The 9 Steps to Financial Freedom (20 page)

Think you’re a long way from needing a bypass trust? Repeat the calculations from time to time, perhaps when you do your taxes every year. Your mortgage is closer to being paid off. Your retirement funds are growing. Maybe you inherited a little money here or there. No matter how much you have, your spouse will be okay if you die first; spouses, remember, can inherit billions without paying estate tax if they are U.S. citizens. But once your spouse dies, or if the two of you happen to die together and those surviving you have more than the current credit shelter amount, it’s estate tax time—unless you have this trust in place. With this kind of trust, you can double your credit shelter amount in this situation. The minute you’re lucky enough to hit that credit shelter mark, which is $5,120,000 in 2012, unless you plan to leave all your money above the exempt amount to a charity, you need a bypass trust.

I am very serious about this. If you and your spouse fall short of the current credit shelter amount, but are getting up there, I urge you to set up a bypass trust. You never know when a two can become a one, so don’t chance it. A bypass trust will cost about $2,500 in attorney’s fees to set up, unless you own a lot of real estate and have lots and lots of cash, in which case it will cost more, or unless you’re just amending a revocable living trust you already have, in which case it will cost less. But wouldn’t you rather leave your hard-earned money to your loved ones than to the IRS?

In the case of Sherry’s family, because Tim and Daniel will eventually die, Tim and Daniel should also set up a revocable living trust, setting up in turn a bypass trust; what’s good for the goose is good for the gander. Tim’s and Daniel’s children should not have to go through what their fathers are going to go through if Mom and Pop don’t take action. At the very least,
the brothers should each have a revocable living trust that leaves the business to each other in trust with their share of the income it generates to Sherry and Christine.

They should also think hard about what they want. Let’s say that one of the wives predeceases her husband. Maybe that brother will want his share of the business to go directly to his kids, not to his brother. If there isn’t some provision for this, the first brother to die might leave his children with nothing. I am sure that Tim and Daniel don’t intend to deny their children an inheritance, but the way their estates are set up right now, that might well be what happens.

If you have a child from two or more marriages and want to protect them all, please, please go see a lawyer
now
. And if you have more than the current credit shelter amount in assets, want to protect all your children, and don’t go to see a lawyer, you are being tremendously irresponsible to yourself, your money, and your children.

In the case of Sherry’s family, let’s imagine that Pop and Mom do manage to get their act together and, with the aid of a bypass trust, leave the business to Tim and Daniel in the most respectful way possible. But Tim and Daniel don’t follow suit; they keep their wills. Let’s say Tim dies first, the business goes to Daniel, and Daniel’s will says everything goes to Christine, who in turn has a will leaving everything to her children. What about Sherry? What about Tim’s own children? Did he mean to disinherit them? Did he intend for Daniel’s kids to get the whole business and his to get nothing? That’s not what he meant, but that’s what could happen. Or if Daniel dies first, did he mean for the same scenario to happen to his children? No, of course
not. Both brothers need to set up revocable living trusts themselves to protect their families, as well as each other.

This doesn’t happen often, but it affects more people than you would think—and it’s important. It’s true that there is an unlimited marital deduction when it comes to estate taxes between spouses. But that holds true only if your spouse is a U.S. citizen. If not, the most you can leave him or her is the credit shelter amount allowed for that year (see
this page
), which in 2012 is $5 million.

In other words, if Mom in Sherry’s family was not a U.S. citizen, and if Pop left her the business through his will, she would owe $350,000 in estate taxes.

There’s a way around this. If you or the spouse who isn’t a U.S. citizen has a child who is a U.S. citizen and who is reliable, that child, when he is of age, can act as one of the trustees for or with the non-citizen spouse, thereby passing on the assets without being taxed. However, if the estate is worth more than $2 million, the laws are unbelievably complex, so you must see an attorney at once.

Whenever I set up an estate plan, I made it a point to ask about any special needs of the children. Over the years I have been surprised at how many of my clients have children who, in one way or another, will need long-term management of the assets that they will eventually inherit. Children who suffer a disability of any kind or the effects of substance abuse, or simply are unable to hold on to money—whatever the case, many of them really end up needing help.

In severe cases of disability, your special loved one might be on SSI, or Supplemental Security Income, and possibly even on Medicaid. Even if you’re helping the child, too, Medicaid can sometimes step in in dire cases and help with, for example, lifelong medication. Parents have to be very careful about how they leave money to children on SSI or Medicaid who will need financial watching over later on, when they are not here. Leave such a child, say, $50,000, and that child might lose his or her federal subsidies and no longer be able to go on once the inheritance is gone.

The answer to this may be a
special needs trust
.

Under the law, if certain limitations are built into a trust, they will make it impossible for creditors to reach the funds in the trust. For example, if I am the beneficiary of a trust that holds the $50,000, but I’m not the trustee, then I have no control or management over this money. Only the trustee has the power to give me money. Because I have no legal right to demand it, my creditors can’t take the money I owe them from the trust. Therefore I’m not really considered the owner of the $50,000, and it can’t be considered my asset in determining my eligibility for government assistance. In some states laws have been passed that take this basic trust principle and use it specifically to allow money to be held in trust for the benefit of a developmentally disabled person while still allowing that person to retain all public benefits.

The greatest protection is provided for someone who suffers a developmental disability, one that impairs his or her ability to provide self-care and custody, which constitutes a substantial handicap. The primary purpose of these special needs trusts is to provide that person with a lifelong supplemental and emergency fund of assistance. Currently there exist basic living needs, such as dental care, which public benefit programs do not provide. While the parents are alive, they often provide for
these needs when necessary. In the interests of love, human dignity, and humane care, they want to keep providing for these needs after they’re gone.

Because the cost of care for developmentally disabled people is very high, the assets in trusts set up to provide for their care don’t count against the beneficiary in qualifying for government assistance. The way they work is that the trustee is directed to pay for the beneficiary’s special needs, which is to say, the requisites for maintaining the beneficiary’s good health, safety, and welfare when, under the discretion of the trustee, such requisites are not being provided by any public agency, office, or department of the state or of the United States. “Special needs” include, but need not be limited to, dental care, special equipment, programs of training, education and habitation, travel needs, and recreation.

If you are trying to protect someone who is not developmentally disabled but receives SSI, the same type of planning is advised but may not be protected to the same extent and may require more careful work on the part of the trustee. But when you love a special person, you already know there are more considerations needed at all times, and you probably don’t mind the technicalities, if you know they offer the greatest hope of protection for your special one.

What was the goal you wanted to accomplish by reading this book? Did you want to find a viable way to reduce your debt, put more money into retirement plans, figure out how to invest your money? Perhaps you’re thinking, Well, now I know all
about wills and trusts, but that won’t help me with my Visa bill, will it?

Oh, but it will. What you need to know and believe is that when you have taken care of others, you have responded to the higher values of your existence—people first, then money. It’s as if, on a material level, you’re giving thanks by taking care of those who helped you enter the world, those to whom you gave life, those who have guided your passage through your life. By taking these actions, you remind yourself of who you really are and what is important to you, what is important in this life. This knowledge is a powerful force. I think it is almighty. The force starts to push forward like a bulldozer, clearing out all the obstacles that prevent you from living the life you deserve to live. As you complete the rest of the steps in this book, these obstacles will continue to be cleared away. Unlikely as it may sound to you now, you will be closer and closer to paying off your Visa bill, taking that trip to Italy, or whatever your goal happens to be.

Please take the actions outlined in this chapter. Do one this week—make a call, get quotes for insurance, ask your parents about what would happen if they had to go into a nursing home. One action this week will clear you to take one action next week, and so on, until you have become responsible to those you love.

M
ONEY IS A
living entity, and it responds to energy exactly the same way you do. It is drawn to those who welcome it, those who respect it. Wouldn’t you rather be with people who respect you and who don’t want you to be something you’re not? Your money feels the same way.

This is one of the reasons why the rich get richer. If you’re respectful of your money, and do what needs to be done with it,
you will become like a magnet, attracting more and more money to yourself.

For some of us, this goes against the grain. We’ve all heard that “money is the root of all evil,” and it’s easy to have the notion that caring for our money is a task that should be beneath us. We know there are more important things in life—like people, as we saw in the last chapter. But that doesn’t mean you should neglect your money. Remember, your financial life is like a garden. If you tend a garden carefully, nourishing the flowers, pruning, and weeding, it’s going to be a lot more beautiful than if you simply water it halfheartedly now and then.

Wouldn’t you like your financial garden to be beautiful and bountiful? Don’t you deserve it? If you treat your money with disrespect, you are actually not giving yourself the respect that you deserve. And when you fail to respect yourself and your money, you actually repel wealth from yourself, and you block more wealth from coming your way.

The consequences of not respecting money may show up in your life in any number of ways. You might lose some of what you have just by neglecting to pay attention to it. As soon as you pay off one credit card, your car breaks down and now you owe even more. Maybe you didn’t get that job you felt certain was yours. A wonderful relationship, or so you thought, just goes out the window over money. However this repulsion takes place in your life, the root cause of it is disrespect of yourself and your money.

When I say this to some people, many of them get very defensive and say, “But Suze, I am the most respectful person I know when it comes to money.” When we look closely at all their actions relating to their money, however, we eventually see that they are not as respectful as they would like to think.

When you start really respecting yourself, those you love, and your money, the result is that you start having control
over your money. What follows from that is control over your life.

Please write down all the ways in which you are both respectful and disrespectful of yourself and your money. Contemplate this for a while, and you’ll begin to see how the actions you take in your life, and with your money, can erode your relationship with yourself and your money. Some questions: