Most people regard visiting with their estate planning attorney like a trip to the dentist. Something that’s necessary, not enjoyable, and which should be kept to the bare minimum.
The truth is that your estate plan is not a “set-it and forget-it” activity. Things change (like your people/money, and the laws, and your needs), and your estate plan should change with it. In this episode, I’m going to go over how to identify whether you should review and/or update your estate plan and the most cost-effective way of doing it.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
Click below to read the full transcript…
Bert: Welcome to “Make It Last.” Helping you keep your legal ducks in a row and your nest egg secure with your host, Victor Medina, an estate planning and elder law attorney and certified financial planner.
Victor J. Medina: Hey, everybody. Welcome back to Make It Last. It is the show that helps you keep your legal ducks rowing and your financial nest egg secure. I’m your host, Victor Medina.
I want to thank you for joining us this Saturday morning as we talk about things dealing with your retirement ‑‑ your planning, legal planning, financial planning, all that good and fun stuff. I’m happy you joining us here today. We’ve got an exciting show for you. I think it’s exciting anyway because I’m going to be talking about how and when you should update your Estate planning documents.
Too many people go through life thinking that their Estate plan is something that they should put in place once and never touch ever, ever again. That’s not the case, so we’re going to take up segments two and three of today’s show and let you know when and how you should be reviewing your Estate planning documents to make sure that they work when you need them.
Before we get to that, I have been on a search. As many of you fine listeners have been following along, I’ve been on a search for a new car. Part of that is because I have leased my car because it lets me write it off through the company, but I lease my car and my lease is up. It’s now time to look at a new car.
I’ve got different options. I can purchase a car and take a deduction off of that, a Section 179 deduction, or I can lease again. As I’ve been having discussions with my parents about it, I realized that they really didn’t understand how auto leasing works.
I thought, “Well, if they don’t understand how auto leasing works, maybe you don’t understand how auto leasing works, and maybe we ought to talk about how auto leasing works.” It sounds like it’s a big mystery because the pitch is always about a monthly payment.
They’re going to come in and they’re going to pitch you on some monthly payment. You never quite understand how to get to the number that they’re getting at. You don’t know if they’re playing funny games with the calculations.
I know that leasing, [laughs] for some shoppers, can seem like it’s as dark and mysterious as the deepest reaches of outer space, full of confusing language, weird fees, and payments, but you can figure this out without an advanced degree in mathematics, right? Let’s talk a little bit about what leasing is and how it differs from purchasing.
You know that when you lease a car you don’t own it. When you lease a car, what you’re actually doing is paying rent on the value of the car for the time that you have it. Just like an auto loan, you can lease a car for 36 months, 48 months, 60 months, 24 months, but it’s essentially a contract where you’re going to rent for certain usage of the car.
The value of that depends on how much you’re actually going to use the car. The metric that they have to measure how much you’re going to be using the car are the number of miles. Often, you will that lease offers are contingent on using a certain number of miles through that period. We usually think about them as miles per year.
An average number is anywhere between 10 and 15 thousand miles per year. Obviously, as the number of miles per year go up, you will be paying more because you’ll be using more of the car for the time that you’re under your rental agreement.
That makes sense for people. They make sense that you’re going to be using more of the car, so you should pay for the other part of the usage. How is that express in the numbers? One of the most important numbers you can focus on is the residual value of the car.
The residual value is how much value is left over at the end of the term of the lease. If you’re going to lease it for 36 months and promise to only use 10,000 miles per year, then the financing company is able to assign a value to that car which they call the residual value. It’s going to be affected by lots of things, the residual value.
It’s going to be affected by the number of miles that you drive on an annual basis. It’s also going to be affected by the trim level of the car, how popular it is, where you reside in the country. Different geographies will affect the residual value. This is a number that’s arrived at by the financing company.
One of the things that you should be doing is you should be asking about what residual value they’re going to assign the car at the end. You have to give them some information. You got to tell them up front, “I’m going to be using is for 36 months and for 10,000 miles. What’s the residual value?”
They’re either going to give you a number or they’re going to give you a percentage. Percentage is the most easy way to do that. Now, as a rough guide ‑‑ I’ve been talking about a 36‑month lease that’s most popular one ‑‑ most cars have a residual value between 45 and 60 percent. That’s the value at the end. The higher the number, the more the car’s worth at the end of the lease.
Therefore, the less money you’ll be paying because you’ll only be paying for the amount of the use that you have, so it’s worth more at the end. You’re only going to be paying for the 40 percent or so that it is there. That’s one number.
Now, another number that you have to pay attention to is the capitalized cost. The capitalized cost is essentially the negotiated sales price plus any fees. What will happen is that they will give you some price. You’ll negotiate off of the sticker price or up from the invoice, but you’ll arrive at some number.
You’ll say, “This is what I’m going to pay for the car, and then you’ll add in whatever fees that are associated with that,” the transportation fees, so on and so forth.” You’ll get to a gross capitalized cost, and then you take off any rebates, which they call a capitalized cost reduction. I started with my gross capitalized cost, that’s the sales price of the car plus fees.
I subtracted any capitalized cost reduction like cash down or a rebate, and that’s the reduction. What you’re left is an adjusted capitalized cost. We took the residual value and we multiply that against the sticker price because that’s what its worth at the end. You go sticker price to sticker price. You don’t do the residual value against your negotiated price, you go against the two.
Now you have a depreciation amount. When you subtract the residual value from your adjusted capitalized cost, that’s the amount that you are paying for. Now we take the adjusted capitalized cost, we subtract it against the residual value, which is a residual percentage, against the sticker price, and we come up with a depreciation amount.
The next thing that we do is we divide the depreciation amount by the number of months in the payment, and we get that. That’s going to be a really small number. [laughs] Don’t get excited about that because we have not added in a rent charge and we have not added in state taxes on it.
The rent charge is actually arrived at by taking your adjusted capitalized cost, adding it to the residual value, and multiplying it times the money factor. That money factor is the amount of interest being charged per month. It’s basically what the rent charge is. We would add it to the base payment.
By the way, if you want to figure out what your interest rate is on that, take the money factor and multiply it times 2,400. That’s the rent charge. Now, we add those two things together and that’s your pre‑tax lease payment.
You multiply the lease payment against your sales tax and then you get your total amount. The easiest way to do that is to take your sales tax at seven percent and multiply your pre‑tax number against 1.07, and that will give you your total amount of your payment. If you want to arrive at a lease payment and how leases work on the numbers, that’s the way that you do it.
Victor: Hopefully, that’s been an eye opening for you guys. It’s been eye opening for me as I’ve gone through that. Something that I knew the last time we did the lease stuff, but I thought that would be an interesting discussion for you.
When we come back, I’m going to talk to you a little bit about estate plans, why they grow stale and why you should update them. This is not a set it and forget it activity. Join us, when we come back, on Make It Last.
Victor: Hey, everybody. Welcome back to Make it Last. We’re talking today about why and how you should update your estate planning documents.
Look, I know that going to visit a lawyer about estate planning is about as exciting as scheduling a voluntary root canal. The truth of the matter is that, when you think about your estate plan, it’s one of those things that you should get done, but there’s no crisis around getting it done.
For most people, they’re not visiting with an estate planning attorney because there’s been something that’s happened in their life that requires them to have estate planning documents. By the time that happens, it’s too late for most people.
Not visiting with an estate planning attorney, they might be visiting with a guardianship attorney, or they might be visiting with an elder‑law attorney to get qualified for Medicaid, or something that needed to happen in probate. Basically, time’s up.
When we visit with an estate planning attorney, we’re doing some proactive planning. We’re putting our adult hat on, and we’re doing some adulting, and we’re saying, “OK, look. I ought to have an estate plan in place.”
It’s not a ton of fun to be thinking about what happens when you die, and what happens when you get sick, and whether or not you want your kids to inherit something, or be in charge of money, or anything like that.
Because that’s not fun, people tend not to do it as a regular activity of their adult lives. They go in and see an estate planning attorney once. They’ll put some documents in place, and then they’ll forget about it.
The reason why that’s a problem is, what you need for an estate plan is a moving target. Let me try to make that case for you because we’re often in a position in my law firm of trying to fix problems caused by stale estate planning documents.
Now, the estate plan might have been perfect when the person put it in place, but they did that in the Nixon Era. They did that during Reagan or Clinton. They did it in the first Bush, never mind the second Bush, and they haven’t looked at the estate plan since.
It might have been perfect when they put it in place, but there are three moving targets that make that estate plan at risk, that put it at risk that it’s not going to work when we’re going to need it. One of those is that the laws themselves change over time.
Before the year 2000, the estate’s tax exemption was only about $600,000. I say “only” because today it’s five million dollars, so quite an increase, but it was only about $600,000 or so. People who put an estate plan in place might have visited with a lawyer that put that number in their estate planning documents.
They said, “If my estate is greater than $600,000, then I want you to do something special or different with how we do the tax planning.” Because the laws have changed that number, have increased it over time, you can get an adverse result by compelling certain planning to be done on that number threshold.
When the tax laws change, it’s an opportunity to review your estate plan to make sure that it still works. Listen, here in New Jersey, about two shows ago by the way, we talked about New Jersey Inheritance and Estate Tax.
If you didn’t listen to that show or if you don’t remember, the last year, in year 2016, we had a change in the law that increased and eventually eliminated the estate tax for New Jersey. Everyone who has a plan that was pre‑2016 that has some number attached to do estate planning and estate tax planning are going to have out‑of‑date documents.
That’s just within the last two years. If you have an estate plan that’s older than two years, it’s time to review it because the laws have changed. The second reason to do it is a little bit harder to quantify, but I’m going to see if I can’t make it a compelling reason for you, which is that the state of the art changes over time.
What that means is that, what we do as estate planners, or what I did as an estate planner 15 years ago is not what I do as an estate planner today. It’s not because I’ve gotten brighter or it’s not because I’ve gotten more experienced and learned how to do it better, it’s because the state of the art, the tools that we use and the way that we use them have improved over time.
Think about it like an iPhone. I was able to do something with an old iPhone when it came out 10 years ago, but what I can do with a new iPhone in this year is so much more. Was it my fault that I put an estate plan together with a 2008 iPhone?
No, because that’s all I had at the time, but if my clients are only stuck with a 2008 iPhone, they’re missing out on a whole bunch of features that have just improved their chances for a great plan and potentially their outcome.
The third reason why you need to review your estate plan is actually the most compelling. I’ve saved it for last because then it brings me right up to a break and there’s a whole teaser thing before we come back. The third reason why we do that is because your personal and your financial circumstances change over time.
If you are at home listening now, I just want you to visualize something. You let me know whether or not, as you review your past history over the last five years, whether you own exactly the same assets that you owned five years ago.
You haven’t bought anything or sold anything different, certainly nothing that would be included in your estate plan. You haven’t changed the way accounts are titled. They haven’t changed companies. They changed it on you. If you own exactly what you owned five years ago, realize that’s only the year 2012.
That was one presidential administration ago. Most people can’t survive that inquiry if I asked them to go back 10 years. 10 years is the new millennium. That’s the 21st century. Do you own exactly what you owned since the new millennium? For most people, the answer’s no. If you own different things, you should be reviewing your estate plan in light of the fact that you own different stuff.
The other reason why you’re going to want to take a look at that, as part of a third reason, is two things ‑‑ financial and personal, both of those together. Now, your personal one is this. How many people have had no changes in their personal circumstances for the last 5 or 10 years? No one’s gotten married, divorced, been born, died, changed, moved, or changed their names.
These are all reasons why you would review your estate plan because, if your personal and financial circumstances have changed, the target that you’re aiming at may have moved. You took aim when you put this estate planning document to say, “Look, when I die ‑‑ which is sometime in the future ‑‑ I’m going to fire this arrow in this direction.
“I’m going to land on the bullseye because I’ve put a great estate plan together.” When your personal and financial circumstances change, when the tax laws change, when the state‑of‑the‑art changes, you get a different bow and arrow. The target may have changed, and your ability to hit that target may not be as good as it would be if you reviewed your estate plan.
I’m going to tell you the most cost efficient way to do that, and what areas to review of your estate plan.
Victor: Remember, those three reasons are enough for you to be looking at your estate plan and updating it before we have a problem. When we come back, on the next segment, I’m going to talk to you about what specifically you can do.
How you can save money so that you don’t have to buy a brand new estate plan every single time, and what to look for in your estate planning documents which trigger whether or not you might have an out‑of‑date plan. Stick with us, when we come back on Make It Last.
Victor: Hey, everybody. Welcome back to Make It Last. We’re talking today about how and why you should update your estate plan. On the last segment, I did talk to you about reasons why to do that. Your personal and your financial circumstances could’ve changed. The tax laws could’ve changed.
The tools and the skills that your state planning attorney may have had at his or her disposal 10 years ago are not as good as what they are today. Everyone’s gotten a new iPhone. By the way, I’m a big iPhone fan. Those of you who know me, I’m a big Apple nerd. This is being released, broadcast on September 9th.
If you’re listening to this between September 9th and September 12th… September 12th they’ve got a new iPhone event. I will be glued [laughs] to my computer, trying to figure out what the new iPhone is going to be, the iPhone Pro. No buttons, really exciting. Anyway, getting back to estate planning.
We’ve made the case for why you need to do the estate plan update. Now the question is, what exactly do you have to review, and what are you going to be…? How can you make an assessment about whether or not it’s time to adjust your estate plan, do it in a cost‑effective manner? To do that, I got to talk a little bit about the way that my law firm works.
My law firm works mostly in trying to get a plan that works for our clients, a simplistic way of doing it. When we created the estate planning firm, one of the things that we did was, we thought about updating in a brand new fashion. Most estate planning attorneys think about updating as a brand new plan that you start fresh every single time that you talk to them.
That’s really not very customer‑friendly. If you believe, as a client, that you got to start from dollar one every single time you need to update your estate plan, you won’t. You won’t visit with anybody. It was hard enough to go for the voluntary root canal six years ago. You’re not going to do it again, especially if it’s going to cost you as much as it did last time.
We created a system that allowed people to routinely be reviewing their estate planning documents, and we’re trying to change their behavior around that. I know that sounds a little manipulative. I do it because I know that my clients will end up better at the end of the road if I’m able to get them in a regular habit of reviewing their estate plan.
In my law firm, what we do is we offer a Client Maintenance Program. I suggest to you that, if you’re not working with our law firm, then, whoever your lawyer is, you should ask them about a client maintenance program. The way the client maintenance or client update program works is that we visit with our clients who are on the program every year. Every year.
Every year we produce a brand new, updated plan. That’s done deliberately. If we’re meeting every year, it gives us an opportunity to match up changes that people have had in their personal and financial circumstances, which they know about ‑‑ the client knows best about that stuff ‑‑ with changes in the law, which I know about.
We have this regular meeting and say, “I kinda know about this stuff.” They say, “Well, I kinda know about this stuff.” We look at that both together and say, “Do we need to make any updates?” we’ll produce a new estate planning document. Remember, just like the iPhone, there’s a new one that comes out every year. Every year, the state‑of‑the‑art of what I’m doing changes.
I want my clients to get the best estate planning documents and estate planning practice and strategies that are possible. By doing that inside of a new document, a new set plans every year, we’re able to do that. You think to yourself, “Jeez, that must be awfully expensive,” and it’s not.
I don’t want to talk about numbers here, but figure that it’s probably only three‑and‑a‑half to four percent of what you initially paid to set up a plan. Somewhere around there on an annual basis. If people aren’t going to do that in our law firm, we’re going to see them once every three years to check in.
The downside to only seeing us once every three years is, while we don’t charge for that meeting, if we have to make any plan updates, we do charge for those plan updates, like an a la carte service. Looking at things on an annual basis takes away the analysis as to whether or not you should be doing it. You’re automatically doing it. You’re doing it every year.
Now we don’t have to worry about making a bad judgment call about whether we need to do it. Here are some triggers for you if you’re not working with a law firm that’s got a client maintenance program the way that we do. You should look to see whether or not people’s names have changed and whether or not there have been any births involved because you likely want things to follow a bloodline.
You will go ahead and talk about having it go to grandchildren. If you have new grandchildren, or if you have a child that unfortunately passed away, or something else has changed about your family situation, that’s a great time to review your estate plan.
The second thing you want to do is look at who’s in charge of your planning document. You had people that you named as a power of attorney agent, as a healthcare agent, as a trustee of a trust, as executor of a will. You have people in positions of responsibility. Review them. Make sure that they’re still the best people for those jobs.
Are they local? Have they moved away? Do they have too much on their plates? Did they prove themselves as not really responsible, and so you’re not really sure about whether or not they should continue on? These are the times and things that you’d be thinking about for whether or not to make a change.
Another metric you can use is the time since your last update. I focus on the timing aspect as a measure because, more and more, financial institutions are rejecting powers of attorney that are too old, based on a policy that they have in place that has got no bearing in law.
There’s no law that says that you have to reject a power of attorney older than a year or three years, but they have an internal policy that does that. A couple of shows ago, maybe more like four or five, we talked about powers of attorney and how they can grow stale.
I know this is going to sound harsh, but trust me. I’ve lived it on the other side of where there have been mistakes and plans that don’t work. If you have an estate plan that’s older than three years, and you haven’t had it reviewed or updated, you are at risk for failure. Specifically in the area of a power of attorney, which you don’t know when you’re going to need.
You don’t know if you’re going to need a power of attorney used for incapacity because you can’t predict when you’re going to become incapacitated. I look at that three‑year mark as essentially the right mark to be reviewing your estate plan and at bare minimum ‑‑ bare, bare minimum ‑‑ signing new power of attorney documents.
Those things need to be updated on a regular basis regardless of whether or not you’ve made any changes to who should be in charge, or regardless of whether or not you’ve made any form changes to the power of attorney itself, that it’s been updated or not. You definitely want to take a look at that. Let’s summarize those real quick before we punch out from this show.
One of them is, take a look at the people in your lives and make sure that there haven’t been any changes about where stuff is supposed to go. People haven’t died or been born, made a name change. There isn’t a new grandchild. There isn’t a new distribution that you want to have.
Look at, first, the people where stuff is going. Then look at the people who are in charge, and review whether or not they’re still the right people to be doing that. Do they still have the capacity to get that done? Is their plate empty enough to take on this job if you need it? Are they looking at moving away too far?
Number one is the people where stuff is going. Number two is the people that are in charge. The third one is look at your date. That’s a really easy one. If you have a power of attorney that’s older than three years I’m going to urge you to go back in and get that updated.
While you’re there, you might as well take a look at all the other stuff that we’ve talked about that might be tax law changes. If you focus on this stuff, you don’t have to get into the nitty‑gritty about whether or not there is an estate tax exemption that’s the wrong number. Let your estate planning attorney do that. That’s what they’re there for.
They’ll review the substance of the document to make sure that it works. You can focus on the stuff that you know best, which is, is it too old? You may have lost touch with your estate planning attorney, they don’t know if it’s old or not. Is it too old, and are the people the right people?
If you focus on those, you’ll make sure that you’re updating your estate plan on a regular basis, and on a schedule that puts you in the best position to have it work when you need it. That’s today’s show. Thank you so much for listening. If you have any feedback for us, you feel free to send us an email at email@example.com.
Go to iTunes and leave us a great review so that other people who care about retirement planning, legal planning, and people who haven’t touched their estate plan in five years can go listen to an episode that tells them to go and look at that stuff and make sure that it’s been updated.
Leave us an iTunes review. Other than that, I want to thank you for joining us today. We will catch you next Saturday on Make It Last, where we help you keep your legal ducks in a row and your financial nest egg secure.
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