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We have common-law marriage, right?

February 13, 2014, by

People tend to throw around the term "common-law marriage" to refer to couples who have lived together for a long time. The implication is that by living together, without getting the legal document, the spouses have acquired some rights in each other's property.

Washington does not have common law marriage. Here, you're not married unless you get the document. But courts do recognize long-term relationships. The Washington Supreme Court has said that when a relationship qualifies, and the couple splits up or one dies, the court should make a "just and equitable" distribution of property between the parties. The reasoning is that the two people living together will take care of each other's things, buy assets together, and support each other in various ways. If this goes on long enough, they acquire a partial ownership in each other's property.

So what sort of relationship qualifies? The Supreme Court has said they look at a number of factors, but the most important factor is that the parties lived together. Other factors include:

  • Continuous cohabitation
  • Duration of the relationship
  • Purpose of the relationship
  • Pooling of resources for joint projects
  • The parties' intent.

Establishing these factors and determining a fair and equitable distribution of property can be a long, painful process potentially involving lots of legal fees and possibly even a trial. Couples in this type of relationship should think about avoiding the pain by planning ahead. A cohabitation agreement, for example, describes property rights, duties and financial support, similar to a prenuptial agreement. Careful estate planning, too, can forestall after-death stress by recognizing each other's contributions to the relationship. For example, a couple in a long-term relationship may decide to execute Wills giving everything to each other, the way spouses would. Or, they might give each other significant gifts that would both recognize the relationship and make it financially disadvantageous to challenge the Will. (No, we're not going to tell you to get married. Unless you want to.)

So what is this non-married relationship called? The Washington Supreme Court in 2007 chose a new name for it: Committed Intimate Relationship, or CIR. Previously they were called "meretricious" relationships. The Court rejected the word "meretricious" for its negative connotation. In fact in 1989 the Court condemned the word "meretricious" for being "offensive, demeaning and sexist" because it is based in a word meaning "prostitute."

By the way, this is different from a State Registered Domestic Partnership. Registered DPs have many of the same rights as married couples. But note that, starting this summer, DPs will only be available to couples where one partner is 62 or older.

Update your beneficiary designations

February 6, 2014, by

When you get a new job, you have to fill out a lot of forms. There are a lot of choices to make. Often, one of those is picking a beneficiary designation for your 401(k).

Or perhaps years ago you started a retirement account with a lovely small investment firm. You may not even remember, but you probably picked a beneficiary. And an alternate beneficiary.

What about your life insurance policy? Or work-provided life insurance? If you have them, you've picked a beneficiary.

Here's today's to-do item: Check those beneficiary designations. Update them.

Those funds don't pass through your Will unless your Will is specifically drafted to override them (and even then, sometimes that "Superwill" provision doesn't work). Your retirement plan and life insurance pass directly to your designated beneficiaries.

In several situations we've had recently, a parent designated one child as a beneficiary for an account - rather than dividing it between all the children. Legally, the beneficiary doesn't have to share. The money is his or hers.

It may seem logical to designate the most responsible child as the sole beneficiary, assuming they'll handle distributing the money to their family members. But that doesn't always happen.

Worse, we've had situations where family relationships changed - but the beneficiary designations didn't. Family members left funds to exactly the wrong people.

So, go change your beneficiaries. While you're at it, it's best not to designate minors. Chances are they'll turn 18 before your death, but you never know. Financial institutions won't give funds to minors, so if something happened to you, there would have to be a court action to distribute the funds to a trustee or a custodian. A better plan: Draft a will with a trust or custodian provision for minors, and designate that as the beneficiary on behalf of your minor.

Estate planning in your 20s and 30s

January 30, 2014, by

Most people in their first few decades don't have any estate planning done, and certainly don't have it at the top of their to-do list. But there are good reasons a person in their 20s or 30s should consider putting their intentions in writing, whether in a Will or Living Trust:

  • Of course, if you have children, you can designate guardians for them. But that's just the start.

  • The death of a younger person can leave their parents with difficult questions to answer at a terrible time. Estate planning can make the process easier for everyone. It would designate who would be in charge of making decisions. And it would be a comfort for survivors to know that their loved one's wishes were being followed.

  • Estate plans can include provisions for beloved pets.

  • Estate plans can include frequently-used passwords. Even though passwords are likely to be changed or rotated, an indication of what a password is likely to be could make things easier for a Personal Representative who wishes to protect their loved one's valuable online content.

  • Estate plans can last a long, long time. We recently probated a Will that was drafted in 1961. It still met the family's needs, despite its age. And it vastly simplified the process of administering the estate.

  • A Will can include provisions for a life partner who is not a spouse.

  • Estate plans can express personal values by specifying contributions, regardless of size, to favored charities.

  • A meeting regarding estate planning can help couples understand the nature of community and separate property, and how to make plans for both.

  • If you have a child with special needs, you can protect their future with a Special Needs Trust.

We're happy to help with estate planning at any age. Give us a call or drop an email.

Keep your estate planning documents current

January 23, 2014, by

One of the most frustrating experiences for an estate planner is sending a draft set of documents to a client... and the client never returns them. That means we've drafted you a beautiful new Will, Power of Attorney documents, and everything else you need... and they sit on the shelf, never seeing the light of day.

From the client's perspective, they may have felt the urge to get their Will and Power of Attorney documents done; they met with their lawyer; documents were drafted up; now the urge is gone. But the documents were never signed and executed! In Washington, draft Wills are unacceptable, unless they're signed, witnessed and notarized per statute. Courts assume that if you haven't properly executed your Will, it's because you weren't ready to execute it yet - perhaps because something was wrong with it.

Check your Wills to make sure they were properly executed. Check them also every decade or so. Children or nieces and nephews may have grown old enough to take more responsibility in managing your estate; new children may need to be provided for; a person you may have chosen to be an executor or hold Power of Attorney may no longer be optimal for that role. Consider also whether a child may have a disability and need a Special Needs Trust. Or, have your investments done well enough that you may need tax planning? It may be a good time to talk to your attorney to find out.

A Living Will: Communicating your intentions

January 16, 2014, by

Washington law allows residents to sign a document called a "Health Care Directive" that declares whether they want to have artificially hydration and nutrition if they are diagnosed in a terminal condition or permanent unconscious condition. The document is intended to give guidance to doctors and family members if you're ever in a life-threatening coma and unable to communicate your intentions yourself. It's sometimes called a Living Will.

The Health Care Directive is a somewhat unwieldy document that doctors say doesn't always apply to every situation. One of the best uses of the Health Care Directive is to reassure your family members if they have to make a life-or-death decision about you. You can also leave clear instructions by having a good conversation with your closest family members, particularly those you've designated on a Power of Attorney Document.

What is probate?

January 9, 2014, by

As a client recently noted, many people think Wills are self-executing: That after a person dies, all their beneficiaries have to do is follow the instructions in their Will. That's not quite the case. A probate proceeding ensures the proper person is appointed executor and that the deceased person's possessions are organized, creditors paid, and gifts passed on to beneficiaries.

(Originally "probate" referred to the court process by which Wills were proven to be valid, but American probate courts have the power to manage estates whether the decedent executed a Will or not.)

In a probate proceeding, a person asks to be appointed to manage the decedent's affairs. A court commissioner or judge will evaluate whether that person is the right person. Were they nominated in a Will? Are they close family? Or is it a creditor? Does anyone object to the appointment? Is the requester a felon? If the court approves the appointment, the person becomes executor of the estate. They then must follow Washington's very specific probate rules. In some situations, the court might give the person fairly free rein to manage the estate; in other cases the court might want to closely supervise each step.

In Washington, a probate is necessary if the decedent owned real estate in the state, or if they had assets worth more than $100,000 (not including some assets that automatically transfer at death). There are a few situations in which no probate is necessary after a death. For example, if a married couple signed a Community Property Agreement, after the first death the entire estate passes to the surviving spouse - even real estate. Or, if a decedent's only assets were money in bank accounts that were co-owned with a loved one, those bank accounts would transfer automatically to the co-owner without probate. Similarly, no probate may be necessary if the decedent's assets all were held in a trust.

When people die owning less than $100,000 and no real estate, Washington law allows a family member to claim and distribute their assets without going to court to open a probate. The process for claiming those assets is described in state law at RCW 11.62.010. In short, the claiming family member must draft an affidavit to present to the bank, or employer, or whoever else is holding the decedent's assets. They must also provide it to the State of Washington - which might send the claiming family member a bill for the decedent's debts.

Observations on doing Lars's tax return (4 of 4); retirement plan contributions.

2d admitting to hospital.jpgLars is putting about $30,000 a year into his retirement plan at the CPA firm. Actually it isn't just Lars's; it's earned income therefore his and Kyra's community property. His account has grown to about a million and a half. This would have seemed like a great amount when Lars started work. Now it's not even their largest asset; they have more than that in real estate, thanks mostly to the smarts and generosity of his childless Uncle Nils.

Some of the retirement plan is Roth, meaning Lars doesn't get to deduct that portion going into the plan, but it isn't taxable when it comes out. His account is invested in stocks, bonds, and REITs. The plan permits Lars and the other participants to direct their own allocations. Lars likes watching the numbers and has an especially good feeling about this holding generally. Why?

Continue reading "Observations on doing Lars's tax return (4 of 4); retirement plan contributions. " »

Observations on doing Lars's tax return (3 of probably 4); the self-employment tax, Social Security, and Medicare.

form se.jpgAnother thing that strikes Lars as he prepares and reflects on his 2012 personal income tax return, is the amount of self-employment tax. He pays this because, as a partner in a CPA firm, he gets a share of the partnership's net income rather than a salary, so there is no Social Security tax deducted from his draws (paychecks). For him the SE tax is about $20,000 for the year, roughly half the amount of income tax he's paying.

At 55, Lars is ten years or so away from drawing Social Security, and has been paying SE tax for a long time. He has not factored Social Security income into his retirement planning, although as the time gets closer and the system remains in place he becomes a little more confident he'll actually receive some. But it doesn't seem like a great bargain, paying today's equivalent of a $20,000 a year for decades in hopes of his and Kyra's getting $30,000-plus for -- well, maybe decades, maybe it isn't so bad.

Continue reading "Observations on doing Lars's tax return (3 of probably 4); the self-employment tax, Social Security, and Medicare. " »

Observations on doing Lars's tax return (2 of maybe 4); retirement plan investing.

graph.jpgSeeing the reduced tax on his capital gains and dividends, Lars feels confirmed in favoring stocks over bonds. There is part of his portfolio that doesn't show up in his income tax return, though, at least not yet: his retirement plan.

Some of it actually never will: the Roth portion. Lars's firm has a 401(k) plan, and he has some of his account in Roth status, meaning he pays the tax on the income as it goes in, but neither the future income and gain on these contributions, nor the distributions when they come out, will be taxed. Lars likes this idea.

Even the non-Roth portion of the retirement plan that will be taxed when it comes out, gets tax-free growth in the meantime. This takes away one of Lars's reasons for not liking bonds, the taxation of interest income at ordinary rates.

Continue reading "Observations on doing Lars's tax return (2 of maybe 4); retirement plan investing. " »

Observations on doing Lars's tax return (1 of maybe 4); why would anyone have bonds now?

pencil + paper.jpgLars is a professional tax preparer. Actually at this advanced stage of his career as a CPA, he is much more reviewer than preparer; the less senior accountants in his office do the return assembly. He has a couple of peculiarities in the way he does his own return. First, he extends it so he can go over it with some deliberation. Tax season is a crush every year.

And Lars does his return by hand, at least initially. This is so he can see how the income and tax ingredients really go together. After he's done that, he does indeed run it through their software and, since the results are always at least a little different, he learns something from that too.

One thing he notices this year is the tax calculation on dividends and capital gains. These have a maximum rate of 15%, about half that on ordinary income like earned income and interest. The policy reasons for this benefit, Lars recalls, are to soften the double taxation of dividends (taxed both at the corporate and the shareholder level, theoretically at least), and to encourage people to invest. Invest in equities, at least. Not bonds.

Continue reading "Observations on doing Lars's tax return (1 of maybe 4); why would anyone have bonds now? " »

Lars's apologies (III of III).

July 19, 2012, by

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Yes, Lars and Kyra had provided in their Living Trust for $100,000 to go to Lutheran World Relief after both of their lifetimes. This is quite a way out in the future (they hope), but Lars knows from doing income tax returns for and advising on the estate plans of clients, that it's a bigger chunk than most wealthy people contribute.

This is the first time their plan has benefited anyone other than their own kids. It feels like a good step. Is it enough? Is it too far off in time? Lars isn't big on dredging up things to feel guilty about, but the new element in their Living Trust has him thinking.

Continue reading "Lars's apologies (III of III)." »

Lars's apologies (II of III).

July 12, 2012, by

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What are Lars's apologies? He's a solid citizen. Successful, supports his family, goes to church, helps other people (sort of). He realizes he's a little more concerned with his own finances, with funding his and Kyra's retirement, than he should be. Really that's pretty well taken care of, thanks in part to the success and generosity of rich and childless Uncle Nils.

Lars could do a little more for other people in his extended family. The recent good conversation with nephew Walter was encouraging, but also a little revealing. Lars had sort of written off his sister's son as an indulged career student, and hadn't done much to try to mentor him off that track. It was only when Lars had to talk with Walter about Nils's trust that he showed an interest in the kid. And Walter had come to a seemingly improved attitude on his own, without Lars's help. They had agreed, though, to meet periodically now - Lars felt better about that.

Continue reading "Lars's apologies (II of III). " »

Lars's apologies (I of III).

Thumbnail image for TE BLOG. guitar. 07.2012.iStock_000003693482XSmall[1].jpg Doing his and Kyra's estate planning has somehow made Lars philosophical. One aspect of this is he is reflecting on the words of songs. One he has heard a few times lately is Nirvana's "All Apologies." Like a lot of Western Washingtonians, Lars takes a little pride in Kurt Cobain's being local. "Come As You Are" reads the sign on entering Aberdeen. Kinda funny; there have to be some there who still think he was a punk.

Lars also just plain likes some of Nirvana's music. It wasn't really his era, but it's good stuff he thinks. The unplugged version of "All Apologies" is especially pleasing, and a little sadder. From what little Lars has read, some of Kurt's behavior might have been obnoxious, but he seems vulnerable and empathetic. Such touching words in his suicide note: "...I love and feel sorry for people too much I guess." OK, there are theories it wasn't a suicide and it wasn't his note, but the sorrow rings true.

What were Kurt's apologies?

Continue reading "Lars's apologies (I of III)." »

Continuing to work: a twofer?

April 26, 2012, by

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CPA Lars has ruminated in recent weeks on the reasons wealthy people aren't jumping on the opportunity to make large tax-saving gifts. Part of it, he thinks, is concern about having enough for the long haul.

Lars has a conversation with a banker friend that tweaks his view a little. He likes having his view tweaked. They're talking about the phenomenon and the benefit of working longer. It goes something like this: investment yields are low, and this makes dollars from working more significant. The banker puts it this way: if a person can make say $150,000 working, what's the equivalent of that in a bond portfolio? If bond yields are four percent, it would take about $4 million of them to produce the $150,000. So in a very limited sense working one more year is like having millions invested.

Lars realizes this is just one perspective; for instance at the end of the year the investor would still have the bonds and the worker wouldn't have them. But the idea causes him to calculate in another way. What does it buy to work another year? Is it a double benefit, a twofer?

Continue reading "Continuing to work: a twofer? " »

Who are these people making large gifts (Part III)?

March 29, 2012, by

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To refine his study of the wealthy a bit, Lars finds a sub-group within his 32, of the 11 with net worth in excess of $20 million. This still falls short of the league of the Carnegies and Rockefellers, but in Lars's town it's a bunch. Eight of the 11 are in real estate, an even higher ratio than in the larger group. The eight are evenly divided between commercial and residential success, and the four residential are equally split between single-family and multi-family. So maybe real estate is the thing, but there are different ways to do it.

How does leverage enter in? There are six of the 11 who made it in real estate without inheritance (more on the heirship thing in a minute). Lars eyes these six. All of them have borrowed a lot of money. It looks like leverage is critical. This might be a bit self-evident to some, but Lars wants to numbers-test a little. He figures: let's go back to our example of Cervantes and Panza. Panza has $1 million in cash and stocks and Cervantes the same value of equity in real estate.

Cervantes' $1 million consists of a $2 million property with a 5% mortgage for $1 million. Let's also assume each has an investment return of 7.5% per year (a little optimistic during these hard times, but not unreasonable for good investors over decades). Panza will gain $75,000 a year. Cervantes will have $150,000 of gain less $50,000 of interest expense, for an advance of $100,000.

Continue reading "Who are these people making large gifts (Part III)?" »