So you decided you want to avoid probate. How do you ensure your estate and assets don’t wind up in Probate Court? There are several good ways to avoid probate:

• Trusts
• Joint tenancy with rights of survivorship (JTWROS)
• Tenancy by the entirety (Missouri married couples only)
• Pay on death (POD) accounts
• Transfer on death (TOD) accounts or deeds
• Beneficiary deeds (Missouri)
• Beneficiary designations (life insurance, retirement accounts, and some other accounts)
• Small estates

My law firm, Johnson Law KC LLC, can help you avoid probate. Call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

What’s a medical power of attorney? What’s the difference between a medical power of attorney and a living will? Do I need a medical power of attorney? When does it go into effect? Let’s answer these great questions.

Every adult needs 4 basic estate planning documents: (1) a will (and/or trust), (2) a living will, (3) a durable financial power of attorney, and (4) a durable medical power of attorney.

• A medical durable power of attorney authorizes a person to act on your behalf to make medical decisions for you while you are alive, but unable to act, such as authorizing surgery or a medical procedure if you are unconscious or in a car wreck.  The person is called your attorney in fact and is your agent.  We customize powers to parallel the desires expressed in your living will. A medical power of attorney includes a HIPAA privacy release and also allows the person to talk with your doctor, pick up medicine, etc.
• Like a medical power of attorney, a living will only applies during your life, but in the extraordinary circumstance of your incapacity or terminal illness. Your living will tells doctors and family members when and how you want to be kept alive or have life sustaining/prolonging medical procedures done for you if you become incapacitated, in a coma, or are terminally ill.
• The “durable” part means that the power survives your disability or incapacity – if you’re sick, in a coma, or out of town, the power of attorney works, so long as you’re alive. Powers of attorney can be “springing” or “immediate,” which is about the trigger time: an immediate power of attorney starts when you sign the document (so your agent has full power to act for you starting when you sign), while a springing power of attorney requires two doctors to certify you’re incapacitated before your agent can act on your behalf (adds an extra layer of accountability, but can also delay things badly if a medical or financial decision needs to be made immediately).
• Yes, you need a medical power of attorney. Any adult who goes to the doctor, the hospital, has surgery, takes medicine (or is on prescription drugs), or has ever seen a HIPAA privacy release needs a medical power of attorney.

My law firm, Johnson Law KC LLC, can help you get your medical power of attorney and the rest of your estate plan done quickly and affordably. Call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

What’s a financial power of attorney? How is it different from a will? What if I become disabled or incapacitated? Do I need a power of attorney? Does it go into effect immediately or only after I become disabled or incapacitated?

Every adult needs 4 basic estate planning documents: (1) a will (and/or trust), (2) a living will, (3) a durable financial power of attorney, and (4) a durable medical power of attorney.

• A financial durable power of attorney authorizes a person to act on your behalf to make financial decisions for you while you are alive, but unable to act, such as paying bills, depositing monies into bank accounts, transferring monies between accounts, and related financial transactions.  The person is called your attorney in fact and is your agent.  State law provides some standard provisions, and we can tailor optional powers to allow your attorney in fact to make gifts, sell your house with your spouse, establish trusts, or similar things.
• A Will only applies after you die, but a financial power of attorney only applies while you’re alive.
• The “durable” part means that the power survives your disability or incapacity – if you’re sick, in a coma, or out of town, the power of attorney works, so long as you’re alive.
• Yes, you need a power of attorney if you’re an adult, have bank accounts, a house, a business, or other assets, travel (especially internationally), or receive income or have bills that may need to be paid in your absence.
• Powers of attorney can be “springing” or “immediate,” which is about the trigger time: an immediate power of attorney starts when you sign the document (so your agent has full power to act for you starting when you sign), while a springing power of attorney requires two doctors to certify you’re incapacitated before your agent can act on your behalf (adds an extra layer of accountability, but can also delay things badly if a medical or financial decision needs to be made immediately).

My law firm, Johnson Law KC LLC, can help you get a financial power of attorney and the rest of your estate plan done quickly and affordably. Call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

What’s a living will? What’s the difference between a Will and living will? Do I need a living will? When does it go into effect? Does a living will avoid probate? Let’s answer these great questions.

Every adult needs 4 basic estate planning documents: (1) a will (and/or trust), (2) a living will, (3) a durable financial power of attorney, and (4) a durable medical power of attorney.

• A Will goes into effect at your death, appoints an executor to handle your estate, and specifies who receives your property. A Will has some custom provisions for your unique family situation and desires, with standard provisions defining your executor’s powers and giving them broad latitude to handle your last affairs under state law.
• A living will isn’t better than a regular will (or an upgrade to a will) – they’re both vital, but they do different things, like a hammer and a screwdriver.
• A living will only applies during your life, when you’re incapacitated or terminally ill. Your living will tells doctors and family members when and how you want to be kept alive or have life sustaining/prolonging medical procedures done for you if you become incapacitated, in a coma, or are terminally ill.
• Living wills avoid situations like the Terry Schiavo or Nancy Cruzan tragedies. (In those cases, the families had a tough time since neither woman had specified what treatment they wanted in writing. Without instructions, it got left up to the courts and/or family members to make the “pull the plug” or life support choices.) The family still has to make the decisions, but with a living will, they have guidance from you about how you want to be treated, what should/shouldn’t be done. Living wills can include do not resuscitate (DNR) orders, comfort care if you are terminally ill, no life support, hospice, and die at home instead of a hospital preferences, or can be customized to reflect your unique wishes and moral convictions about end of life issues.
• A Will may need to be probated, but a living will avoids probate, since it only applies during your life.

What’s the difference between living wills and medical powers of attorney? Medical powers of attorney are for more routine or common health care decisions or treatments than the living will, which only applies in extraordinary situations. A medical durable power of attorney authorizes a person to act on your behalf to make medical decisions for you while you are alive, but unable to act, such as authorizing surgery or a medical procedure if you are unconscious or in a car wreck.  The person is called your attorney in fact and is your agent.  We customize powers to parallel the desires expressed in your living will. A medical power of attorney includes a HIPAA privacy release and also allows the person to talk with your doctor, pick up medicine, etc.

My law firm, Johnson Law KC LLC, can help you make a Will and get your estate plan done quickly and affordably. Call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

What’s a will? Is a living will better than a regular will? Do I need a will? Does a will avoid probate? Let’s answer these great questions.

Every adult needs 4 basic estate planning documents: (1) a will (and/or trust), (2) a living will, (3) a durable financial power of attorney, and (4) a durable medical power of attorney.

• A Will goes into effect at your death, appoints an executor to handle your estate, and specifies who receives your property. A Will has some custom provisions for your unique family situation and desires, with standard provisions defining your executor’s powers and giving them broad latitude to handle your last affairs under state law.
• A living will isn’t better than a regular will (or an upgrade to a will) – they’re both vital, but they do different things, like a hammer and a screwdriver.
• Yes, you need a Will. A Will ensures your property and assets are distributed to the people you care about and that your finances and final affairs are taken care of well. If you don’t execute a Will (or trust), your property passes under the default options of state law. By making a will, you choose who gets what; by not making a will, Kansas or Missouri chooses who gets what.
• No, a will does not avoid probate. In fact, a will has to be submitted to probate to be legally binding after someone dies. But depending on the size and complexity of a person’s estate, probate may be a simple, quick deal.

Probate and estates. When a person dies, all their assets and liabilities become their estate. An estate usually goes through the county probate court, unless (1) the deceased person’s assets all pass outside of probate or (2) the size is too small for probate. Probate has a bad reputation in most people’s minds, but it’s often actually fairly quick and inexpensive. Probate can sometimes take several weeks or months depending on the family dynamics and estate’s complexity. The family hires a lawyer to talk with the judge, say this person died, here are their assets, here’s the will, and we want to follow the will to distribute the assets. If everyone gets along, the judge usually signs off and things get settled shortly.

Avoiding probate. Assets can pass outside of probate, by trust, beneficiary deed, transfer on death deed, pay on death, beneficiary designations, or joint tenancy. Married couples often own a house as joint tenants, so the surviving spouse/tenant gets the house without probate. Beneficiary deeds and transfer on death deeds are different names for the same thing, where the owner specifies who gets the property upon their death. Pay and death and beneficiary designations are used for life insurance, retirement accounts, and accounts at banks or other financial institutions.

Do I need a trust? Can I avoid probate without a trust? Clients can save money and avoid probate by being sure everything is titled to pass outside probate upon their death (a piecemeal approach). Trusts can be more convenient, an ownership umbrella for everything that avoids probate, but many clients can get the same benefits without paying for the extra documents/paperwork.

Small estates. Kansas and Missouri both have exceptions for “small estates” – under about $40,000. So if someone dies with less than $40,000 in their name, there’s a simple affidavit their relatives take to the bank to transfer the assets, without having to step foot in court.

What about Legal Zoom, Rocket Lawyer, or other inexpensive services? Let’s answer the question everybody’s thinking, but nobody wants to ask. You get what you pay for, and hiring a lawyer is affordable. My firm has seen Wills and estate planning documents done by Legal Zoom, ones done by well known local firms, and homemade Wills. My firm often ends up fixing estate plans done by Legal Zoom or homemade/library forms, since they’re not prepared by licensed local attorneys, they’re usually not properly signed, witnessed, or notarized, they’re often missing vital ingredients, have complicated legalese, or have excess provisions clients don’t want, need, or understand. One document talked about the California Probate Code when the document was supposed to avoid probate and the client had no connection or property in California. Why? Because an automated Internet service didn’t know any better, but we quickly fixed the document for the client. (Some online legal services have law professors review their forms, but law professors often aren’t licensed attorneys or don’t have any practical experience meeting with clients and preparing documents, so they may not know what to look for, what traps to avoid, and how to customize documents for clients’ unique needs and family situations.) Many clients are surprised by how affordable a Will is – do yourself and your family a favor and hire a local lawyer to do your Will.

My law firm, Johnson Law KC LLC, can help you make a Will and get your estate plan done quickly and affordably. Call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

I recently enjoyed meeting seminar attendees and presenting on taxes and legal ethics as part of a Kansas probate seminar in Kansas City, hosted by Foxmoore Continuing Education. Courtesy of Foxmoore, I’m pleased to offer complimentary copies of my published articles and Power Point slide decks on taxes and ethics. (Attorneys are required to attend about 12 hours of continuing education (CLEs) seminars each year – including 2 hours of legal ethics training – to maintain state bar licenses. I’ve attended many CLEs, but it was a good learning and growth experience to teach at a CLE seminar.)

The CLE’s tax portion explored final individual and fiduciary income tax returns for decedents, estate taxes, gift taxes, and generation skipping taxes (IRS Forms 1040, 1041, 706, and 709) and the individual and fiduciary Kansas and Missouri counterparts. To make the tax part more useful (and interesting) for folks, we walked through preparing and filing the various tax returns as a group, since serving each client’s legal and tax needs is our top priority. The CLE’s legal ethics portion reviewed the familiar ethics canons, with a focus on probate and estate planning issues and recommended some best practices for attorneys and accountants. We also discussed the IRS’ recent Circular 230 revisions, which makes those (annoying and) ubiquitous accounting and law firm email/blog/website footers optional.

My law firm, Johnson Law KC LLC, is experienced counseling clients from all stages and walks of life on every aspect of estate planning and the probate process. We can help you answer your estate planning and asset protection questions and solve your legal issues with confidence and friendly expertise. If we can serve you or your family with your trust or estate planning questions, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

What’s a QTIP? No, it’s not the fuzzy thing people used to clean out ear wax. QTIP stands for “qualified terminable interest property” and is a tax law term of art. A QTIP works to allow a person to transfer property in trust while enjoying some tax benefits and reducing tension between a spouse and children from another marriage, while minimizing the tax consequences.

My law firm, Johnson Law KC LLC, can guide you and your family through the QTIP process. If we can serve you or your family on your QTIP needs, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

What’s a QPRTs? QPRT stands for “qualified personal residence trust.”A QPRT enjoys some tax benefits and allows a person to transfer the family home or personal residence (not a vacation home) to their family, while minimizing the usual tax consequences.

My law firm, Johnson Law KC LLC, can guide you and your family through the QPRT process. If we can serve you or your family on your QPRT needs, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

Death and Taxes: Form 1040 and Form 1041

Benjamin Franklin once said nothing was certain in life but death and taxes. Federal income tax is charged on a person, their estate, and/or their trust. Kansas and Missouri have individual and fiduciary income taxes, but no state estate, gift, or generation skipping transfer (GST) taxes.

Form 1040

When a person dies, two tax returns are usually filed for the tax year: (1) a final Form 1040 for the deceased person and (2) a Form 1041 for the deceased person’s estate and/or trust. Form 1040 is the familiar individual income tax return, while Form 1041 is the (often less familiar) fiduciary income tax return. Just like Form 1040 captures an individual’s or married couple’s income and deductions for the year, so Form 1041 captures the estate and/or trust’s taxable income, expenses, or deductions. Often both tax returns are “short year” returns, covering less than 1 year each (since the person lived less than a full year). The final Form 1040 covers the decedent’s income from January 1 through the decedent’s date of death, while the Form 1041 captures income from the decedent’s date of death through December 31. A final Form 1041 may be filed jointly with the surviving spouse.

Form 1041

An estate files Form 1041 if the estate had: (1) gross income of at least $600 for the tax year or (2) a nonresident alien beneficiary. A trust files Form 1041 if the trust had: (1) any taxable income for the tax year, (2) gross income of at least $600 for the tax year, or (3) a nonresident alien beneficiary. Schedule K-1 (of Form 1041) reports an estate and/or trust beneficiary’s share of income, deductions, credits, or other items. An estate can claim a $600 annual personal exemption. Most trusts only get a $100 exemption, but trusts that must distribute all accounting income get a $300 personal exemption.

Trust Income Taxes: Mind the Gap

A trust has three roles – (1) grantor, (2) trustee, and (3) beneficiary – and a trust can be taxed three ways: a trust’s income taxes could be paid by the trust’s (a) grantor, (b) trustee, or (c) beneficiary. Most trusts are designed so the trustee pays income taxes. But many trusts are designed so the grantor or the beneficiary picks up the tax bill.

Grantor Pays the Tax Bill: the Intentionally Defective Grantor Trust (IDGT)

The grantor could start an intentionally defective grantor trust, where the trust income is taxable to the grantor and the trust money is not included in the grantor’s estate, since the trust is irrevocable and outside the grantor’s control, while the grantor pays the trust’s income tax bills.

Trustee Pays the Tax Bill

Usually the trustee pays the trust’s income taxes from the trust’s assets. But trusts can be designed so the beneficiary or the grantor pays the trust’s income taxes, while the trust assets are not included in the beneficiary or grantor’s estate. Some irrevocable trusts need a third party trustee (like a bank or trust company) to avoid income tax issues when making distributions to a beneficiary, but a beneficiary can guide the trust’s investment strategy (even as “investment trustee”). Control is key – if the IRS allows a person to exclude assets from their estate, the person cannot control those assets.

Beneficiary Pays the Tax Bill: the Beneficiary Defective Inheritor’s Trust (BDIT)

A beneficiary could have a beneficiary defective trust, where the trust income is taxable to the beneficiary/recipient, but the trust money is not included in the beneficiary’s estate, since the trust is irrevocable and outside the beneficiary’s control, while the beneficiary pays the trust’s income tax bills.

Tax ideas are often once in a lifetime deals, like withering leaves of grass or falling flower petals, leaving only memories as the seasons change. Seize great opportunities, since as acclaimed poet Rudyard Kipling wrote, these moments of possibility “vanish at the morning’s breath!” For more tax ideas, see this article.

My law firm, Johnson Law KC LLC, is experienced counseling clients from all stages and walks of life with various aspects of estate planning and taxes. We can help you answer your estate planning and tax questions with confidence and friendly expertise. If we can serve you or your family, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

Trusts 101

What’s the difference between a living or revocable trust and an irrevocable trust? Change.

Living/Revocable Trusts

A living or revocable trust is a stand alone estate planning document, often executed with a pour-over will. A revocable trust can be changed or amended over time as circumstances and needs change (K.S.A. 58a-601, 602) – e.g. someone gets married, divorced, has children, receives an inheritance, retires, or dies. A revocable trust becomes irrevocable when the settlor or grantor (the person who set up the trust) dies (K.S.A. 58a-813(b)(3)).

Irrevocable Trusts

By contrast, an irrevocable trust usually cannot be changed or amended, although some exceptions, including “decanting” exist. Since 2011, Missouri has allowed decanting by statute (V.A.M.S. 456.4-419); Kansas allows decanting under common law with court approval. The administrative terms of an irrevocable trust can often be changed (e.g. a new trustee appointed, the trustee changing locations, the trust moving from Kansas to Missouri or vice versa). But the substantive or dispositive provisions of an irrevocable trust often cannot be changed – who gets what, how long the trust lasts, and other issues. An irrevocable trust must also file a federal fiduciary income tax return (Form 1041) if income exceeds $600 for a fiscal year, and pay a higher income tax rate than an individual on a compressed tax schedule. Learn more at Taxes 101.

My law firm, Johnson Law KC LLC, is experienced counseling clients from all stages and walks of life on every aspect of estate planning and the probate process. We can help you answer all your estate planning and asset protection questions with confidence and friendly expertise. If we can serve you or your family with your trust or estate planning questions, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.