Estate Planning: More Than Just Death and Taxes

The Consumer's Guide to Estate Planning

and Distribution of Assets

Death and taxes. Historically estate planning has been about little more than planning for death and taxes. Given the unpopularity of these two subjects, it is not surprising that people are unmotivated to plan their estates. The message of this guide is that estate planning is no longer just planning for death and taxes. We emphasize that you should be motivated to plan out of love of family, friends, and personal causes.

To be honest, no one is obligated to plan. As you will discover in this guide, state governments have, for decades, assumed that people will not plan their estates, and have created, by statute, a bare-bones estate plan for everyone. So, for people who are not particularly concerned about who (including the government) gets what and when after they die, rest assured that your state legislature has a plan in place for you. And, if you feel confident that nothing will ever go wrong for your family, you do not need to plan. If you are sure that your spouse will live comfortably after your death, that your children will never be sued or divorced, that your grandchildren will get a college education without your help, then no planning is necessary.

If you do want to protect your loved ones and to provide for their future as best you can, then you must plan. You can plan for how and when they will receive their inheritances. You can plan to provide for your life partner after your death, in spite of what your family may want. You can plan to support your community and important causes through charitable donations. You can plan to pass along your values and beliefs to future generations. In this way, planning becomes a life-affirming symbol of your love. Death and taxes take a back seat to what you really want to accomplish.

This Consumer's Guide to Estate Planning and Distribution of Assets is designed to help provide you with information and answers to some of the questions you will encounter.  These are questions which we, as Elder Law attorneys and financial planners, deal with on a daily basis. Our clients have found this guide to be a valuable resource, and we hope you will find it useful too.                                                              

O ne of the most difficult transitions people face is the loss of a loved one and the distribution of the loved one's assets, or 'probate'. In addition to dealing with the stress and emotional turmoil which accompanies the grief process, the death of a loved one often makes the rest of us come face to face with our own mortality.

While no one wants to think about his or her own death, the fact is that our own death is not just a possibility, it is a certainty. And when we die, our families will have to administer our estates and distribute our assets as well.

Although death is unavoidable, unnecessary stress on our loved ones is not.  Through proper planning, we can dramatically decrease, or possibly eliminate, the stress and anxiety associated with the administration of end-of-life and probate issues.

What is Estate Planning?

Estate planning is a term that has changed dramatically over the years. At one time, estate planning meant having a will that would go through probate and, if a person was married, titling property jointly with a spouse. It conjured up visions of death and of wealthy families gathered in attorneys' wood-paneled offices listening to wills being read. It suggested that the wealthy should plan so that they could avoid estate taxes. Changes in the laws and changing views of finance, lifestyle, privacy, nontraditional families, and longevity of life have made estate planning far more interesting and, frankly, more compelling for a larger group of people than ever before.During the 1980s and early 1990s, estate planning attorneys debated wills and probate versus living trust planning. That argument has been settled. Most Americans now recognize that living trust-centered estate planning is frequently more suited for the modern, mobile society in which we now live.For these and many other reasons, estate planning is no longer will planning or tax planning only for the wealthy. It is financial, retirement, business succession, charitable, medical, disability, legacy, and gift planning. Its scope is not daunting, as it might seem from this list; it is exciting and rich in opportunities.

An estate is the total property, real and personal, owned by an individual prior to distribution through a trust or will. Real property is real estate and personal property includes everything else, for example cars, household  items, and bank accounts. Estate planning distributes the real and personal property to an individual's heirs.

Estate planning is the process by which an individual or family arranges the transfer of assets in anticipation of death. An estate plan aims to preserve the maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death. A major concern for drafters of estate plans is Federal and state tax law.

Wills and trusts are common ways in which individuals dispose of their wealth. Trusts, unlike wills, have the benefit of avoiding probate, a lengthy and costly legal process that oversees the transfer of assets. Sometimes, though, it will be useful to make inter vivos gifts (gifts made while the donor is alive) in order to minimize taxes. The Federal Gift Tax exempts certain levels of lifetime gifts.

Although the reasons for having an estate plan vary almost as much as the individuals themselves, here is a list of some of the basic goals of estate planning:

1.                  Planning for loved ones: The options available for ¿how and when¿ to give what you own to your friends, family, loved ones, and charity are limited only by your goals and your imagination. That statement may not sound logical, but we believe it to be factual based on our experience. You have tremendous opportunities to ensure that your heirs receive your property in a manner that best fits their needs and your goals. You have the ability to plan for your spouse, to create a legacy for future generations of your family and for your community, to remember friends, and to make a difference.

2.                  Planning for seniors: Governmental studies further indicate that if we live to age 65, we are likely to live to age 83, and that people today aged 65 or older face a 40 percent lifetime risk of entering a nursing home. The projections are that these figures will get worse: We will live longer, and as we do, our risk of entering a nursing home will go up. It is critical for all of us who want to retain our privacy, dignity, and control to understand the issues of medical care and long-term-care costs and our options to plan for them.

3.                  Business planning: Some studies indicate that only about 50 percent of all family-owned businesses last more than one generation and that very few last more than two generations. Estate tax plays a role in these losses, but failing to plan for the succession of the business plays an equally important role. In our experience, saving estate taxes is usually the aftereffect of planning for other goals, those being primarily a happy and comfortable retirement and a successful transition of the business to co-owners, family, or key employees in order to support the retirement.

 What Happens if You Die Without A Will?

If you die intestate (without a will), your state's laws of descent and distribution will determine who receives your property by default. These laws vary from state to state, but typically the distribution would be to your spouse and children, or if none, to other family members. A state's plan often reflects the legislature's guess as to how most people would dispose of their estate and builds in protections for certain beneficiaries, particularly minor children. That plan may or may not reflect your actual wishes, and some of the built-in protections may not be necessary in a harmonious family setting. A will allows you to alter the state's default plan to suit your personal preferences.

What a Will Does

A will provides for the distribution of property owned by you at the time of your death in any manner you choose (subject to the forced heirship laws of some states that prevent disinheriting a spouse and, in some cases, children). Your will cannot, however, govern the disposition of properties that pass outside your probate estate (such as certain joint property, life insurance, retirement plans and employee death benefits) unless they are payable to your estate.

Wills can be of various degrees of complexity and can be utilized to achieve a wide range of family and tax objectives. If a will provides for the outright distribution of assets, it is sometimes characterized as a simple will. If the will establishes one or more trusts, it is often called a testamentary trust will. Alternatively, the will may leave probate assets to a pre-existing inter vivos trust (created in your lifetime), in which case it is called a pour over will. In either case, the purpose of the trust arrangement (as opposed to outright distribution) is to ensure continued property management and creditor protection for the surviving family members, to provide for charities, and to minimize taxes.

Aside from providing for the intended disposition of your property to spouse, children etc., there are a number of other important objectives that may be accomplished in your will.

_    You may designate a guardian for your minor child or children if you have survived the other parent-and, by judicious use of a trust and appointment of a trustee, eliminate the need for bonds and supervision by the court regarding the care of each minor child's estate.

_    You may designate an executor of your estate in your will and eliminate the need for a bond; in some states the designation of an independent executor will eliminate the need for court supervision of the settlement of your estate.

_    You may choose to acknowledge or otherwise provide for a child (e.g., stepchild, godchild, etc.) in whom you have an interest, an elderly parent, or other individuals.

_    If you are acting as custodian for the assets of a child or grandchild under the Uniform Gift (or Transfers) to Minors Act, you may designate your successor custodian and avoid the expense of a court appointment.

Good planning can also enhance your support of religious, educational, and  other charitable causes.

What A Will Does Not Do

A will does not govern the transfer of certain types of assets, called non-probate property, which by operation of law or contract pass to someone else on your death.

How to Execute a Will

Wills are signed in the presence of witnesses and certain formalities must be observed. A later amendment to a will is called a codicil and must be signed with the same formalities. In some states, the will may refer to a memorandum disposing of tangible personal property, such as furniture, jewelry, automobiles, etc., which may be changed from time to time without the formalities of a will. In many states, a will that is formally executed with the signatures notarized is deemed to be self proved and may be admitted to probate without testimony of witnesses or other additional proof.

Trusts 

The term trust describes the holding of property by a trustee (which may be one or more persons or a corporate trust company or bank) in accordance with the provisions of a written trust instrument for the benefit of one or more persons called beneficiaries. A person may be both a trustee and a beneficiary of the same trust. A trust created by your will is called a testamentary trust and the trust provisions are contained in your will.

If you create a trust during your lifetime, you are described as the trust's grantor or settlor, the trust is called a living or inter vivos trust, and the trust provisions are contained in the trust agreement or declaration. The provisions of that trust document (rather than your will or state law defaults) will usually determine what happens to the property in the trust upon your death.

A living trust may be revocable (subject to change and terminated by the settlor) or irrevocable. Either type of trust may be designed to accomplish the purposes of property management, assistance to the settlor in the event of physical or mental incapacity, and disposition of property after the death of the settlor of the trust.

      Trusts are not only for the wealthy. Many young parents with limited assets choose to create trusts either during life or in their wills for the benefit of their children in case both parents die before all their children have reached an age deemed by them to indicate sufficient maturity to handle property. This permits the trust estate to be held as a single undivided fund to be used for the support and education of minor children according to their respective needs, with eventual division of the trust among the children when the youngest has reached a specified age. This type of arrangement has an obvious advantage over an inflexible division of property among children of different ages without regard to their level of maturity or individual needs at the time of such distribution.

What is a Revocable Living Trust?

Much has been written recently regarding the use of "living trusts" (also known as a "revocable trust" or "inter vivos trust") as a solution for a wide variety of problems associated with estate planning through wills. Some attorneys regularly recommend the use of such trusts, while others believe that their value has been somewhat overstated. The choice of a living trust should be made after consideration of a number of factors.

This brief summary is intended to provide a framework of basic knowledge regarding "living trusts" in general, in order that you might determine whether you should pursue a discussion of this technique further with your attorney licensed to practice in the state where your estate would be administered.

The term "living trust" is generally used to describe a trust (a) which you can create during your lifetime, and (b) which you can revoke or amend whenever you wish to do so. You can also create an "irrevocable" living trust, but that is permanent and unchangeable and is almost exclusively done to produce certain tax results beyond the scope of this summary.

A "living trust" is legally in existence during your life, has a trustee who is currently serving, and owns property which (generally) you have transferred to it during your life. While you are living, the trustee (who may be you) is generally responsible for managing the property as you direct for your benefit. Upon your death, the trustee is generally directed to either distribute the trust property to your beneficiaries, or to continue to hold it and manage it for the benefit of your beneficiaries. Like a will, a living trust can provide for the distribution of property upon your death. Unlike a will, it can also (a) provide you with a vehicle for managing your property during your life, and (b) authorize the trustee to manage the property and use it for your benefit (and your family) if you should become incapacitated, thereby avoiding the appointment of a guardian for that purpose.

How to Plan for Incapacity

Step One : Durable Power of Attorney

An important part of lifetime planning is the Power of Attorney. Valid in all states, these documents give one or more persons the power to act on your behalf. The power may be limited to a particular activity (e.g., closing the sale of your home) or general in its application, empowering one or more persons to act on your behalf in a variety of situations. It may take effective immediately or only upon the occurrence of a future event (e.g., a determination that you are unable to act for yourself). The latter are "springing" Powers of Attorney. It may give temporary or continuous, permanent authority to act on your behalf. A power of attorney may be revoked, but most states require written notice of revocation to the person named to act for you.

The person named in a Power of Attorney to act on your behalf is commonly referred to as your "agent" or "attorney-in-fact." With a valid Power of Attorney, your agent can take any action permitted in the document. Often your agent must present the actual document to invoke the power. For example, if another person is acting on your behalf to sell an automobile, the motor vehicles department generally will require that the Power of Attorney be presented before your agent's authority to sign the title will be honored. Similarly, an agent who signs documents to buy or sell real property on your behalf must present the Power of Attorney to the title company. The same applies to sale of securities or opening and closing bank accounts. However, your agent generally should not need to present the Power of Attorney when signing checks for you.

Why would anyone give such sweeping authority to another person? One answer is convenience. If you are buying or selling assets and do not wish to appear in person to close the transaction, you may take advantage of a Power of Attorney. Another important reason to use Powers of Attorney is to prepare for situations when you may not be able to act on your own behalf due to absence or incapacity. Such a disability may be temporary (e.g., due to travel, accident, or illness) or it may be permanent.

If you do not have a Power of Attorney and become unable to manage your personal or business affairs, it may become necessary for a court to appoint one or more people to act for you. People appointed in this manner are referred to as guardians, conservators, or committees, depending upon your local state law. If a court proceeding, sometimes known as intervention, is needed, than you may not have the ability to choose the person who will act for you. With A Power of Attorney, you choose who will act and define their authority and its limits, if any.

Step Two : Living Will

A living will is your written expression of how you want to be treated in certain medical conditions. Depending on state law, this document may permit you to express whether or not you wish to be given life-sustaining treatments in the event you are terminally ill or injured, to decide in advance whether you wish to be provided food and water via intravenous devices ("tube feeding"), and to give other medical directions that impact the end of life. "Life-sustaining treatment" means the use of available medical machinery and techniques, such as heart-lung machines, ventilators, and other medical equipment and techniques that will sustain and possibly extend your life, but which will not by themselves cure your condition. In addition to terminal illness or injury situations, most states permit you to express your preferences as to treatment using life-sustaining equipment and/or tube feeding for medical conditions that leave you permanently unconscious and without detectable brain activity.

A living will applies in situations where the decision to use such treatments may prolong your life for a limited period of time and not obtaining such treatment would result in your death. It does not mean that medical professionals would deny you pain medications and other treatments that would relieve pain or otherwise make you more comfortable. Living wills do not determine your medical treatment in situations that do not affect your continued life, such as routine medical treatment and non life-threatening medical conditions. In all states the determination as to whether or not you are in such a medical condition is determined by medical professionals, usually your attending physician and at least one other medical doctor who has examined you and/or reviewed your medical situation. Most states permit you to include other medical directions that you wish your physicians to be aware of regarding the types of treatment you do or do not wish to receive.

In addition, a living will should enable you to appoint a person to whom you grant authority to make medical decisions in the event you are unable to express your preferences. Most commonly, this situation occurs either because you are unconscious or because your mental state is such that you do not have the legal capacity to make your own decisions. Normally, a single individual is appointed as your health care proxy, though quite commonly one or more alternate persons are designated in the event your first choice proxy is unavailable.  In any extreme medical situation, medical professionals will make the initial determination as to whether or not you have the capacity to make your own medical treatment decisions. As with the Durable Power of Attorney, the Living Will is a state specific document that must meet certain legislative requirements in order to be acceptable in any given state.

Legal Assistance

It is easy to be lured by advertisements claiming you can save time and money by drafting your own will using do-it-yourself software or fill-in-the-blank will kits. It is unlikely that these systems will generate a suitable will that accomplishes all your objectives. Only a qualified lawyer can interpret the maze of laws bearing on property rights, taxes, wills, probate, and trusts.