March 17

How Should I List My Assets and Debts For My Divorce?

Getting all of your financial ducks in a row is one of the keys to a successful divorce.  In a previous post (“Getting organized is key to a successful divorce”), I described how you should inventory your assets by taking pictures or video, and making a list.  In this post, I’ll describe taking the next step in the process.

The statutes require that both parties disclose all of their assets and liabilities to each other and to the court.  If you fail to disclose an asset and the court determines that you did so intentionally, you will have to deal with a cranky judge, which is not a good thing, and it could lead to painful consequences.  So, be honest and disclose everything—the risk of doing otherwise is not worth it, and more importantly, it is just plain wrong to do otherwise.  I have seen situations where people failed to disclose assets because of a mistaken belief that it was not an asset.  However, there is an old legal maxim, “ignorance of the law is no defense.”  Although that usually applies to criminal matters, it applies here as well, because everyone is held to the same rules regardless of whether they represent themselves or have legal counsel.  This is one of the reasons I get frustrated when dealing with an unrepresented (we call them pro se) party in a divorce, and another reason why I think everyone going through a divorce should have a lawyer.

Ok, so let’s start with your assets.  In your ledger book or computer spreadsheet, create a new workbook.  Make three columns.  Label the columns as follows: “Assets,” “How Owned,”, and “Market Value.”

Under Column A, “Assets,” list all of the different categories of Assets.  I use these basic categories:

Real estate

Automobiles & other motor vehicles

Bank accounts

Investment accounts

Investment securities

Certificates of deposit

Stock options

Commodity accounts

Collectibles

Antiques

Jewelry

Art

Boats

Investment property

Retirement accounts

Life insurance policies

Personal property

Furniture

Clothing

Appliances

Books

Musical instruments

Firearms

Animals

Cemetery lots or other burial property

Tools

Sporting goods

Business interests

Business equipment

Accounts receivable

Inventory

Farm products

Under each category, you may have to insert more than one row.  For example, if you own your residence and a vacation property, you would have two lines below “Real estate,” one for each property.  However, do not drive yourself crazy listing every piece of furniture—think of it as an aggregate category.

If anyone owes you money, you should consider that an asset, and list it.  For instance, if you loaned your brother-in-law money to help him start a business, and you expect him to repay that debt, list the loan as an asset.  Remember to include any securities, stocks, bonds, certificates of deposit, stock options, Treasury notes and bonds, and commodity accounts that either of you own, jointly or individually.

If you have an ownership interest in a business, you should obtain a balance sheet from your accountant, and have him or her perform a business evaluation of your interest for you.  If you don’t have an accountant, you should consult with your attorney, who should be able to recommend several to you.  Most of the time, your attorney will recommend accountants with whom they have worked in the past.  A good accountant can help immeasurably in helping you construct your true financial picture.  I remember a recent case involving a medical professional who was in a partnership with other physicians.  On paper, his ownership interest initially looked like it was worth millions of dollars.  The accountant found, however, that after paying for overhead, taxes, and deducting other legitimate business expenses that the value of his interest was much less than that.  Although he was not a pauper by any measure, he was not as wealthy as his wife initially believed, which had a huge impact on how we negotiated their settlement.

In Column B, “How Owned,” indicate whether the asset is jointly owned (“J”), owned individually by husband (“H”) or wife (“W”).  In Wisconsin, virtually everything is marital property, which means just about everything is jointly owned.  That is a whole other subject that I will address in another blog post.  For now, if you have any question, talk to your lawyer or err on the side of caution and indicate “J.”

In the last column, “Market Value,” make your best estimate of the value of the asset.  I tell people to estimate what they think someone would pay for the asset at an auction.  You can look up the value of your house on a website, such as Zillow.com.  At some point, you may have to get an appraisal, but for now, your best estimate will be sufficient.

After you have finished listing everything you own of value, turn to a new ledger page or scroll down your worksheet, and list your liabilities.  This time make four columns: “Liability,” “Secured or Unsecured,” “Who Owes,” and “Balance Due.”  Here is the basic category listing that I use:

Mortgages

Property taxes outstanding

Automobile loans

Secured loans, any source

Unsecured loans, any source

Secured credit cards

Unsecured credit cards

Federal Income Taxes

State Income Taxes

Business Taxes (Fed & State)

Accounts payable

Ask yourself a basic question: to whom do you owe money?  Start with the big items first: mortgages, student loans, credit cards, car loans, and other secured loans, including loans against your retirement fund.  Don’t forget unsecured loans from banks, credit unions, finance companies, and individuals (include friends and relatives who lent you money and expect to be repaid).  It is just as important to disclose all of your liabilities as it is your assets.  Under the law, if you fail to disclose a debt, then you will be solely responsible for it, even if your spouse could have otherwise been equally liable.  Identify the creditor in the left column of the ledger.  If the loan is secured by any property—like a car loan, for instance—indicate that in column B, “Secured or Unsecured.”  Credit card debt may be secured or unsecured.  Most department store cards are secured, while most bankcards are not.  For example, if you bought your Kenmore washer and dryer using your Sears store card, that is a secured debt.  However, if you purchased them with your Capital One Visa, the debt is unsecured.

In the third column, indicate whether the debt is a joint debt, where you and your spouse are equally responsible for repaying it, or if it is one of your individual obligations.  Make it simple: enter J for joint, H for husband, and W for wife.  For example, both of you are probably obligated to pay your mortgage, but your college student loan is probably your own responsibility.  The basic test whether an obligation is a joint or individual responsibility is if one or both of you signed the contract creating the debt.  If you both signed the promissory note for the car, even if your spouse drives it most of the time, that debt is your joint responsibility.  There are exceptions, however.  For example, if you bought a car, and signed the note alone, in some states your spouse could be equally liable for the loan even though they did not sign the note if the creditor provided proper notice to the spouse regarding the loan.  The usual test is whether the loan was for a “family purpose.”  A “family purpose” is usually defined as that which benefits both spouses or your dependents.  Check with your accountant or future lawyer to see if your state has this exception.  In Wisconsin, if the creditor sent a notice to the other spouse, then both of you are liable for that debt even if only one of you signed the contract.

In the last column, enter the balance owed.  Use the latest statements available, or, if you do not have one, contact the creditor and find out how much you owe.  Then add the total, and subtract it from the total value of your assets.  This will give you your net marital estate value.

Finally, print the worksheets or copy your ledger pages, pour yourself a glass of wine, and sit back and relax on a job well done.  Then, call me if you want some experienced representation!

 

March 10

Trust or Will: which is the better choice for your estate plan?

The first question I usually hear from my estate planning clients (OK, the second question—the first is usually, “Why do I need an estate plan anyway?”  I answered that in another post) goes something like, “Which will work better for me, a will or a trust?”  In order to answer that question, it makes sense to describe what each of those documents is, and look at what they can and cannot do.

Most people know what a will is, a document that tells our survivors how we want to distribute our assets when we die.  The person who makes the will is called a testator, and the people who stand to inherit the estate are called heirs.  Wills for married people with children usually provide that the surviving spouse inherits all of the testator’s assets, and then when the spouse dies, everything is divided among their children.  This sounds simple enough, doesn’t it?  However, there are many potential landmines lurking in this scenario.  Here is just one example: what if both parents die leaving behind minor children?  Naming a minor child as a beneficiary of a life insurance policy or a retirement plan opens a can of worms for the child.  Minors cannot receive funds directly from such accounts.  A probate court would have to name a financial guardian for the child to control those assets until the child turns 18.  Even then, would the parents have wanted their 18-year-old kid suddenly to have their hands on potentially hundreds of thousands of dollars?

Speaking of probate, when a person dies with a will, that will has to be administered through what is known as the probate process.  Probate is a lawsuit against the estate designed to ensure that the creditors are paid and oversees the distribution of the testator’s remaining assets.  Since the first function of probate is to find the testator’s creditors, the process is necessarily public.  Look in the legal notices section of your local newspaper.  You will find several Notices to Creditors notifying the public that Amos McGill has met his Maker and instructions on what to do if he left this world owing you any money.  In addition, anyone can walk into their local Register of Probate office and ask to see old Amos’ will.  Would you want that?

Probate is also lengthy.  In Wisconsin, the probate process takes a minimum of 6 months even for simple estates, and can take as long as two years for complicated or contested estates.  During that time, the assets are frozen, which means that your loved ones, who may need access to them, could be prevented from doing so until the court closes the estate.  Imagine the difficulties this could create for your loved ones if they had to wait a year or longer to receive their inheritance.

Finally, probate is expensive.  In Wisconsin, attorneys may charge by the hour, which could run up the bill quickly if there are complicated issues.  In addition, the personal representative has a right to reimbursement for any expenses related to managing and settling the estate up to 2% of the value of the estate.  There are other associated costs, such as probate bonds, filing fees, etc.  The bottom line is that it is not uncommon for probate costs to exceed $10,000.00.

Now let’s talk about trusts, and how they work.  A trust is basically an agreement between three people—the grantor, who is the person or married couple who owns the assets, the beneficiary, who will eventually receive the assets, and the trustee, who is responsible for carrying out the grantor’s wishes.  A typical scenario involves a person or couple who creates what we call a revocable trust, which only means that as long as they are alive and competent they can make changes to the trust or revoke it altogether.  While you are alive, you fill all three roles, as grantor, beneficiary, and trustee.  This means that as long as you and/or your spouse are alive, you have total control over your assets just as you would if you did not have a trust.

The big difference between a will and a trust is that you fund your trust while you are alive by transferring ownership of your assets into the trust.  This creates a barrier between your assets and the rest of the world, and allows you to keep your private business private.  Instead of owning your house as “Mr. and Mrs. Amos McGill,” your trust would own the house under the title “Mr. and Mrs. Amos McGill Revocable Trust.”  You would put all of your assets into the trust with the exception of your life insurance policies and your retirement accounts.  There are special rules that apply to those assets, but all you really need to know is that your beneficiary designations for those assets would control their distribution when you die.  If your die leaving minor children as the beneficiaries, your trust would contain instructions protecting those funds until you designate that your trustee has the authority to release them.

When you die, since your trust owns all of your assets, guess what?  There’s nothing to probate!  If you properly funded your trust, then your estate would not be subject to the public, lengthy, and expensive probate process.  Your trustee would take immediate control of the assets and make sure that they are distributed when and to whom you choose.  The trust would also contain provisions as to who would take care of your minor children until they are old enough to fend for themselves and when and how they would receive their inheritance.

People run into trouble with their trusts if they are lackadaisical about updating their assets and making sure they are properly titled.  One of the services that I offer my estate planning clients is that I will review their plans at least every three years free of charge to make sure that they are funded properly, and that the provisions of their trust still apply to their circumstances.

Since they are more complicated to set up, it does cost more to create an estate plan involving a revocable trust than a regular will.  However, in the long run trusts save people money, as the cost is usually less than what a probate would cost, and it definitely saves time and avoids headaches for those left behind.

By now, it should be no mystery that I prefer trust-based plans for most of my clients.  One need not have millions of dollars of assets to justify utilizing a trust vehicle for their estate plan.  If you want to avoid probate, protect your kids, and have control of your assets from beyond the grave, then a comprehensive trust based estate plan can meet all of those goals better and cheaper than a will based plan.

Please contact me if you would like me to answer your questions as to which kind of plan would work best for you.  I look forward to helping you protect your family and your assets.

March 4

Getting organized is key to a successful divorce

The beginning of a divorce case is usually the scariest part of the whole process. The process is so daunting to some that they actually choose to remain in an unhappy marriage because they are more worried about the time, effort, and expense of getting divorced. I get it; it is scary, but I can also tell you that you can reduce or even eliminate the fear by getting yourself organized and approaching the process step by step. In this post, I’ll describe a few initial things that you should do that will help you later. In future posts, I’ll go into detail on the other steps you should consider taking to help make your case run as smoothly as possible.

So where do you start? First, you should understand that divorces are essentially financial transactions. Think of it as the dissolution of a small company rather than the rendering of a marriage. Mr. and Mrs. Smith are going out of business. Not all divorce cases involve the custody and placement of minor children. However, every divorce case does involve the division and allocation of the parties’ financial assets and obligations.

The first thing you should do is look around, literally and figuratively. What do you own, and how do you own it? Either buy a ledger book from your local office supply store or create a spreadsheet on your computer (encrypt it so that prying eyes won’t discover it). List everything you can think of, including real estate, bank accounts, investment accounts, collectibles, antiques, jewelry, art, automobiles, boats, investment property, business property, retirement accounts, insurance policies, etc. Walk around your house, making entries in your ledger book as you go. Don’t forget furniture, tools, sporting goods, and all that stuff in your garage, closets, basement, and attic, known generally as personal property. You’ll be surprised how much you really own.

Take pictures as you list your property in the ledger or spreadsheet. Or, if your smart phone or tablet has the capability, video everything as you walk through the house. This accomplishes two things: first, it fixes in time the quality of your property. The whole process of getting divorced can take several months, even years in extreme cases. Suppose your ex destroys that couch in the rec room then claims it’s worthless? A picture showing its condition before a vengeful ex used it as a trampoline will help you convince the judge that your valuation is correct. Second, pictures add meaning to your entries. How else is the court to know that “picture over fireplace” is your prized lithograph of dogs playing poker?

List all the assets you can think of in the left column. In the next column, indicate how that asset is held. For instance, if you own your home, do you own it as tenants in common (each of you owns 50% of the property with no right of survivorship) or as joint tenants (each of you owns 50% of the property with right of survivorship)? If Aunt Millie left a valuable antique set of china to you, indicate that you own the property individually because of the inheritance.

In the next column enter the market value of the asset. If you don’t know the exact value, enter your best reasonable estimate. It’s better to underestimate the value of your assets: if you think your house is worth between $100,000.00 and $110,000.00, use the $100,000.00 number. When estimating the value of all that stuff from the basement, garage, etc., don’t use replacement value, or what you paid for it when new. I always tell people to estimate what they think people would pay if these items were auctioned off. That’s the value most property appraisers will use when valuing the marital estate once the divorce is pending. You might as well use a similar process now.

There are a few things you should keep in mind while making your list. Most states do not include property that you inherit or that someone gave to you. For instance, if Aunt Millie left her antique cuckoo clock to you, that clock is your individual property. Your soon to be ex has no claim on that clock—it’s yours!

The same basic provision applies to gifts as well, but there are some exceptions. I like to call this issue the Custody Fight Over the Engagement Ring. Some people believe that when the marriage ends, they have the right to retrieve, or at least divide, any gifts they gave their spouse. I have seen cases where the parties agree on dividing everything else, affecting several hundred thousand dollars worth of assets, but fight like starving hyenas over carrion when it comes to who gets the engagement ring. In most states, the ring not only stays with the wife, it is counted as her individual property, and is not considered part of the divisible marital estate. Just so the men reading this don’t feel too badly about this, remember that set of custom-made golf clubs she gave you are yours as well.

Philosophically I think that is the correct solution. After listening to hundreds of divorce clients, I’ve concluded that the best way to put this issue to rest is to be generous with your ex. You’re getting out of the relationship, you’re moving on with your life. Why make it any more difficult than it already is? I’m not saying you should just roll over and let your ex have whatever they want, especially if they gave that item to you in the first place.

January 3

Who Needs an Estate Plan?

The short answer is–everyone! It does not matter whether you are single, married, divorced, or widowed. It does not matter whether you own a mansion or rent an apartment. It does not matter whether you have little kids, grown children, grandchildren, or no children at all. The bottom line is that everyone needs an estate plan.

What you may not already know is that if you don’t have an estate plan, you actually do. The State has a plan for you if you die without a will, which is called dying “intestate.” The basic rules of intestate succession in Wisconsin are found in statute section 852.01, and are as follows:

  • Your surviving spouse or domestic partner
    • If you leave no surviving children, or if all of your kids are born to your spouse or domestic partner, then your spouse or partner gets the whole estate.
    • If any of your surviving kids are NOT born to your spouse or domestic partner, then they basically split your property with your spouse or domestic partner, which could make for some interesting holidays after you’re gone.
  • If your spouse dies before you, and you leave kids behind, then each of your kids will share equally in your estate.
  • If you don’t have any kids, then your parents, or if your parents are gone, then to your brothers and sisters, and then to your nieces and nephews (this is where the myth of the “long lost rich uncle” comes from).
  • If none of those people are around, then they look for your grandparents and their relatives.
  • If they can’t find any of your relatives, then your estate “escheats” (which literally means “falls to”) to the State of Wisconsin to be used for the school fund.

You may think that the State’s plan is just fine.  However, the State’s plan may not represent how you would want your estate to be distributed.  It can also take lots of time, during which your family may be left without access to resources that you want them to have.  It’s also a public process, where anyone can take a look at how your estate is being distributed.  Do you really want all of this for yourself and the people you care about?

What if you don’t have any property to leave behind?  Do you still need an estate plan?  Of course you do, if you think about it.  Estate planning isn’t just about passing along your stuff to the next generation, it’s about passing along your legacy to them.  A properly constructed estate plan can pass along your values and insights to your heirs in ways that are as creative as you want them to be.  What if you have no property but you have kids?  Who is going to take care of them if you step in front of the bus?  If you haven’t left behind a legally binding declaration you’re opening the door to a fight between family members over who will get your kids.  Imagine the trauma your children and the rest of your family would likely endure as they waded through months of court hearings, court appointed guardians, etc.  You can avoid all of those issues in your estate plan so that you can ensure that your children will be protected and raised according to your wishes.

What’s the best way to go about getting an estate plan put into place?  Well, you’ve found the right place, as I specialize in constructing comprehensive estate plans that keep people out of court, out of the public eye, and ensure that their wishes are carried out appropriately after they’re gone.  If you would like to discuss your estate planning needs with me, please contact me to arrange a meeting.