Financial Preparedness

Prince or Pauper, You Need These Documents

In the movies, the family gathers nervously. The lawyer walks in and slowly unfolds the will. Of course it’s theatrical: it’s a movie. Anger, tears and unexpected elation immediately split the family forever.

In real life, most people don’t want that kind of drama. They expect their estates to be divided equally. But unfortunately, says Knoxville attorney Victoria Tillman, a common error often results in shock.

“A pitfall that I see is that older clients are encouraged by a bank or a friendly neighbor to add another person on their checking account,” Tillman says. “When the account owner dies, that account becomes their property.”

“It would be better if they gave the person financial power of attorney rather than joint ownership,” she said. “Most of the time, when a bank puts somebody on the account, it gives the co-owner the right of survivorship, which means the account would go to that person at the death of the original owner.”

Even though the will may dictate the property be divided into equal thirds, she says, at the time of death, the account becomes the property of the co-owner.

“It’s always better to have a financial power of attorney in place. It’s best to go ahead and put into writing the people you want to assist you when you’re not able to handle your own affairs.”

“I had a sweet little client,” she recalls, “and we’d completed some great estate planning for her that reflected her wishes. She went to the bank and happened to have her great-nephew with her. The bank encouraged her to add him as a joint owner. When she came back in and told me what she’d done, I said, ‘Your great-nephew could go to Las Vegas and have a good weekend draining that account and you’d have no recourse.’ I encouraged her to take him back off and provide the bank with a copy of the financial power of attorney we’d already prepared that named the person that she had chosen to assist her with her financial affairs.”

Knoxville elder law attorney Monica Franklin points out a few more problems she commonly sees. “The most obvious problem is that some people do not save enough for retirement,” she says. “This is becoming more of an issue for younger people because of the rarity of pensions and burdensome student debt.”

Retirement accounts such as a 401k or individual retirement account are very important, she says. Individuals should start them in their 20s and make regular contributions, even if they can’t contribute the maximum amount.

While saving is important, people should not overlook the equal importance of debt reduction.

“Almost everyone’s income is going to drop at retirement, often considerably,” Franklin says. “That can make it difficult to manage a large mortgage or student debt. Those debts are deductible on your income tax returns, so there is a certain predilection to delay paying those debts down. However, the tax treatment is less relevant after retirement and the additional debt payments can stretch saved resources. So, I recommend that people plan to be able pay off their mortgage within a few years prior to retirement, if possible.”

Balancing the cost of raising a family, saving for retirement and reducing your debt can be challenging, but are all important, she adds.

“I advise you to make sure that you contribute to your retirement each month and are cognizant of the end date of your mortgage.”

She says a common mistake made by aging parents is to give their homes to their children too soon.

“Often, the parents are worried about paying for nursing home care, so they give part or all of the home ownership to the children to ‘protect’ it from estate recovery. Doing so comes with significant risks. For most of us, our largest asset is our home.

“Giving the home to the children means that we cannot access our home equity to pay for long-term care. It also means that the home can be lost if a child dies, gets divorced, gets sued, or just takes the money. Believe it or not, I have seen children evict their parents from the home after the parent gave it to the child. The final issue that should be weighed when giving away the home is capital gains taxes.  If a parent gifts a home or farm that has significant appreciation directly to the children during their lives, it can cost the children tens of thousands of dollars in capital gains taxes. That is always a consideration.”

What can younger people do to prevent these problems occurring as they grow older? They have in place the correct documents.

Tellico Village lawyer Loren E. Plemmons, who specializes in estate planning and trust administration, says there are documents everyone should have in place.

“Whether you’re a prince or pauper, you should have a last will and testament, financial power of attorney, healthcare power of attorney and an advanced care plan or living will,” she says.

Can a will be created by individuals without the assistance of an attorney?

“There are truly legal technicalities that must be followed to make it a valid document,” Plemmons says. “In my opinion, nobody should write their own will or get one off the internet because they’re fraught with problems and may not get the result the individual was hoping for. If the will isn’t prepared according to law or signed according to law, the person is usually deceased before the problem is discovered, and it’s too late to fix it.”

With blended families, the husband and wife should decide how the assets will flow, she says, rather than rely on the laws of intestate succession, which means there is no will and the state of Tennessee determines who the heirs are.

“When the first spouse dies, the children of that spouse could receive nothing if it isn’t spelled out in a last will and testament. When the remaining spouse dies, all the assets will go to that set of heirs, even though the assets may have been accumulated by both parties.”

She says wishes should be legally put into place. Don’t rely on what you assume will happen. Specify who will be executors, who will be financials agents, and who will receive property after death.

“A very common issue is that a married couple thinks if they die without a will, everything they own goes to the surviving spouse,” says Knoxville elder law attorney Glen Kyle. “That’s not the law. The law is that everything owned by the first spouse to die is split between the surviving spouse and the children.

“If something happens and there’s not power of attorney for finances or advanced directive, then we have to go to court for conservatorship. It costs money and takes time and usually involves several lawyers,” he says. “If it’s contested, it can cost tens of thousands of dollars and take a year or more. It can be like a divorce, tearing the family apart.”

He seconds the need for everyone 18 and older to appoint a durable power of attorney for finances and have a healthcare advance directive agent in place to make decisions for them while they’re living.

“A will only takes effect when you pass away,” Kyle says. “People of any age can become temporarily or permanently incapacitated, whether by a catastrophic accident or illness. In those cases, it is very important that another person has the legal authority to manage your finances and make medical decisions.

Not only should you appoint people, but you should also appoint successor agents and backups.

“You need someone to step in in case that person is unable to serve,” Kyle says.

“In a durable power of attorney for finances, you appoint an agent who can, among other things, pay your bills, manage your investments, manage your real estate, and your insurance policies. The agent is a fiduciary, meaning that he or she has to manage your finances solely for your benefit. It is also important to note that the agent does not have power ‘over’ you. You are not relinquishing any of your rights. “

Kyle says a healthcare advance directive incorporates both the traditional living will and a healthcare power of attorney, but it generally contains more detailed questions and answers about your healthcare decisions.

“In this document, you describe your end-of-life wishes and appoint an agent to carry out your wishes by making medical decisions for you if you are unable to do so,” he says. “A healthcare power of attorney and living will are types of advance directives.

“It is crucial to talk to your family and healthcare providers about your wishes. By putting your decisions in writing, you can reduce some of the uncertainty and guilt that often accompanies having to make end-of-life decisions for a loved one.

If an incapacitated individual does not have a power of attorney or an advance directive in place, he says, often the only alternative is to establish a conservatorship. That is a legal process where someone sues you in court to remove some of your legal rights and to make you a ward. There are certainly times when this is absolutely necessary, but often it could be avoided by having a valid financial power of attorney and healthcare advance directive in place before the accident or illness.

Ultimately, it’s up to you. Get the correct documents, seek the advice of a good attorney and financial planner, and look forward to enjoying the benefits of retirement rather than gambling on your future.

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