Law Offices of RL Johnson’s Blog

CLIENT INQUIRY RECEIVED – Thursday, February 07, 2008 7:17 AM

They gave us this info through the church we are going to, think it sounds shady or no? They’re really trying to press people to donate money when they do this, plus, the software costs $3500. They’re telling us that we can have our house payed off in 4 yrs. Sounds too good to be true!

ST

ATTORNEY RL JOHNSON’S REPLY – Thursday, February 07, 2008 10:47 AM

My suggestion is this: If you have $3,500 to invest: (1) payoff your high interest credit cards, (2) buy some cheap term insurance, and (3) start planning for the following: (a) disability insurance for Rob (which he can probably get along with term-life insurance cheaper through a trade or business association); (b) start a retirement account(s); and, (c) open 529 (i.e., college savings) plans for the kids. Oh, give a little to the charity of your choice and claim the donation on your income taxes.

Most importantly, DO NOT waste your time money and/or energy with MMA. Here’s seven (7) reasons:

§ MMA is built on the idea that having a mortgage is a bad thing: This is simple not true! Here’s a link that explains it better than I can. http://www.ricedelman.com/cs/education/article?articleId=232 . In fact, I highly recommend this website for all of your financial planning questions.

§ You must have equity in your primary residence and that home equity line of credit (“HELOC”) that you’re required to take out must be a “revolving account.”

§ MMA completely ignores that fact that whatever amount you apply to your principal mortgage payment is ineligible for annual tax deductions (note that tax the deduction on mortgage interest payments is about 35 cents on the dollar!)

§ MMA ignores the importance of paying down high interest credit cards (some 18% or more). Compare 18% to the 5 – 8% you pay on your mortgage.

§ MMA won’t tell you that paying off your house sooner won’t increase its value.

§ MMA ignores the fact that if your (“HELOC”) is adjustable you could easily start loosing money if you don’t have a lot of disposable income each month or you spend more than you make.

§ MMA won’t tell you that a borrower with financial discipline who wanted to pay down principal could do so on her own, without a fancy product that charges a premium rate!!! Just make 2-3 extra mortgage payments each year and direct that they be applied to the principal. No big deal! Why do you need their software?!?

I trust that this message finds you well.

Take care,
/s/Rod

CLIENT INQUIRY RECEIVED 2/7/2008 @ 08:13

Rod,

Bob died without life insurance. He left us about $50 in debt. I didn’t see any reason to probate his will, there wasn’t any money. He had a small (under 5K) retirement fund that he hadn’t cashed yet (he was 69 when he died). Well, now the fund wants him to start drawing a regular amount out. I called them and told them he was deceased. They want me to send a death certificate and then to roll the money into one of my retirement accounts.

There is also a small amount of Honeywell stock. I can’t find the stock, but I get $3 dividend checks every 3 months.

I don’t have any more death certs (I can get one if I have to).

I sold his van, refinanced the house in my name, paid off about 1/2 of the debt, and am chipping away at the remainder. Our son (age 19 and very stable) is living in the house (in Oklahoma) and I am working here in Detroit to make enough money to pay for the house and the credit card bills.

I need to know what kind of mess I’ve gotten myself into by my avoidance behavior and how to get out.

Thanks,

MS

ATTORNEY RL JOHNSON’S REPLY – 2/7/2008 @ 13:26

MS,

Following are some general comments respecting issues evident in your last email. The comments are general because—absent more information and a full document review—I am unable to respond to your overarching concern (i.e., how you best escape whatever “mess” your avoidance may have wrought). With that in mind, here are some thoughts regarding the visible issues.

1. Choice of Law

Generally, the state law of a person’s domicile controls the disposition of the wills or estate. A person’s domicile is the place s/he physically resides and for which s/he evidences a present intention of making a permanent home for an unlimited or indefinite period. It appears that Bob resided in Oklahoma. Consequently, rules particular to Michigan would be inapplicable. However, while each state has its own law governing the disposition of wills and estates, they generally follow a similar pattern.

2. Consequences of Failing to File Bob’s Will

Generally, the holder of a person’s will is required to promptly file it with the court having jurisdiction over the testator. I would have to consult Oklahoma law to let you know whether there’s a statutory penalty for avoiding probate.

a. Property that Passes Outside a Will
First, it’s important to note that there are categories of property for which a will is ineffective (e.g., houses, retirement accounts, proceeds from life insurance policies, and even brokerage and bank accounts can all pass to others outside of whatever a will says).

Second, jointly owned property is inherited automatically. For instance, if you own a piece of property jointly with another person, then that property isn’t governed by your will; it passes to you automatically at the other owner’s death by right of survivorship (the van you sold may have been such an item). I assume (I didn’t check Oklahoma law) that your home was held jointly with a right of survivorship. As such, probate was unnecessary.

To sum up, in the foregoing kinds of cases—while there are forms that must be filed—there’s no need for a probate court proceeding to transfer ownership of the property to the survivor.

To find out whether Bob had any other property with a right of survivorship, take a look at the deeds, titles, and account statements. Look for the abbreviations listed—usually at the top of the statement, after your names—to decipher what you find. If the property was owned as community property (CP), separate property (SP), or tenants in common (TI C), it does not carry a right of survivorship, and it would have had to pass pursuant to Bob’s will.

Having said that, the biggest consequence of avoiding probate is that creditors may not get paid because they received no legal or constructive notice of Bob’s death. This is the subject of the next section.

3. Creditors and Taxes Get Paid First

Naming a beneficiary for retirement or stock accounts doesn’t change a thing when it comes to the rights of creditors or the IRS. That is, even though Bob’s property has new owners, Bob’s executor is going to have to pay his estate’s outstanding debts or expenses (I note that you have already assumed this duty relative to the credit cards and the mortgage, which you re-fi’d). However, there remains a chance that Bob had other debts about which you don’t know. Indeed, this is one of the functions of probate.

The other function is to assess estate tax liability. The good news here is that most families aren’t subject to the estate tax at this point, anyone who dies with more than $2 million will owe some and transfer-on-death (“TOD”) and payable-on-death (“POD”) accounts count toward that total.

Again, I would have to consult Oklahoma law to let you know whether there’s a statutory penalty for avoiding probate.

4. Mandatory Distribution of Retirement Assets

Regardless of what Bob’s will says, Bob’s retirement accounts passes outside of his will and probate is unnecessary. Moreover, all financial services companies (i.e., insurance companies) require an account holder to name a beneficiary.

I am unclear as to the kind of account Bob owned. In your email you write that the fund now wants “him” to start drawing a regular amount. This sounds like an annuity. Conversely, you write that the fund wants to liquidate the account (i.e., wants you to roll it over). Not only does this suggest that you are the named beneficiary, it appears that Bob owned mutual funds. Thus, in order to assist you in this matter, I would need to see the most recent quarterly statement.

Finally, if you are the named beneficiary you will need to provide the fund with a death certificate and proper identification.

5. The Honeywell Stock

Bob’s stocks are probably held in a brokerage account; thus, more than likely he never held actual stock certificates in his possession. Every state but Louisiana and Texas has now adopted a law (the Uniform Transfer-on-Death Securities Registration Act) that permits TOD registration. (It’s also sometimes called “beneficiary registration.”) TOD registration provides for an automatic transfer without probate, directly to the beneficiary. The $3 dividend checks that you receive should provide you with the firm’s contact information. Again, a death certificate and proper identification will be required.