially here in Washington State, we seem to be on the front end of some of this change. When it gets to Estate Planning, John, sometimes people just need this broken down for them. They need to understand what are the nuts and bolts, what do they really need to have, and to make sure that they’ve dotted all t heir i’s and crossed all their t’s and this can be confusing. There’s a lot of information but if somebody’s getting ready to retire, what should they be thinking about from an Estate Planning standpoint?
John: Yeah, it’s a great question. One of the things I always tell people is the purpose of Estate Planning is so that people can control what they own while they’re alive and also if they become incapacitated and also at their death. They also want to be able to take care of their loved ones and themselves, if they become disabled. They also want to give their wealth to who they want, when they want, how they want, and save every tax dollar fee and cost possible.
That’s a lot of things to consider and so if someone does not have a plan at all, that’s one of the biggest mistakes someone can make. I mean having a plan means to sit down with someone who’s qualified and talk through some of these details that we’re discussing today and basically determining what it is you want to do and how it is you’re going to do it. That’s one of the biggest mistakes that I see and so getting some counseling is really important.
I see a lot of other very common mistakes. People here in Washington, because of the community property state believe that whether it’s through joint tenants, tenantly owned accounts and real estate, they can leave everything to their spouse and everything will be fine. In many cases that’s true, you intend to leave something to your spouse and that’s great but there’s a lot of unintended consequences that occur.
For example, I worked on a case a few years ago where a surviving husband was married for 35 years and his wife died and everything was left to him. He remarried and the woman was much younger than he was. She had her own set of children and his children were older, in their 40s and he didn’t have to wait four, five years after that and they discovered that all the wealth that their mother and he had accumulated during their lifetime, he went and changed his will to give it all to this much younger woman and her kids and they didn’t see a penny of it.
Leaving everything to a spouse is intuitive but it’s not always the best decision, without some counseling so …
Jason: That’s a great point, but I wanted to ask you another question because this is something that we see people do frequently where, let’s say mom is still alive, dad is passed away and the adult children are just trying to make sure that mom’s in a good position. What we’ll see happen sometimes is the mother will put her adult children on her accounts, so if they’re joint tenant with right of survive … She’ll make a joint tenant account and put her daughter, for example, as a co-owner on that account. What are your thoughts about that structure in accounts that way?
John: Yeah, that’s a great question and certainly that’s something that’s possible, given some good counsel on that. The problem with that is is in our country, the Federal government considers any transfer of wealth to any individual over $14,000 now is considered a taxable gift and a lot of people aren’t aware that there’s a Gift Tax system in our country, so that’s one potential consequence. For example, if the account is $100,000 and a parent puts a child on, they’ve just given you a gift of half of that account to that child.
A $50,000 gift has been made to that child and so they don’t know that they have to report that to the IRS and potentially pay taxes on it. If they don’t pay taxes on it, it will actually reduce their Estate Tax credit. It could have some seriously negative consequences if they don’t get some good counsel before doing that.
The other thing that people are not aware of and this one actually can be really even more painful, particularly with folks who don’t have a taxable estate for Estate Tax purposes is if a parent puts a child or anybody else on an account or even real estate that’s appreciated, so an account with appreciated securities, for example, is the best example in the account scenario and these appreciated securities have a low cost. In other words, the parents bought it 50 years ago, PACKAR Stock, our clients have lots of PACKAR stock.
Fifty years ago for pennies, not pennies but really low cost and what happens is they unintentionally and unknowingly give this gift to their children by making the children a joint owner on the account. What happens is, if the parent dies and then the children end up owning that account and selling that stock, that appreciated stock, at whatever price it sells for today, they’re going to pay an incredible amount of Capital Gains income tax on that sale.
The reason that’s a bad thing to do and it’s a bad idea is because the way our Estate Tax laws are written right now, they say that if an individual dies, and somebody inherits their account rather than they’re made an owner of the account some time previously in life, they get what’s called a stepped up basis. Now it’s an artificial creation of a tax law that says that when they get it, the cost that they are deemed to have paid for that stock is the actual fair market value of the date of the parent’s death.
What that means is they got a million dollars of a PACKAR stock, that their parents bought for $500 50 years ago, then they’re not going to have a $999,000 taxable gain, they’re going to be able to sell that same million dollar stock for a million dollars and they’ll have zero gains. In the previous example I used, I didn’t go into the numbers but your difference between what the parents paid and what the child sells it for eventually is going to be Capital Gains and that could be tremendous, particularly for appreciated stock or appreciated real estate that’s had a lot of growth over the years. That’s one of the biggest, biggest errors I see people make and it can be very, very expensive …
Jason: Very expensive.
John: Where the Capital Gains right now are 20%.
Jason: Yeah, so bottom line is if you’re thinking about gifting to the people you care about, you might want to … and towards the end of your life, you might want to consult with somebody and say, “Hey, does it really make sense to make these gifts now or would the family members or friends, whoever you’re giving the money to be better off if you just wait and let those assets pass and receive the step up basis that you’re talking about and that’s an important one.
Back to this idea of putting the kids on the checking account, does it open up … Let’s say mom puts her daughter on the checking account. Now the daughter is involved in a car accident or she gets divorced, does it open the mom’s checking account up to any kind of liability? Could people go after that asset?
John: Absolutely, and in fact, I’ve actually seen it happen in the bankruptcy context where our firm has had people who have filed bankruptcy and they say, “Oh, well, my mom put me on her $100,000 investment account.” Guess what, the bankruptcy court and the judge and the bankruptcy trustee now own that, so, yes, creditors of the joint owner are going to be able to access that account if they get the proper judgment. Pretty dangerous and risky to do that thing.
Jason: What’s the solution? If you want somebody, because the reason they’re doing it is if something happens to mom, daughter can pick up the checkbook and keep paying the bills, right. What’s the better solution for people, instead of taking on all of that risk? How do they solve that problem without naming a joint tenant with right of survivorship on an account like that?
John: The best way to do it is through the use of an Estate Planning tool called a Durable Power of Attorney for financial decisions and legal decisions and that is a tool that is very commonly used for this very purpose, so that a child or someone that is trusted can literally make legal and financial decisions and access the bank accounts and investment accounts, to continue to support the parent who has a need to be supported or have their bills paid for by the child. That’s the most common way to do it is through this financial power of attorney. [Crosstalk 00:27:11] …
Jason: All right. John, we’re at that point again where we need to take another quick commercial break. We’ll be right back. I’m really enjoying this. I’m sure our listeners are, too, so stick with us.
John: Thank you.
Jason: All righty, folks, Jason Parker here, back with you, the host of Sound Retirement Radio, this lovely little radio show and I’m having a hard time spitting the words out here this morning. I need to have another cup of coffee or something. I’ve got John Kenney on the program with us. We’re talking about Estate Planning issues.
John, I know that before we get too far into this, I want to just take a quick opportunity. I know a lot of people listening to this program are going to want to learn more about the work that you’re doing. How can people learn more about some of these topics we’re discussing if they want to know more about your firm and the work that you do? What’s the best way for them to find out about you?
John: I take all my clients and individually counsel them on a case by case basis. Of course if somebody wants some information that’s tailored to their particular situation, a complimentary consultation with myself would be the way to go. We do offer those and we schedule appointments pretty regularly with folks to do that and I can analyze your own individual client situations and discuss with them what I would recommend.
There’s plenty of information on the internet. My website has some articles, although we’re in a transitional period so I’m hesitant to give out the website because we’re changing over and we haven’t got all our articles up there but certainly an individual consultation would be one way to get some very specifically tailored ideas for your own situation.
Jason: All right. We appreciate that. Does it have to be face to face? Can you do those over the telephone or over Skype or …
John: Whatever works, I’ve done video chats with people around the country. I’ve done telephone conference calls and obviously person to person, face to face.
Jason: All right. Let’s talk a little bit about joint property ownership.
John: Yeah, so what I’ve found in … We’ve talked about the scenario where you put a child on a bank account or something like that and that’s one of the most common ones but I’ve also seen it happen with real estate and it becomes even more problematic with real estate because what happens is you get into title issues and title problems in addition to the loss of the stepped up basis that we just discussed for appreciated real estate. You get into title issues with joint ownership, even worse is if you own a piece of real estate jointly with someone who’s not your family member, like a partner, and then you get into potential lawsuits.
Because if you don’t have some sort of agreement with this partner and you pass away then your children are stuck with trying to fight something out with your partner potentially. I see this quite frequently and to avoid title issues and potential disagreements with partners, it’s really best to consult with an attorney and have this arrangement more formally prepared through some sort of written agreement or document.
Jason: Boy, this is actually something I see happen all the time where a man will … His wife will have passed away and a woman, her husband will pass away and these two come together in their later in life and they don’t want to get married necessarily but they decide to buy a house together. They go in on it and they say, “I’ll pay half and you pay half and we’ll just work it out that way,” but that really creates a lot of potential problems for people down the road. That’s not something I’d really thought of.
John: No, and that’s another common one that a common law marriage situation, Washington State courts have followed a common law marriage principle in deciding community property and there’s cases out there. I’m always cautious when I’m dealing with people who are not married, who are living together, and purchasing real estate, and comingling their investments and their real estate because that is a risk that if they pass away, that the surviving one of the two of them can make a claim on everything, on the whole thing. Having some sort of agreement to avoid that would be great.
Jason: What constitutes common law marriage?
John: I’m not a Family Law attorney but typically it’s a seven to 10 year period of individuals cohabitating and basically acting like a couple that’s together as a married couple, sharing expenses, sharing property, sharing accounts, sharing things that … like you would with a spouse. There’s a lot more that goes into it and as I said, I certainly disclaim that I’m not a Family Law attorney but I know enough about it to be careful with clients when I’m doing their Estate Planning to make sure that they’re understanding and familiar and aware of these concerns and risks.
Jason: Yeah, now you mentioned earlier when we were talking about the Washington State Estate Tax, I think what a lot of people don’t realize is that there is two levels of taxation. There’s a Federal Estate Tax with the $5 million exclusion, then there’s the Washington State Estate Tax with the $2 million exclusion and you said potentially up to 60% of your estate could be taxed if you’re above that $5 million. That’s just a big tax hit. You mentioned life insurance in that equation and how important it is to look at all of your assets. Do you want to take a minute and just talk a little bit about life insurance?
John: Sure, life insurance for the right individuals or the right family can be a great tool and it’s a tool oftentimes used to replaced wealth if someone passes away. You’re in the financial industry and you know how good a tool it can be. What a lot of people don’t realize though is if they get a life insurance policy that has a higher face value … When I say higher, we look at policies and become concerned if it’s three or four or $500,000 or more, particularly if someone is near that $2 million net worth, independent of the life insurance.
Because what happens is the net effect of having the big life insurance policy is it can push people over that $2 million limit and then potentially be taxed at a rate of 10 to 20% in the State of Washington. Even worse, of course, is the Federal government, if someone’s over five or close to $5 million, and they’ve got a policy that’s a larger policy that can push them over that limit.
I have a lot of pilots that are clients of mine and medical doctors and these industries tend to attract people that want to buy a lot of life insurance, a million or $2 million policy is not uncommon in those industries to replace the earning power that those individuals have and so it’s very common that these folks have that issue because it does count. It’s a myth that individuals out there believe that life insurance is not subject to a state tax or does not come into the equation.
That can be resolved with a very simple tool called an irrevocable life insurance trust and I have to evaluate that on a case by case basis because not every policy is perfectly suited for that. For example, certain whole life policies may not be … It may not be advisable to use that but for a term policy, it’s almost a no brainer because the net effect is to remove that life insurance death benefit from the estate’s valuation for Estate Tax purposes.
Jason: John, we’re always looking to protect people and you’re right, life insurance can be a good tool. Unfortunately though, sometimes it’s really aggressively sold as like the silver bullet, fixes every problem and as you and I both know, that’s not the case but from an Estate Planning standpoint, where have you found the best use of life insurance, as an attorney, somebody that’s not being paid anything for recommending an insurance policy? Is it through an irrevocable life insurance trust where you’re just trying to get money out of somebody’s estate so that they don’t end up having to pay Estate Taxes on those dollars?
John: That’s a great question. There’s benefits on many levels, I think the obvious benefit is to have money available to the surviving family members to have some cash and some liquidity. That would be particularly effective for somebody who either owns a business that’s hard to sell and the family needs liquidity or they own a lot of real estate and it’s a bad time to sell real estate, like it’s been over the last three years. Having some liquidity is great.
We often will find it as a useful Estate Planning device when we’re actually dealing with clients who have higher net worth and we’re trying to use other very sophisticated techniques to avoid a state tax is it actually require transferring some of the wealth to other structures like some sophisticated trust and then we use the life insurance, instead of a life insurance trust to be able to replace some of that wealth that they’re moving out other parts for their estate.
It’s used typically in combination with other sophisticated techniques but it can be a really great wealth replacement tool depending on what we’re trying to do elsewhere to eliminate or reduce the state taxes.
Jason: Okay, I know that, yeah, you can really get … Things can really start getting complicated when we get into some of these more advanced Estate Planning concepts and especially the use of insurance. Insurance are contract driven and they are very complicated so I would caution our listeners out there, if they’re looking at life insurance, it certainly can be a great tool but you really need to understand what you’re getting into.
What about the, John, some people come in and they say, “I really don’t want to sit down with an attorney. I’m just going to run down to the office supply store and buy one of these do it yourself wills.” What should people be thinking about there?
John: The concerns that I have with the do it yourself wills, whether they go online to do it or go to the office store is all the concerns that we’ve been discussing. Having a human being to discuss some of these concerns and risks and things with is invaluable because the advice that we can give will save thousands if not tens of thousands of dollars in potential state taxes.
Certain online, unnamed purveyors of online wills have actually been sued in some states because of the fact that they just sell the will and they claim not to be a law firm with their disclaimers and then something happens and the will was just a one size fits all. Certainly that didn’t apply to the situations and there was Estate Taxes paid and so the online place was sued. It’s very difficult to communicate with an online service with an employee of the office supply store when you’re trying to get some actual counseling and advice.
It’s almost impossible because they’re just there to sell you a piece of paper or let you download a form for a really cheap fee. That’s something that’s really important. The documents that they provide, because they’re being sold on a nationwide basis, the other concern I found is they’re a one size fits all, like I mentioned before and they don’t work in particular situations and with particular state laws.
I’m always cautioning people, “Look, our documents are written for Washington State law. They’re written with the counsel that we give you in mind and tailored to your specific needs and your specific situations” It’s always a very risky thing to go online or to go to an office supply store to get a will.
Jason: I’ll tell you, for the most part, by the time people get to be 60, 70 years old, their financial lives have … Their lives in general have gotten to be pretty complicated in many instances. Some people with children from marriages in the past and businesses that they own or businesses that they’re trying to sell and so … I just think having that custom tailored approach is really a great idea.
What’s worse, John, having no will at all or having a really poorly done will?
John: I hate to say it but in some cases it could be having no will at all, or excuse me, having a poorly done will because it could really screw things up, pardon the expression. At least the state has a fairly straightforward plan of distribution of one’s assets if someone does not have will, but the best thing to do is to get a good will.
There are many attorneys out there that do adequate work and do good wills with some counseling but it’s hard to say which one’s worse, having a bad will or no will. Because if you’re giving your wealth away to the people that the state law says that your wealth will go to if you don’t have a will, then it’s probably going to end up being okay in the long run but certainly you don’t want to rely on chance that the state law’s going to match up with your intentions and your wishes.
Jason: Yeah, what about … One of the topics where you wanted to touch on was this idea of no disability planning. As that pertains to Estate Planning and retirement, what are the pitfalls with no disability planning or not planning for the possibility and potential that you could become incapacitated in some way or disabled in some way? Have you seen anything first hand here?
John: Sure … I have and so when I first started practicing, it was strictly an Estate Planning practice and as time has passed over the last 15, 16 years, I’ve seen more and more clients and in fact in my own personal life with my own mother, who became disabled and passed away last year, I’ve seen this, where sometimes it’s necessary to get some assistance or aid from the government agencies that are there to give aid. If somebody has a certain amount of wealth or a certain level of wealth, they won’t qualify for that and in the State of Washington, it’s called Medicaid and that’s something that not everyone wants or not everyone plans for but it’s certainly something to throw into the equation and the mix, to consider.
More sad, I think than anything else is if one spouse becomes incapacitated where the other spouse cannot take care of them anymore and they have to go to nursing home and if the nursing home costs a lot of money which they do cost a lot of money, it can have the effect of literally cleaning out the bank account of the healthy surviving spouse and leaving them with nothing. I have started to discuss this as a concern with clients. It is a concern because the older we get, the more that we should consider these things.
One of the best things I can tell a client who’s not having serious health issues is to talk to a planner who deals with long term health care or long term insurance. Long term care insurance can be affordable and if you do it at the right time and your health is in the right condition, then you could afford it and certainly, it can give you a great benefit and there’s some great products out there that your better versed in than I to speak about but certainly something I strongly encourage clients more now than I did a decade ago to actually look into it.
There are some planning techniques that we can use. The problem with the state laws as they exist today is that we have to have plenty of notice. Typically, at least five years notice before someone is contemplating needing the assistance of the state for nursing home care and a lot of people, it’s hard for them to predict. We do go into this and certainly something that everybody should be aware of and consider that it’s expensive for this long term care. You’ve got to have some plan or talk to an adviser to get some long term care insurance.
Jason: Boy, that’s great. John, we’re at a point here where we need to take another break and we’ll be right back.
Jason: All righty, folks, welcome back to another round of Sound Retirement Radio, I’m your host Jason Parker, as always, I sure appreciate you being on, listening to the program today. For those of you just tuning in, if you didn’t hear earlier, we’ve set up a new website at socialsecurity-planner.com.
If you are thinking about retirement, one of the most important decisions you’ll make is how and when to start your social security, especially for married couples because you can really … If you understand the rules, you can really put those benefits to work for you in a way that’s meaningful and could add significant additional income over your lifetime. Again that’s socialsecurity-planner.com, if you’d like to attend one of our webinars on some of the strategies there.
This morning, I have John Kenney on the program. John Kenney, again, is an attorney. He specializes in Estate Planning, Asset Protection and Wealth Preservation, also Transfer and Tax Minimization. His office, he works up out at Poulsbo but I know they have another office, I believe down in Tacoma. His website is LuceKenneyLaw.com and, John, that is right. You guys more than one office and more than just the one office there in Poulsbo, correct?
John: We do, our Kitset County office is in Poulsbo and our South King County, First County Office is down in the Fife area which is just 10 minutes east of Tacoma there.
Jason: Okay. Very good, so we were talking about some of the mistakes people make, ending with disability benefits. Obviously you had this, your own experience with your mom and her health declining and it sounds like you really become a lot more of an advocate for long term care planning after having gone through that personally. Boy, I find that to always, almost always be the case when people are ready to actually start doing that type of planning.
It’s after they’ve had the firsthand experience and they know what it’s like. They just say, “Boy, what could this have done, how could this have worked if we had done a little bit of preparation and planning?” I couldn’t agree with you more.
John, I have to tell you, every single person that we sit down with, even though we’re insurance licensed, I prefer not to sell long term care insurance. We usually refer that out at my firm, just because those plans have gotten to be so complicated and there’s so many moving parts but in every single plan that we put together for people, one of the scenarios we always walk them through is what happens if you don’t die but you start down the slippery slope of your health changing? What would that mean to you financially?
Because what I want to do is I just want to remove the emotion from the equation, let’s not talk about the fact of whether or not you’re ever going to need this but if it does happen, can you financially cover that cost. When people see it black and white, the numbers laid out for them, they say, “Boy, I need to do something about this,” and that’s when we can refer them to somebody that’s specializes in that so I couldn’t agree more.
What are some of the most common Estate Planning documents that everybody should have as they’re preparing for retirement?
John: We mentioned one earlier and we talked about it as a will and so a will is the most fundamental and basic Estate Planning device or tool if you will that’s used to transfer wealth to the people that you want to transfer it to. Everybody should have at minimum a basic will and as I said earlier, done with the counsel of a good attorney who understands how to prepare wills.
There are other types of things and many people have heard of these called trusts and there are hundreds of different types of trusts and you see them all over the internet and there are different purposes for trusts. There’s irrevocable trusts and there’s revocable trusts and the common idea with the trust is it’s almost like a corporation. It has an existence and a life apart and aside from the person who creates it.
There’s a lot of good Estate Planning that can be done through the use of a trust and the most common type of trust that we use for basic Estate Planning is called a revocable living trust and the name revocable means that you can change it as much as you want when you’re alive and health. That is often used in conjunction with a basic will to do a good Estate Plan for folks.
The other thing that I mentioned earlier is called a durable power of attorney for financial and legal decisions and it’s called a durable because it’s a power of attorney that becomes effective if you are incapacitated or if you actually want it to be effective. You can be in a position where you’re older and you’re tired of going to the bank all the time and you want your adult child to take over so you sign a document that says, “My power of attorney’s effective immediately.” That document will allow the individual you designate to be able to do these things to take care of your financial affairs and make decisions for you in order to help you out.
This we see quite commonly when people are starting to get older or really even becoming incapacitated and it’s necessary. The other commonly [crosstalk 00:48:10] …
Jason: One question. One quick question on …
Jason: The durable power of attorney. One of the things I’ve been hearing lately is that you should consider not waiting until you’re incapacitated for the durable power of attorney to come into effect that some people today are actually putting that durable power of attorney into effect immediately without having to wait for the health event. What are your thoughts on that?
John: I think it’s fine as long as the individual you’re giving the power of attorney to is well trusted, like a very trusted child or your spouse, of course. There’s no risk in doing that if they’re a very well trusted individual so that’s done sometimes but there’s no harm in waiting either because it will be effective once you’re incapacitated based on the terms of the document. One or the other will work. My biggest concerns is if I see individuals giving a power of attorney that’s effective immediately to a neighbor or somebody who’s not really been a part of their life for that long.
Because we’ve had cases where … I just heard about a case the other day where the post woman, the lady who delivers the mail ended up moving in with an older person and got power of attorney from her and actually took advantage and drained her bank accounts and was eventually sued by the family of the older lady that she moved in with. There’s a lot of weird stuff that happens with powers of attorneys, you have to be very careful but for the most part if you’re using a trusted person that’s been part of your life for a long time, then it’s perfectly fine.
Jason: Okay, so that’s the power of attorney and then you also … Were you going to touch on the health care power of attorney?
John: I was, so the next document we commonly prepare is a health care power of attorney and I mentioned this scenario earlier where the lady who is pregnant and in a coma down in Texas where she did not have a document that would allow her husband to remove life support if that was necessary and certainly there’s a lot of moral implications there but certainly something to consider because a lot of people don’t realize that if you’re in this condition of being kept alive in intensive care situations, it costs tens of thousands of dollars per day.
If you’re a married couple, for example, and you don’t have unlimited resources like most of our clients don’t, it’s something that you need to converse about with your spouse about these real life scenarios that, “Hey, if you’re in an intensive care situation without a document and you’re being kept alive, tens of thousands of dollars per day, it could drain the finances of the surviving spouse.” Having this conversation with each other and with an attorney’s important and we can create this document that gives the surviving spouse the authority to make the health care decisions.
The other thing is very commonly done with a health care power of attorney is what’s called a living will and it’s kind of a counterpart for the health care power of attorney. This is where you state your desire that you really don’t want to be kept alive by life support and machines indefinitely, you’d rather have your health care agent, your spouse or whomever you’ve selected, an adult child, make that decision with the medical staff to remove that life support because of all the potentially negative consequences that can occur.
Jason: Okay, John, I sure have enjoyed having you as a guest, as always. I appreciate you taking time out of your busy schedule to be here to help educate our community but as you think about planning, I know that a lot of times, people though come in to meet with us and we’ll talk about their Estate documents and I’ll say, “Look, when was the last time you had things updated?” and it’s been 20 years, and they know they need to get it done, why do you suppose so many people just procrastinate and put this off and they just don’t get it taken care of?
John: I believe just because it’s … I did the same thing when I was younger, before I had a child. It’s not a fun thing to think about, your death, your disability, and it’s something that although we will all die at some point in our lives, it’s not something that’s fun to think about on a regular basis. It’s a very easy thing to procrastinate. I did it and I did not have a will until I had my own child and decided it was time to get my own will, even though I had been an attorney for about three or four years. No, it’s an easy thing to procrastinate.
Jason: Yeah, it seems like one of those issues. It brings up a lot of issues, oftentimes, too. You have people and you’re trying to figure out what’s going to go where and who’s going to do what and, man, some of this … Even when my wife and I did this we found ourselves in some pretty heated discussions at times about who is going to raise the kids? Who would be the suited to do that?
John, again, I sure appreciate being on the program. If you’ll one more time just tell our listeners how they can get a hold of you if they would like to take you up on that consultation?
John: Sure, you can check our website at www.luce, L-U-C-E, kenney, K-E-N-N-E-Y, law.com, that’s lucekenneylaw.com or give my office a call at 360-850-1049 and we’d be glad to set up a complimentary consultation for you.
Jason: Awesome, John, thanks again for being a guest on Sound Retirement Radio.
John: No problem, Jason. My pleasure.
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