Testamentary Capacity: A Growing Legal Concern

Baby boomers have profoundly affected the way we do business and the way we live our lives. They’re the big, noisy generation that demanded to be heard. They pioneered breakthroughs in multiple industries, including art, medicine, science, education and technology. Now the boomers have gotten old, and while they’re being replaced by millennials, they’re still setting records. They’re joining the ranks of the estimated 5.5 million Americans who have Alzheimer’s disease, a demographic that is growing at an alarming rate. With no cure in sight, one in 10 people aged 65 and older has Alzheimer’s.

With the increased occurrence of some kind of dementia, it’s not surprising that the matter of testamentary capacity is being raised more frequently when it comes to signing legal documents.

What is testamentary capacity and why is this important?

Testamentary capacity is the legal term defining a person’s legal and mental ability to make or alter a valid Will. Wills are often executed by older adults who may be losing their mental capacity; determining testamentary capacity is a process that helps protect these potentially vulnerable adults from those who may be hoping to profit from the Will.

Testamentary capacity is a legal question, not a medical question

It is important to note that having dementia or Alzheimer’s disease does not necessarily mean that a person lacks capacity to execute his/her Will. There is no single definition of capacity, nor is there a general test or criteria that we can apply to establish capacity, mental capacity or competency. Rather, in every case, capacity is specific to each time and situation. Legal capacity can fluctuate. In terms of the law, there is a presumption of capacity until it is disproved.

In determining testamentary capacity, it is critical that the person signing the legal documents understands the relevant information and the consequences of the documents he/she is signing.

Capacity characteristics and criteria

The following capacity characteristics and determining criteria are used as guidance in determining capacity, but it’s important to keep in mind that determining capacity can be a very subjective exercise. It requires the testator to have the ability to understand the following:

• The nature of the act of making a Will and its essential elements.
• The extent of the property of which he or she is disposing.
• The claims of those persons who expect to benefit from the terms of the Will.
• An overall understanding of the relationship among these factors—the Will as a legal document, the property identified therein and the people who will be named as its beneficiaries.

We encourage everyone to create a Living Trust

But for those whose parents have been diagnosed with some form of dementia, the timing becomes much more critical. Our dedicated team is helpful, compassionate and affordable. Contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment.

Trump, Taxes and Divorce: End of the Alimony Deduction

While many of the changes to the GOP Tax Cuts and Jobs Act are geared toward corporations, big businesses and those who own them, a repeal of a deduction for alimony is an example of how the tax law will have consequences beyond the one percent.

In some cases, the new law will be turning over tax policy that has been in place for decades. Given the highly partisan and controversial manner in which this bill was passed, it leaves many wondering if Republican legislators thought through the consequences for those who are likely to be most affected—in most cases women.

Current law has included an alimony payment deduction for 76 years

According to the Act as it is currently written, this deduction will be eliminated, effective 2019. Couples who are in mediation, separated or contemplating Divorce are being counseled to act now if it seems that Divorce is the inevitable outcome. A result of the new law could be a surge in Divorces.

“Now’s not the time to wait,” said one Philadelphia lawyer and former chair of the American Bar Association’s section on family law. “If you’re going to get a Divorce, get it now.”

The deduction substantially reduces the amount of alimony payments

What does the deduction mean for divorcing couples? For those in the highest income-tax bracket, it means that every dollar someone pays to support a former spouse is actually costing him/her a little more than 60 cents. Potential divorcees have all of 2018 to use the alimony deduction as a bargaining chip in their negotiations with estranged spouses.

An increase in acrimonious Divorces that disproportionately target women

Many believe that removing this deduction will make Divorces more acrimonious, that people won’t be willing to pay as much alimony. More couples will end up fighting in court because they won’t be able to agree on alimony terms. Since it is women who tend to earn less and are most often the recipients of alimony, many believe this tax change could disproportionately hurt women. One family law attorney believes that the repeal reduces the bargaining power of vulnerable spouses, mostly women, in achieving financial stability after a Divorce.

Tax break: An overview

1. A burden on the IRS. This alimony deduction has been criticized for being a burden on the IRS. There is a one-one relationship between what ex-spouses are paying and receiving. In 2010, there was a $2.3B gap in the reporting. If they don’t match, the IRS may be auditing two people who may already be feuding—a very difficult situation.
2. Alimony has been deductible since 1942 because lawmakers believed it was unfair to tax people on the alimony they paid when the money was not available for them to spend.
3. The deduction is significant for divorcing couples. Let’s say that John earns $250,000, which puts him in the 24% tax bracket. He agrees to pay $4,000 per month in alimony, but it really costs him about $3,000, with the deduction. Without the break, John may agree to pay only what would have been his after-tax amount, about $3,000.
4. Unfair to give divorcees a special break. House Republicans justified the repeal by suggesting that it was unfair to offer a special break to divorcees. The repeal prevents divorced couples from reducing income tax through a specific form of payments unavailable to married couples.
5. The tax change is projected to raise $6.9B over the next decade; it is one of the ways Republicans are trying to compensate for the huge deficit created by the tax cuts.

If you are contemplating Divorce, if it’s uncontested, we can assist you

California Document Preparers has assisted hundreds of couples with their Divorces. If you can agree on division of property and a parenting plan, we can save you considerable money. Our dedicated team is helpful, compassionate and affordable. Contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment.

Forget the Drama; Probate Court is a Methodical Process

Abby’s mother died in a tragic automobile accident in January. She had never prepared a Living Trust because, like many people, she assumed that this was something she’d have plenty of time for when she grew old.

An only child, Abby would be the Administrator of her mother’s estate

When Abby came in to our Oakland office, we reviewed the Probate process and her responsibilities as Administrator. On the day of our Probate hearing, Abby showed up at the courthouse, and she clearly had prepared for her day in court—she was wearing a suit and heels, makeup and she’d had her hair done. She confessed that she wanted to look professional, but there was another reason. “There were going to be all those good-looking lawyers in the courtroom.” Abby was turning her mother’s Probate hearing into a drama. Hearing her description of how she scanned the courtroom for witnesses, the judge and prosecutor, we couldn’t help thinking that she’d watched too many old episodes of Law & Order.

There’s no prosecutor or jury in Probate Court

Our client was in the courtroom specifically to get the judge’s permission to proceed with the Probate of Abby’s mother’s estate. “The judge will review your petition and grant Letters Testamentary, the document that authorizes the Executor of a Will to take control of a deceased person’s estate.” When the required paperwork is completed and submitted to the court, the judge is most likely to review and approve it without any discussion.

California Document Preparers generally manages this process for our clients. We answer our client’s questions and ensure the Probate process continues to move forward after the hearing. Disputes and objections are rare. Settling an estate is a straightforward, orderly process.

Probate can be intimidating, yet it’s a very methodical process

As part of Probate, the Court appoints a personal representative, or Administrator, to settle the estate, so we work with that person throughout the Probate process. The Administrator is responsible for:

• Collecting all Probate property of the decedent.
• Paying all debts, claims and taxes owed by the estate.
• Collecting all rights to income, dividends, etc.
• Settling all disputes.
• Distributing or transferring the remaining property to the heirs.

Access to the decedent’s accounts

As the Administrator, Abby will gain access to all of her mother’s records–bank statements, savings accounts and income tax returns–to fully understand the financial landscape. This may include valuing assets, taking physical custody of assets and selling assets, as necessary, to pay off debts or expenses.

During Probate, the deceased’s estate becomes a separate tax entity, so Abby will need to obtain a federal identification number and open a bank account in the name of the estate to pay creditors. It is also necessary to file the estate’s tax return and a final individual tax return.

Distribution of remaining assets

Once all taxes and debts have been satisfied, the Court will then distribute any remaining assets according to the Decedent’s will, or according to state law when there is no Will. In California, as in most states, when there is no will, the first priority is given to the deceased’s spouse, followed by the deceased’s children.

In Abby’s case, her father died in 2013, and she was an only child. Once all debts are paid and the estate is settled, the remaining assets will be hers.

We encourage everyone to create a Living Trust

We all hope to live long, happy lives, but sometimes circumstances intervene. Creating a Living Trust is one of the most thoughtful things you can do for your family. Our dedicated team is helpful, compassionate and affordable. Contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment

7 Ways One Can Benefit from Divorce!

Whether you’re in the process of getting a Divorce or still just thinking about it, you understand the toll that it will take on you and your family. Divorcing couples are faced with the stark reality that they will be starting a new life as a single person, often a single parent, and on a single income. As couples divide their lives, property and parental responsibilities, they are relieved to be ending what is generally a troublesome relationship, but that ending can leave them with significantly fewer assets and retirement savings.

Most of the articles about Divorce are endless discussions of the negative effects on budgets and families. But here’s a look at seven financial benefits that could help make a sad situation a little brighter.

1. Easier budgeting and more control over money

The end of a marriage can mean the end of fights over money. If one spouse is a carefree spendthrift and the other is thrifty, the relationship will inevitably run into serious conflicts. The expenses you and your partner prioritize and the way you spend money are fundamental to a relationship. If this is one of the issues that has driven a wedge between you and your spouse, and ultimately caused your Divorce, you are looking forward to freedom from having to plead with your spouse to rein in spending.

Nancy Hetrick, a senior financial advisor with Better Money Decisions in Phoenix is an example. In the six months after her Divorce to a spendthrift husband, she accumulated $20,000 in savings, while her ex racked up tens of thousands in debt over the same period. This is a dramatic example of different priorities about how to spend money. In this case, it drove a couple to Divorce.

2. Early access to a retirement fund, penalty-free

A Divorce is one of the few times a person can pull money out of a retirement account early and not be slapped with an early withdrawal penalty. If a Qualified Domestic Relations Order is reached as part of a Divorce, it allows for an early withdrawal from the account. This money is exempt from the typical 10% penalty assessed to those younger than age 59 ½. Note that income tax still needs to be paid if the money is not rolled into an IRA.

Cashing out part of a retirement account can be a risky move, and should only be considered after receiving sound financial and tax advice, but it gives the newly divorced some much-needed cash-flow flow at a difficult time when money may be tight.

3. Potentially better investment returns

Divorce could mean better investment returns, at least for women. Men usually take a more aggressive approach to investments and take more risks. After a Divorce, women have the opportunity to take over their own retirement planning, which ultimately can be advantageous.

4. More college financial aid for the kids

Divorce can be hardest on children, but there is one place where they come out ahead–college financial aid. The Free Application for Federal Student Aid (FAFSA) only requires financial information from the custodial parent rather than both parents. However, child support and alimony received from the noncustodial parent must be included on the FAFSA application. Additional financial aid is a little-known benefit of Divorce, but one that can be significant.

5. Social Security perks for older divorcees

Divorced spouses may be eligible to file for Social Security spousal benefits at retirement. If you were married to your spouse for at least ten years, you’re entitled to these benefits. This is something the ex-spouse doesn’t know you’re doing, and it has no impact on the benefits the ex-spouse receives.

If you were 62 by Jan. 1, 2016, you can file a restricted application for Social Security spousal benefits once you hit full retirement age. No longer allowed for younger workers, this application will allow you to receive half of your spouse’s benefit, while you defer your own and let it grow until age 70. For married couples, this only works if a person’s spouse has already started his/her benefit. For divorced couples, you don’t have to wait until your ex-spouse turns on Social Security.

6. Opportunity to reset financial priorities

Many divorced couples end up resenting the lifestyle changes necessitated by their Divorces. Divorce often means selling the family home; membership in the country club may no longer be affordable. Moving to a more modest neighborhood or apartment may be unsettling. Financial experts point out that a Divorce gives people the opportunity to rethink their priorities. It well may be that giving up a family home is a good thing—families are often significantly overextended with huge mortgages, spending more than they can afford, constantly challenged to keep up with their neighbors. Downsizing and living an affordable lifestyle can be a relief.

7. A better bottom line

Divorce doesn’t have to mean a depleted bank account. Even on a lower income, divorced people can build wealth by making smart use of their resources. Not everyone’s financial situation will improve with Divorce, but some people are surprised to learn that it does.

Getting a Divorce isn’t something to rush into, but if you find yourself in the midst of a crumbling marriage, don’t despair. You can still come out ahead. While it is always disruptive and emotionally draining, many couples enjoy new lives that are free of constant tension and bickering.

Are you contemplating Divorce? 

If it’s uncontested, we can help you. Our dedicated team is helpful, compassionate and affordable. Contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment.