Estate Planning & FAQs
Through our lives, we spend so much time worrying about making a decent
living. Questions like, "Will we have enough for a new house? Can I afford
that new car? Can I take that trip I've always wanted to take?"
But
the years pass.
You've built up an estate, and achieved success. Your focus starts shifting
away from taking care of yourself, to ensuring your loved ones are cared for
after you're gone. That's what estate planning is all about.
Some traditional methods of estate planning include:
Wills
are the most basic
of estate planning documents. First introduced in medieval England, wills are
basic instructions to a court how a deceased person wanted to distribute money
and property. Everyone who is concerned how their estate will be divided
should (at the very least) have a current and valid will.
What's In a Will?
Within a will, you describe several things:
1.
Who
you are, and what right you have to give away property;
2.
A
description of the property itself; and
3.
Exactly who you want it to be distributed to.
Wills are extremely easy to draw up. A qualified estate planning attorney,
although recommended, is not always required. Many courts have accepted simple
handwritten wills drawn up without any legal counsel. In addition, Internet
and software companies manufacture programs that create a will right from your
home computer. Some states even allow an oral will to be acceptable; however,
it is best to execute a formal will (just to be sure).
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Publicity vs. Privacy
While its simplicity is a definite benefit, a will has serious disadvantages.
For instance, a will is only an instruction to a court of law; it can be
contested. Once entered into court, your will is public record, eliminating
any privacy.
Relatives, friends, and associates can be reading a newspaper, read about your
death and petition the court to share in your wealth. Family Court can be
heartbreaking for many; not only do your loved ones have to cope with your
death, but then have to battle other acquaintances and distant family members
for the right to your estate.
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Can
a Will Be Invalid?
Unfortunately, when a will comes before a court, you are no longer around to
vouch for it. A will can be found to be invalid for several reasons including:
1.
Improper execution
2.
The
grantor was not mentally competent and able to understand what they were doing
when they executed the will
3.
The
will was made under duress, or as a result of undue influence from another
person.
If
the will is found to be invalid for any reason, the court will usually treat
it as though you had died intestate, or without a will. At that point, the
particular state you reside in will decide how your property will be
distributed. And if there are no living relatives, the property reverts back
to the state.
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Wills and Probate
The
process of having an attorney present your will before a court is called
probate. Unlike living trusts, each and every will must go through the probate
process. Probate usually ties up the estate anywhere from 9 months to 2 years,
and can cost approximately 2% of your entire estate value.
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What Happens If You Become Incapacitated
Wills only become effective when you pass away; they do nothing for you while
you're still alive. For instance, if you should become incompetent, and not
have named a trustee or given power of attorney to someone else, the court
will decide your proper medical care and distribution of assets. By the time
you pass away and the will goes into effect, there may be little of your
original estate left for your family.
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Nothing Worse Than Death and Taxes
Wills do nothing for estate taxes. Individuals that have assets, including
real estate, over $1 million are subjected to extreme estate taxes that climb
up as high as 50%. Plus, if you're married, a will may not maximize the
Unified Credit exemption for both individuals; in some cases, the $1 million
exemption meant per individual is reduced to $1 million per couple.
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Drafting Your Own Will
Each family's situation is different. For some, a will is sufficient. However,
it is the most basic of estate planning documents. If you wish to preserve
your wealth for generations to come, then you may want to combine a will with
other advanced estate planning techniques.
While a will can be drafted with simple estate planning software, it's usually
wise to have a professional estate attorney do it for you. Legal counsel may
help you avoid many of the pitfalls associated with wills, and ensure that the
chances it could be contested are reduced.
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Over the last two decades, the popularity of Living Trusts has skyrocketed. No
longer a tool just for the rich, Living Trusts are one of the most common
estate planning tools in use today.
This legal arrangement, usually drafted by an estate attorney, creates a
separate entity called a Living Trust. A Living Trust is called that simply
because it is created while you're alive (as opposed to a "testamentary" trust
created after death).
The
Parties Involved
The
Living Trust document itself names three different parties. The individual (or
couple) that establishes the Trust is named the Grantor (also referred to as
the Trustor).
The
Trustee is the person named by the Trust as the controller of the Trust's
assets (and in many cases, the Trustees are the same people as the Grantors).
On the receiving end, the Beneficiaries are the heirs that will benefit from
the Trust once the Grantor's have passed away.
Who
Needs A Living Trust?
Almost anyone with an estate of $100,000 or more can benefit from having a
living trust. Estates of $100,000 or more are often subjected to probate in
their state of residence, which can cost anywhere from 2%-4% of the estate's
value in court and legal fees.
The
living trust also is useful for individuals subject to estate taxes. Through a
living trust, a couple is able to maximize their Unified Credit to its
fullest. It even accomplishes protection for individuals wanting to avoid
conservatorship.
Advanced living trusts can be structured for complicated family situations.
Re-married spouses, with children from a previous marriage, can use an
advanced revocable trust to ensure kids receive their proper inheritance.
Avoiding Probate
Living Trusts avoid probate, since they are completely private. Because a
trust is recognized as a separate legal entity, distributions can be made by a
Trustee to named beneficiaries without any involvement from the courts.
The
courts maintain no control over the Trust's assets, and do not tie up the
assets in a lengthy (and costly) probate process. The Trustee simply
distributes assets to named heirs, but only if those assets have actually been
placed inside the Trust.
Funding Your Living Trust
Once established, almost anything can be placed in a trust: bank accounts,
stocks, bonds, real estate, life insurance, and personal property. In
"funding" the trust, you simply change the name or title on your assets to the
name of your Trust. Many people worry about losing control of assets; however,
that is not the case within a carefully constructed Living Trust.
Always There For You
Because the Trust is essentially controlled by one individual (the Trustee),
that person can carry out your wishes when you're not able to. For instance,
if you have children from a previous marriage and wish to leave them an
inheritance, specific instructions to the Trustee will ensure that they
receive what you had requested.
If
you're institutionalized or unable to care for yourself anymore, the Trust can
still function and make distributions as needed. The Trustee has a fiduciary
responsibility to see that your requests are fulfilled exactly. He or she can
even provide care and protection for disabled relatives or handicapped
children in accordance with your wishes.
Reducing Estate Taxes
The
Living Trust also minimizes estate taxes by fully utilizing every individual's
Unified Credit. The Unified Credit, as mandated by Congress, shelters up to $1
million from estate taxes. With only a will in place, a married couple will
receive a single $1 million exemption. However, if a Living Trust with "A-B
Provisions" is in place and one spouse dies, the Living Trust separates into
two separate trusts (commonly referred to as an A-B Trust).
In
an A-B Trust, each of the two separate trusts receives its own $1 million
exemption, meaning a total of $2 million is sheltered from estate taxes.
Any
amounts over that $2 million will be subject to estate taxes, with rates
climbing as high as 50%.
Living Trusts are easy to start-up and require little on-going maintenance.
They afford an extra measure of protection against loss of control, and ensure
that your assets remain out of the public record even after your death.
However, they do not provide protection against creditors or divorce, and do
not reduce estate taxes for estates over $1 million in value ($2 million if
married).
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A
power of attorney is used for situations where an individual cannot be
present, but that individual has entrusted someone to do the job in their
place. When someone holds "a power of attorney," they are able to enter into
contracts, negotiate, and settle matters as if they were that other person.
An
ordinary power of attorney expires when a grantor becomes incompetent or
passes away. The theory is that if the principal couldn't do it on their own,
then the agent shouldn't be able to do it either. This makes sense in many
financial and commercial situations, but makes little sense when dealing with
elderly issues.
Durable Power of Attorney
A
Durable Power of Attorney can act on a person's behalf even while that person
is still alive. People suffering from dementia or senility, who are no longer
competent to make their own decisions, need to continue to make financial and
medical transactions long after they have the capacity to do so. A Durable
Power of Attorney allows them to do that.
Setting up a Durable Power of Attorney is as easy as signing a single legal
document, naming who you would like to appoint as your agent. There are no
hearings or court proceedings to go through. What happens if you do suffer
from dementia or are incapacitated, and have not signed a Durable Power of
Attorney? If you have not named an agent to act on your behalf, you can only
hope that someone will become a Conservator for you.
Conservatorship is a lengthy and expensive court procedure requiring someone
to volunteer to become your Conservator. Finding a volunteer, whom you trust
with your affairs, to suddenly appear and want to be your Conservator is rare.
In many cases, it is also unreasonable to expect there will be enough money
and time to go through the court proceedings necessary to establish the
conservatorship.
Individuals granted Power of Attorney must, by law, act in good faith at all
times on behalf of the grantor. Suppose an elderly man is declared
incompetent, but had given his adult child a Durable Power of Attorney. The
son cannot turn around and put his father's house in the child's name, or sell
off assets for his own use. The law maintains agents have a fiduciary duty to
the grantor, and cannot take advantage of his or her position.
Medical Power of Attorney
A
Medical Power of Attorney (also known as a Durable Power of Attorney for
Health Care) is so critical, because it allows a trusted agent to make
healthcare decisions on your behalf. Few hospitals wish to take on the
responsibility of determining your healthcare decisions for you, especially in
this litigious society.
The
Medical Power of Attorney helps your doctors determine when life-supporting
measures should be stopped. If your wish is to not use life-sustaining
measurer, you can convey this to the person you've named, and they will be
able to fulfill your wishes on your behalf. A Medical Power of Attorney only
has this responsibility to you for healthcare decisions, and cannot make
financial or other decisions on your behalf (unless, of course, you've granted
both Powers of Attorney to the same person).
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Estate Planning FAQs
1. Why do I need an estate plan?
2. If I don't create an estate plan, won't the government provide one for me?
3. What's the difference between having a will and a Living Trust?
4. The possibility of a disabling injury or illness scares me. What would
happen if I were mentally disabled and had no estate plan or just a will?
5. If I set up a Living Trust, can I be my own trustee?
6. Will a Living Trust avoid income taxes?
7. Can I transfer real estate into a Living Trust?
8. Is the Living Trust some kind of loophole the government will eventually
close down?
9. Isn't a Living Trust only for the rich?
10. Can any attorney create a Living Trust?
Most of us spend a considerable amount of time and energy in our lives
accumulating wealth. As we do this, there also comes a time to preserve wealth
both for our enjoyment and for future generations. A solid, effective estate
plan ensures that your hard-earned wealth will pass intact to those you intend
to be your beneficiaries, instead of being siphoned off to government
processes and bureaucrats.
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YES. But your family may not like it. The government's estate plan is called
"Intestate Probate" and guarantees government interference in the disposition
of your estate. Documents must be filed and approval must be received from a
court to pay your bills, pay your spouse an allowance, and account for your
property and it all takes place in the public's view. If you fail to plan your
estate, you lose the opportunity to protect your family from an impersonal,
complex governmental process that is a burden at best and can be a nightmare.
Then there is the matter of the federal government's death taxes. There is
much you can do in planning your estate that will reduce and even eliminate
death taxes, but you don't suppose the government's estate plan is designed to
save your estate from taxes, do you? While some estate planners favor wills
and others prefer a Living Trust as the Estate Plan of Choice, all estate
planners agree that dying without an estate plan should be avoided at all
costs.
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A
will is a legal document that describes how you want your assets distributed
at death. The actual distribution, however, is controlled by a legal process
called probate, which is Latin for "prove the will." Upon your death, the will
becomes a public document available for inspection by all comers. And, once
your will enters the probate process, it's no longer controlled by your
family, but by the court and probate attorneys.
Probate can be cumbersome, time-consuming, expensive, and an emotional trauma
in a family's time of grief and vulnerability. Con artists and others with
less than pure financial motives have been known to use their knowledge about
the contents of a will to prey on survivors.
A
Living Trust avoids probate because your property is owned by the trust, so
technically there's nothing for the probate courts to administer. Whomever you
name as your "successor trustee" gains control of your assets and distributes
them exactly according to your instructions.
There is one other crucial difference. A will doesn't take effect until you
die, and is therefore no help to you with lifetime planning, an increasingly
important consideration now that Americans are living longer. A Living Trust
can help you preserve and increase your estate while you're alive, and offers
protection should you become mentally disabled.
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Unfortunately, you would be subject to "living probate," also known as a
conservatorship or guardianship proceeding. If you become mentally disabled
before you die, the probate court will appoint someone to take control of your
assets and personal affairs. These "court-appointed agents" must file a strict
accounting of your finances with the court. The process is often expensive,
time-consuming and humiliating.
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YES. In fact, most Living Trusts have the people who created them acting as
their own trustees. If you are married, you and your spouse can act as
co-trustees. And you will have absolute and complete control over all of the
assets in your trust. In the event of a mentally disabling condition, your
handpicked successor trustee assumes control over your affairs, not the
court's appointee.
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NO.
The purpose of creating a Living Trust is to avoid living probate, death
probate, and reduce or even eliminate federal estate taxes. It's not a vehicle
for reducing income taxes. In fact, if you're the trustee of your Living
Trust, you will file your income tax returns exactly as you filed them before
the trust existed. There are no new returns to file and no new liabilities are
created.
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YES. In fact, all real estate should be transferred into your Living Trust.
Otherwise, upon your death, depending upon how you hold title, there will be a
death probate in every state in which you hold real property. When your real
property is owned by your Living Trust, there is no probate anywhere.
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NO.
The Living Trust has been authorized by the law for centuries. The government
really has no interest in making you or your family go through a probate that
will only further clog up the legal system. A Living Trust avoids probate so
that your estate is settled exactly according to your wishes.
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NO.
A Living Trust can help anyone protect his or her family from unnecessary
probate fees, attorney's fees, court costs and federal estate taxes. In fact,
if your estate is greater than $100,000, you'll find a Living Trust offers
substantial benefits for you and your family.
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NO.
You should choose an attorney whose practice is focused on estate planning.
Members of the American Academy of Estate Planning Attorneys receive
continuing legal education on the latest changes in any law affecting estate
planning, allowing them to provide you with the highest quality estate
planning service anywhere.
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