Many estate planning techniques have developed in response to a single fact: The federal and state governments may impose a tax when you transfer property to someone else after you die. The federal estate tax is imposed on most types of property that a person transfers at death. Many examples of property are obvious: stocks, cash, and real estate. However, the tax can also be imposed in situations in which the deceased does not own the property but can direct where it passes.
Determining all of the elements that make up an individual's gross estate for tax purposes is beyond the scope of this general discussion. Instead, you should consider the following major points as you begin to develop a strategy for minimizing or reducing your estate tax exposure.
Estate Tax Liability
The estate tax is progressive, so as the value of your estate increases, planning becomes more important. The marginal estate tax rate on a transfer of $10,000 is 18%, while the rate on a transfer in excess of $3,000,000 is 55%. The amount of tax computed is increased by 5 percent for taxable estates between $10 million and $17,184,000. This 5-percent surcharge eliminates the benefit of the graduated tax rates, resulting in an effective tax rate of 55 percent (60 percent in the phase-out range). Prior to the Taxpayer Relief Act of 1997, the 5-percent surcharge applied to taxable estates between $10 million and $24.1 million. The higher threshold eliminated the benefit of the unified credit. Congress may reinstate the unified credit surcharge in the future.
The estate tax is really a transfer tax because it applies to property transfers during lifetime (such as gifts) and at death (such as inheritances). As a result, an effective estate plan should consider both lifetime giving as well as the transfer of property at death. All such transfers may be subject to tax. More importantly, lifetime planning can significantly reduce any transfer tax liability at death.
Some types of transfers are excluded in determining the amount of a transfer that is subject to tax. For example, lifetime gifts from an individual of less than $10,000 per recipient per year are generally excluded from any transfer tax considerations. The $10,000 exclusion will be adjusted periodically for inflation.
In addition to the $10,000 annual exclusion, every individual taxpayer can transfer a certain amount of property during his or her lifetime without paying estate or gift tax due to a lifetime exemption amount. This exemption amount is used to calculated the credit available to offset the unified transfer tax. The exemption amount will increase to $1 million in 2006. Table 3-1 below illustrates how the exemption amount will increase and the corresponding credit amount.
Increase in Lifetime Exemption Amount
Transfers Made During Calendar Year(s)
Applicable Exemption Amount ($)
Applicable Credit Amount ($)
2006 or later
For simplicity, the remainder of the examples in this publication will assume the applicable exemption amount is $1 million.
Estate administration expenses and debts can be deducted before computing any estate tax liability.
For a married couple, the primary deduction that reduces any gift or estate transfer tax is the marital deduction. This deduction is unlimited and permits one spouse to transfer any or all property to the other spouse free of tax. Thus, with proper planning, the estate transfer tax for married individuals can be deferred until the death of the surviving spouse. (Note: This deduction is generally only available for transfers to a spouse who is also a U.S. citizen.)
Amounts given to charity during lifetime or at death generally are not subject to any transfer tax.
After all exclusions and deductions have been considered, a tentative tax is computed on the remaining amount of transferred property. This tax can be offset by the applicable credit amount based upon the applicable exemption amount previously discussed. Thus, any estate with a total value less than the exemption amount will generally not be subject to any federal estate taxes.
Although the marital deduction allows for an unlimited amount of property to pass between spouses without transfer tax consequences, this deduction does not eliminate the need to develop an estate plan for the overall family. A simple estate plan under which everything passes to the surviving spouse may eliminate any taxes in the estate of the first to die; however, additional taxes may be due at the death of the surviving spouse. The marital deduction should be coordinated with each spouse's unified credit.
State death or inheritance taxes may have to be paid in addition to federal transfer taxes. Many state transfer taxes are patterned after the federal tax; however, there are differences, and state taxes may be incurred even in situations in which there is no federal tax.
Introducing to Estate Planning
Everyone has an estate plan, even if you have done nothing, due to the intestate succession laws.
The possible problems with intestate succession or an older estate plan is that:
Assets may not pass according to your wishes.
The federal government and the state in which you live may get much of what you own.
Your family and friends may suffer undue inconvenience.
This guide will show you how to avoid these problems with effective estate planning. Many people feel that estate planning is an unpleasant and morbid subject. They put it off because they are "too busy," or because they think they don't own enough assets for planning to matter, or because they don't like to think about death.
There is no doubt that estate planning can raise some difficult emotional issues. Unfortunately, if you ignore those issues now, you may cost your family thousands or even millions of dollars later, as well as cause considerable anguish. Proper estate planning takes far less time and effort than most people imagine, and it can give you tremendous peace of mind. If this is your first attempt at planning your estate, we recommend that you start by calling our office and requesting an appointment with our staff. We also recommend that you request an Estate Planner before you come in for the appointment. The estate planner will help our staff develop an estate plan specifically suited for your needs. The planner will help you figure out what you own so that you can make informed choices about disposing of it.
Certain documents are key estate planning tools: a will, a living will, and a durable power of attorney. Regardless of your age or level of wealth, if you do not have these documents or have not updated them recently, you should seriously consider drafting them or thoroughly reviewing them.
Estate taxes can be a big concern because estate tax rates can reach as high as 55%. However, with proper planning you can minimize or eliminate your estate tax bill. If your estate is worth more than the excess of the applicable exemption amount ($650,000 in 1999, increasing to $1,000,000 in 2006), you should seriously consider formulating an estate plan. Unnecessary taxes are the silliest of all taxes to pay, and almost no one would want their family unduly burdened with an unnecessary or inflated tax bill. As a further caveat to estate taxes, many people feel that estate taxes are a “rich person’s tax” and not applicable to them. However, with the dramatic increase in the stock market and land prices (especially in our area), $650,000 is not what it used to be. Most people do not even realize how complicated their financial lives are. To put this in perspective, the average small local family owned grocer typically has $650,000 in inventory, not to mention any retirement plans, or his family home and automobiles.
Throughout this package, we at Meacham, Earley & Jones, P.C. will attempt to educate you on pressing concerns in estate planning. We you find the information useful and educational.
The Limits on Giving
How Much May I Give Away Without a Gift Tax Liability?
One method of reducing your estate is through lifetime gifts. You can give $10,000 a year in cash or value of property to any number of different people without incurring a gift tax liability. (Note: Gifts of certain partial interests in property and gifts to trusts may not qualify for this exclusion.) You and your spouse as a married couple (if both are U.S. residents) can jointly give $20,000 per year to each recipient. This is true even if one spouse owns all of the gift property. You can also pay unlimited amounts of medical expenses and certain educational expenses (tuition only) and not be subject to any gift tax liability, as long as those payments are made directly to providers rather than to the donees. The $10,000 annual exclusion will be adjusted periodically for inflation.
The Taxpayer Relief Act of 1997 added a provision that allows taxpayers to spread a gift to a qualified state tuition program (QSTP) over five years. Thus, a taxpayer who contributes $50,000 in 1999 to a QSTP for the taxpayer's child can apply his or her $10,000 annual exclusion amounts for 1999, 2000, 2001, 2002, and 2003 to the 1999 gift. Any other gifts during the five-year period to the same beneficiary will be subject to gift tax.
You can transfer sizable amounts of wealth tax-free if you formulate and implement a gifting program early. You can retain effective control of the sums transferred by making gifts either to uniform gifts or transfers to minors' accounts or to trusts managed by independent trustees who follow the written directions of the trust's creator. If you want to retain investment, administrative, or dispositive powers, you must exercise extreme care in drafting the trust instrument to prevent the gift from being pulled back into your estate at your death.
A program of gifting must be reviewed carefully because of other economic and tax considerations. For example, the Omnibus Budget Reconciliation Act of 1993 subjects trusts and estates to the top income tax bracket of 39.6 percent for taxable income in excess of certain amounts ($8,450 in 1999).
Once the $10,000 per donee per year is exceeded, any excess may create a gift tax liability. Initially, no tax will actually be due because of the $1,000,000 lifetime exemption amount. However, once you have fully used the exemption, you will be required to pay tax.
What are the Advantages of Gifting?
The two primary advantages of gifting are:
1. Any postgift appreciation is not subject to the transfer tax unless the gift is included in the state. For example, if you give property worth $10 and at death the property is worth $50, $40 escapes transfer taxes. (However, $40 in potential capital gain could have been avoided by having the asset included in the estate.)
2. Any gift taxes paid on gifts made more than three years before death will not be subject to estate tax. For example: A donor in the 50-percent transfer tax bracket has $1.50, which allows him or her to make a gift of $1.00 and pay tax of $0.50. If the$1.50 is retained in the estate, the heirs will receive only 50 percent of the $1.50 or $0.75, as compared with the $1.00 gift. Thus, heirs may benefit by early transfer even when the maximum transfer tax is extracted.
Consider a typical situation in which a husband and wife have three children, each of whom is married and has two children. A gift of $20,000 per year ($10,000 from the husband, $10,000 from the wife; or all from the husband or wife, if gift splitting is elected) may be given to each child, grandchild, and son- or daughter-in-law. Each year $240,000 (12x$20,000) could be removed from the parents' combined estates and would grow by any after-tax earnings or appreciation. Also, the children and grandchildren may have lower income tax rates than the parents.
Caution: Certain transfers in trust and any lifetime transfers of any interest in your business require extremely careful planning.
It is important for you to understand the effect of lifetime gifts on the computation of the estate tax due at death. As mentioned earlier, if you make gifts in excess of the allowable exclusions and deductions, you will generally have made an adjusted taxable gift that will be added back to your taxable estate.
Are There Disadvantages to Gifting?
There are two main disadvantages of making gifts:
1. The donor loses the enjoyment and control of the property forever.
2. The donee's basis for determining gain will be equal to the donor's cost increased by the gift tax paid on the net appreciation in value of the gift, but not to more than its fair market value. The donee's basis for determining loss will be the lesser of the donor's basis or the fair market value of the property at the date of gift.
Also, for taxable gifts the transfer tax may be paid early.
Assume that you give property worth $30, which cost you $10, and pay a gift tax of $3. The donee's basis will be $12, determined as follows:
Gift tax on appreciation element ($3 x 20/30)
Is It More Beneficial to Receive Property by Gift or by Inheritance?
Property that passes through an estate generally has a basis equal to the value used in computing the taxable estate, which is usually the fair market value of the property at the date of death. In general, if appreciated property is going to be sold by the donee, it may be better to inherit the property than to receive it as a gift, since a higher basis will reduce the taxable gain.
Are Gift Taxes Payable on Gifts to a Spouse?
No, as long as the spouse is a U.S. citizen. As discussed in Chapter 2, there is an unlimited marital deduction for purposes of the unified gift and estate tax. Property may be transferred freely between U.S. citizen spouses. This provision presents a planning opportunity by allowing spouses to equalize their potential estates through lifetime gifts without incurring federal gift taxes.
If your spouse is not a U.S. citizen, you may give him or her only $101,000 per year without incurring gift tax. This amount will be adjusted periodically for inflation.
Business and Financial Planning
possible for partnerships to offer limited liability to their LIMITED partners, a limited partnership always had to have at least one GENERAL partner, who was fully liable for the debts of the business.
The new "limited liability companies" have, in effect, done away with the need to have unlimited liability for ANY of the owners of what is, in essence, a partnership form of business organization.
In addition, all 50 states and D.C. have now adopted a similar type of entity, the limited liability partnership (LLP) or registered limited liability partnership (RLLP). The LLP (or an RLLP) is simply a garden variety partnership that registers with the state and pays a specified fee, in order to become an LLP or RLLP and to have limited liability conferred upon the partnership, which is generally quite similar to an LLC, except that it may be operated like a regular partnership, for the most part.
However, in many states, an LLP offers only very limited protection, insulating only against the liability arising from malpractice committed by another partner in the firm, and does not confer general protection against trade creditors or against other liabililities of the LLP, as a rule.
I.R.S. CHECK-THE-BOX-REGULATIONS OPEN THE DOOR WIDE FOR LIMITED LIABILITY COMPANIES. It was not until 1988 that the Internal Revenue Service finally ruled that LLCs created under a new LLC law in Wyoming could qualify for tax treatment as a partnership, rather than as a corporation, even though they offered limited liability protection to the owners, much like a corporation. However, the IRS laid down a strict set of hightly technical rules that LLCs had to follow, if they were to avoid being subject to corporate income taxes. This tended to discourage the use of LLCs by all but the most adventuresome businesses, for a number of years. Because of the complexity tax requirements of the IRS rules, many lawyers, other than a few tax lawyers, were reluctant to attempt to set up LLCs for their small business clients. In addition, the IRS took the position that a one-owner LLC would be taxed as a corporation in all instances.
However, in 1997, the IRS opened the floodgates when it issued a new set of regulations that basically allowed any LLC to choose whether it wished to be taxed as a partnership or a corporation, simply by filing an IRS form and "checking the box" as to what kind of taxable entity it wanted to be. The new "check-the-box" regulations also allowed one-owner LLCs, for the first time, to escape corporate tax treatment, and instead be ignored as entities for tax purposes, the same as a sole proprietorship.
The regulations provide that any newly formed "eligible entity" (which excludes corporations and, in most cases, banks) will be treated by default as a partnership, unless the owners or members of the eligible entity elect corporate tax treatment, by filing Form 8832. A noncorporate entity with only one owner, such as a one-person LLC, will be treated as not being an entity that is separate from its owner -- that is, its existence will be ignored -- unless the owner elects corporate tax treatment. Thus, a sole proprietorship that becomes an LLC will continue to be treated as a sole proprietorship by the IRS, and an LLC set up by a corporation will be treated as just another branch or division of the corporation, and not treated as a separate legal entity.
The IRS will also continue to honor the noncorporate tax status of any entity that was reporting as a noncorporate entity (such as an LLC reporting as a partnership) before 1997, generally.
An existing eligible entity, if previously treated as a corporation before 1997, is now able to elect noncorporate status by simply filing Form 8832 with the appropriate IRS service center, specifying the date the election is to become effective, provided the date is not more than 75 days after, or 12 months prior to, the date of filing. If no date is specified on the form, the election becomes effective on the date filed. A copy of this form must be attached to the tax return of the person or entity filing the form for the first year in which the election is in effect. (Note, however, that such a change from corporate to noncorporate status would be the equivalent of a corporate liquidation, with potential capital gains or other taxable income resulting at both the corporate and owner level at the time of such changeover. Don't make such a change without first consulting a competent tax advisor, as the tax consequences can be severe in certain situations.)
This new set of IRS regulations is a truly revolutionary change in the very old and long-established ground rules for choosing a legal entity.
Under the new "check-the-box" regulations, there is very little reason for any business with more than one owner to operate in "naked" form, without limited liability, as a partnership. Also, now that the new IRS regulations are in effect, it is very likely that most of the states which still require an LLC to have at least two members will eventually amend their LLC laws to permit formation of one-member LLCs. A majority of states have already done so.
If your state allows one-member LLCs, it will now make good business sense for almost any sole proprietor to become an LLC, since the IRS will ignore the existence of the LLC and continue to treat its income as being earned by a sole proprietorship. In short, you will gain the benefits of limited liability for your sole proprietorship without any increase in your federal tax compliance chores or any changes in your tax liability. By contrast, if you incorporate your business to gain limited liability, you become subject to a whole host of federal and state income and franchise tax burdens, plus much more complicated tax compliance requirements. (Of course, there are still situations when certain corporate tax advantages may outweigh such disadvantages. For example, S corporation status is often preferable to an LLC for professional firms, since profits not paid out by an S corporation as salary will not be subject to self-employment tax.)
It may soon also become standard practice for any form of business, including sole proprietorships, partnerships or corporations, to create separate LLCs for any new business ventures, such as new stores for a retail chain, so that the failure of such a new store or other venture will not devastate the entire company. This could be accomplished in the past by setting up multiple corporations for each such business segment, but the heavy accounting, legal, and tax return compliance costs of setting up and maintaining numerous corporations has generally made that strategy prohibitively expensive for all but quite large businesses.
Under the new set of ground rules, the main business entity can now set up a series of subsidiary LLCs that create "fire walls" between different segments of the business, but which can be totally ignored for federal tax filing purposes -- the main business will still file one partnership or corporate tax return (or file one Form 1040 with one or more Schedule C's, in the case of an individual owner), combining the results of all the separate "sole proprietorship" LLCs on the single tax return. No multiple tax returns, no horrendously complex consolidated corporate tax returns and intercompany accounting will be required for such arrangements -- a very clean, very simple, and very effective way to reduce your liability exposure to creditors!
However, be aware that it will still be necessary to keep separate accounting records and bank accounts for these LLCs, as each will be a separate legal entity. Otherwise, creditors might be able to "pierce the veil" if their assets are commingled with yours or with assets of another entity, or if you do not otherwise consistently treat the LLCs as separate business entities. Also, most states require some kind of annual report to be filed, along with filing fees, by all LLCs doing business in the state, so that any LLC will require some additional paperwork, besides keeping separate accounting records.
Note, for example, that in Rev. Rul. 95-37, the IRS has ruled favorably that an existing partnership may generally be converted, tax-free, to an LLC (if the LLC qualifies for partnership tax treatment). In fact, such a conversion can be done without terminating the partnership's taxable year (the LLC is simply treated as a continuation partnership) and without need to obtain a new Federal Employer Identification Number. In many states, a simpler approach may be to merely register the partnership as an LLP, however, where state law permits, and where the liability protection that is offered by an LLP is comparable to that of an LLC (which is frequently NOT the case).
Be aware that, if an LLC is treated as a partnership, the members may be subject to self-employment tax on their earnings from the partnership. However, newly proposed IRS tax regulations, if adopted, would generally treat members of an LLC like limited partners in a limited partnership, so that certain members of an LLC would not be subject to self-employment tax on their distributive share of earnings from the LLC. However, a member of an LLC that elects to be taxed as a partnership (or a partner in a limited partnership) would be treated as earning self-employment income if any of the three following conditions applies to the member:
He or she has personal liability as a partner of the partnership for debts or claims against it (this would generally only apply to a general partner in a limited partnership, not an LLC);
The member has authority to contract on the LLC or partnership's behalf under the law of the state in which the LLC or partnership is organized; or
The member participates in the entity's trade or business for more than 500 hours during the tax year. [Prop. Regs. Sec. Over the past few years, alternate forms of businesses have arisen. This is greatly due to favorable Revenue Rulings and the passage of final treasury regulations in 1997. If you have formed a business in the last ten years or have been operating in the same business form for many years, now may be the time to review your entity selection and determine if you are operating in the most efficient form of business. This insert is designed to educate you about the basics of the newest form of business entity, the limited liability company. However, bear in mind that this insert discusses merely the basics as applied to most LLC statutes throughout the nation, and is not necessarily true in Georgia and Alabama.
The age-old choice of entity in starting a business has always been a threefold one sole proprietorship, partnership, or corporation. But now, not only do most states allow you to change your partnership into a "limited liability partnership," but there is also a new kind of business entity, which has recently arrived on the scene: the "limited liability company."
BACKGROUND OF LLCs. Starting with the pioneering state of Wyoming in 1977, and ending with the Hawaii legislature in 1996, every state has, in recent years, now passed laws creating a new type of legal entity called a "limited liability company" (or LLC). These new entities, which resemble (and are usually taxed as) partnerships, offer the advantages of limited liability, like corporations. While it has long been 1.1402(a)-2(h)(2)]
Even if a member of an LLC participates more than 500 hours a year in the LLC's business, his or her distributive share of the profits may not be subject to self-employment tax, although any "guaranteed payments" received from the LLC for services will be. Thus, part of a member's income from an LLC could be subject to self-employment tax, while part is not, under the Proposed Regulations.
However, in service partnerships engaged in activities such as legal or medical services, accounting, architecture, engineering, actuarial or consulting services, anyone who provides more than a minimal amount of such services would not qualify for treatment as a "limited partner" for purposes of the above exemption from self-employment tax on his or her income from a limited partnership or LLC.
PROS AND CONS OF LIMITED LIABILITY COMPANIES: Major benefits of LLCs over the traditional business entities that were available up till now (corporations, partnerships and sole proprietorships) include the following:
-- Unlike a general partnership, owners of an LLC have limited liability; and, unlike limited partners in a limited partnership, they do not lose their limited liability if they actively participate in management.
-- Now that the IRS "check-the-box" regulations have become effective, a business that is currently a sole proprietorship is also able to change to LLC form and thus obtain limited liability, with no tax consequences or added tax compliance requirements of any kind, as the IRS will now, in effect, ignore the existence of the one-owner LLC for tax purposes. (But be sure to confirm that any states where you do business will recognize your 1-person LLC, or else you may not have limited liability in such states.)
-- Like a regular corporation (a C corporation), an LLC provides limited liability to its owners, but taxable income or losses of the business will generally pass through to the owners (but any such losses may not always necessarily be deductible, due to the "at-risk" and "passive loss" limitations of the tax law).
-- An LLC is more like an S corporation, in that it provides for a pass-through of taxable income or losses, as well as limited liability, but can qualify in many situations where an S corporation cannot, since an S corporation cannot: have more than 75 shareholders; have nonresident alien shareholders; have corporations or partnerships as shareholders; own 80% or more of the stock of another corporation; have more than one class of stock (or otherwise have disproportionate distributions); or have too much of certain kinds of "net passive income."
-- Also, LLC owners may be able to claim tax losses in excess of their investment, such as on certain leveraged real estate investments, which would not ordinarily be possible in the case of an S corporation or even a limited partnership.
-- LLCs are (generally) simpler entities to maintain than corporations. An LLC is required to file its "articles of organization," which are similar to articles of incorporation, but the operational similarities tend to end there. It is also a good idea for an LLC to have a written operating agreement, which spells out how the company is to be operated, much like a partnership agreement. However, from that point on, the LLC is governed by its operating agreement, and there is generally no need for any of the tedious corporate formalities such as minutes of meetings, resolutions and annual meetings of the shareholders ("members" in the case of an LLC). This operating flexibility, in addition to freedom from corporate level income tax (except in the few states that impose state income taxes on them) makes the LLC a highly advantageous form of doing business for the closely-held or family-owned business.
On the other hand, most of the LLC statutes have certain built-in disadvantages, as compared to S corporations or other corporations, such as the fact that LLCs must usually provide in their articles of organization that the entity will terminate in not more than 30 years, and the fact that an LLC must (generally) have more than one owner, unlike corporations. (But many of these provisions, and in particular the one-owner prohibition, have already been repealed by most of the states, now that the IRS final regulations have made such restrictions unnecessary for federal income tax purposes.)
Even the federal tax treatment of LLCs is no longer uniformly favorable. Perhaps unintentionally, a new partnership tax law provision in the Revenue Reconciliation Act of 1993 may adversely impact professional service firms that are organized as LLCs, rather than as true partnerships. Under the 1993 tax law amendments, certain payments made by partnerships to outgoing partners (for "goodwill" or "unrealized receivables") are no longerdeductible to the partnership, EXCEPT if made to a general partner in a service partnership, such a a law or medical partnership. Since LLCs, if properly organized, are treated as partnerships for income tax purposes, this new law will apply equally to professional service firms that are either LLCs or partnerships....With one important Catch-22: Since an LLC has NO general partners (all of its partners have limited liability, like limited partners), then NO payments (for goodwill, etc.) by an LLC to buy out one of its members can qualify as deductible under the 1993 tax law change. This can be a serious tax disadvantage for a professional service firm that operates as an LLC, rather than as a partnership. (Furthermore, some states with LLC laws do not yet ALLOW professional service firms to operate in the LLC form.)
Professional firms will often find it preferable to operate in the form of professional corporations, and S corporation status, rather than as LLCs, since all the earnings of a professional LLC will generally be subject to self-employment tax. If operating as an S corporation, only the salaries paid will be subject to FICA taxes (at the same rate as self-employment tax), and any remaining profit that is earned by the S corporation will be subject only to income tax, not to self-employment or FICA taxes.
Questions About Wills
I am going to see an attorney next week about preparing new wills for my spouse and me. What should we do to prepare for that meeting?
You should gather a variety of information in preparation for your meeting with your attorney and think about estate planning issues.
Bring summarized data about you, your family, and intended beneficiaries, including complete names, addresses, social security numbers, and dates of birth. Or contact or office for an Estate Planner. This is a form which will summarize the information into an easy to fill out form, and will expedite your estate plan.
Bring the following documents to the meeting, if available: your current will(s), if any; financial statement listing assets, liabilities, and ownership; life insurance policies and related beneficiary designations; retirement and other employee benefits and related beneficiary designations; and deeds indicating how your real property is titled. If the actual documents are not available, a brief summary or description of each of the above should be prepared. In addition, you should provide information regarding any potential inheritances.
Begin to focus on what you want your will to accomplish for you. Who do you want to receive your assets? How? When? Who do you want to act as your executor or trustee to hold and administer your assets for the benefit of your beneficiary(ies)? If you have minor children, do you have a guardian in mind?
Determine who you want to handle your affairs in the event of disability or incapacity.
Be prepared to discuss your intentions regarding health care decisions.
What types of questions might the attorney ask in our first meeting?
Our attorneys will typically begin by reviewing the information that you bring with you, both financial and personal, and will try to gain an understanding of your overall estate planning goals. Remember, your will and other estate planning documents are your opportunity to direct how you want your estate to be managed and distributed. Questions about your beneficiaries and their needs will be asked. The attorney will also need to know about the people or entities that you want to act in the administration of your estate. The will also covers the powers and authority of your named representatives. Therefore, the attorney will want to discuss the range of powers you want to grant your representative. Finally, the attorney will address issues regarding particular assets: personal effects and household goods, business interests, partnerships, collections, and so forth.
My wife and I do not want to leave our assets to our children in the same way. Can our wills address these differences?
Your will deals with the disposition of your property. Thus, your will and your spouse's will do not have to be the same. However, it is important, whenever possible, that your wills be coordinated to create an effective overall estate plan for your entire family.
Do I have to name my spouse as the executor of my estate? As my agent in my power of attorney?
You can name any legally competent individual(s) or corporate entity as your executor. Any individual(s) can be named as your agent in a power of attorney. You should focus on naming someone who is competent to fulfill the fiduciary duties and who you feel comfortable will carry out your wishes.
Where should my estate planning documents be kept?
The original copies of your estate planning documents should be kept in a safe, secure place that can be accessed when needed. The originals of your documents may also be kept in your safe-deposit box at your bank. However, you should be aware that laws in many states may restrict access to your safe-deposit box after your death. Copies should be kept with other important personal documents in your home and should also be given to your named representatives.
I want each of my children to have one of the family heirlooms should I list these in my will?
It is not generally recommended to include an extensive list of personal assets in your will. The items and your wishes may change over time, potentially causing the amending or rewriting of your will. Instead, you should consider directing your executor to follow the instructions you have outlined by separate letter regarding specific bequests of personal effects. Such a letter is generally not binding on the executor, however; it is a letter of guidance that your executor will consider when distributing your personal assets.
I want to leave specific instructions about my funeral. Whom do I tell and how?
You should inform family members or your named representatives now of any special instructions or intentions. These instructions should generally not be a part of your will because it may not be accessed and read until after the funeral.
My spouse and I just moved into our new home from another state. Do we need to reconsider our wills and other estate planning documents?
State law establishes many of the rules regarding the management and disposition of your property at death or in the event of disability. At the very least, you should have your documents reviewed by an attorney qualified to practice in your new state of residence. Your move is an opportunity to review your entire estate plan for changes in your goals and circumstances. The determination of property ownership is largely set out by the law of the state in which you lived when you acquired the property. A later move to another state can have implications concerning ownership. This is particularly true if you move to or from a community property state.
My spouse and I placed our assets in a living trust several years ago. After one of us dies, can the survivor change the distribution of assets in the living trust?
The surviving spouse can change or alter the distribution of assets in the living trust provided the deceased spouse gave the survivor either a general or limited power of appointment over the assets in the trust. Giving an individual the power to appoint property is an important decision that should be discussed with your attorney.
Estate Planning Documents
If you don't have a will, you should make one. If you have one, review it to be sure that it describes your current situation. These are two of the most basic principles of estate planning.
Why are wills so important? Without a will, you have left your estate planning to your state governmentunder its laws of intestacy. First, the a local probate court will have to appoint an administrator to manage your estate. This person, possibly someone neither you or your family has met, will have to be paid. Second, even if your surviving spouse is named the administrator, he or she may have to post a financial bond. Third, the amount of time required to settle your estate may be unnecessarily long at a time when the financial security of your family is particularly important.Fourth,your estate could pay substantially more federal and state taxes than necessary. And fifth, your surviving spouse may receive less than half of your separate property, depending upon the state law and the number of other surviving family members, including your children, parents, and siblings.
Your will should serve a number of purposes. In a way, a will can be a very personalized roadmap of what you want done with respect to your property and your personal wishes. It is primarily responsible for describing how you want to distribute your property after your death. A will also lets you name a guardian to care for your minor children if you die or become incapable of caring for them. Finally, a will lets you name your executor, the person who will oversee the settling of your affairs after you die.
In short, your will allows you to give direction and authorization to others to act on your behalf after your death.
You are not required to use a lawyer to prepare your will, but you must follow some very precise rules in writing and signing the document, or the will may be considered invalid. While there are many print and software publications to help you with drafting a will, it is better to seek professional counsel in this area. An attorney will ensure that your will meets all the legal requirements andminimizes the chance of any misunderstanding when it is read. An attorney can also give you the advice you need on how to change and store the document. Either way, it doesn't take much to get started: just a good sense of what you own and anunderstanding of your goals and objectives.
If you amend your will or prepare a new one, you should destroy copies of all previous wills.
Durable Power of Attorney
What would happen to your finances if you were temporarily incapacitated by illness or injury? Most financial planners recommend having sufficient savings to fund up to six months of your living expenses ... but who would pay your bills? And how? If you did not explicitly give someone authority to handle your affairs and the power to manage your finances, even your spouse may not be able to take care of essentials without asking a court for permission to do so. As you might imagine, this is a time-consuming, awkward approach -- and fortunately one that is completely avoidable.
You can solve these problems with a durable power of attorney. This valuable document lets you transfer legal authority to another person to handle your personal affairs, from signing your checks to preparing tax returns and making retirement elections. (Of course, this is a very powerful document, so you should be certain that you have absolute trust in the person to whom you delegate this authority.) By making the power of attorney "durable," you ensure that it will endure even if you are incapacitated. You may revoke this power if you later change your mind and want to designate someone else.
The typical power of attorney takes effect when it is executed. However, many states permit a "springing" power of attorney that goes into effect only when a specified event (such as incapacity) occurs. The time for executing a durable power of attorney is now, since no one knows when incapacity or disability may occur. Durable power of attorney forms are often available in legal self-help publications. Often, banks or other financial advisers may serve in this capacity for you, and they can provide these forms as well. If you use these standard forms, you should consult with an attorney or legal adviser to ensure that the form is current, meets your state's requirements, and, most importantly, addresses your specific needs.
One final point with respect to powers of attorney: You may be named as the agent or attorney-in-fact for someone else. You need to know what would happen if you were not able to act because of your own disability or death. A plan for a successor should be developed in the event of the death or disability of the named agent.
Wills and durable powers of attorney focus on the administration and disposition of your property in the event of your death or incapacity. There are additional estate planning documents that deal with personal issues, such as medical treatment. These documents are referred to by different names in different states; however, they are often referred to as living wills and durable powers of attorney for health care.
Living wills do not affect your property, but they are an important part of planning for the future. A living will -- and a related document known as a durable power of attorney for health care -- lets you describe the type and extent of medical treatment that you prefer. These instructions are invoked if you are unable to make those preferences known in the future.
For example, if you were severely injured in a car accident, you might be in a coma with no apparent prospects for recovery. Would you want your doctors to do everything possible to keep you alive? Would you prefer minimal, non-invasive treatment? These are extremely difficult decisions, and they require reflection on your most deeply held philosophical and religious beliefs. The purpose of a living will is to make your intentions known, so that your family and your doctors will be able to lawfully act in accordance with your wishes.
Living wills are generally invoked only in "life or death" situations. Frequently, however, people face related challenges even when their life is not in danger. People who are unconscious, for example, are clearly unable to make their treatment preferences known, but that does not mean that they do not have preferences. For this reason, many people now prepare a durable power of attorney for health care in addition to a living will.
Durable Power of Attorney for Health Care
A durable power of attorney for health care is a legal document that gives another person the legal authority to act as your agent with regard to your own health care decisions. When you grant a trusted person that authority by completing the power of attorney document, you ensure that your wishes can be carried out. The person or persons you name in this document may be required to make decisions on your behalf at a very stressful time. Therefore, you should select your agent carefully and discuss your wishes with that person to ensure that he or she will be able to carry out your wishes. You can purchase blank forms for living wills and durable powers of attorney for health care in most good bookstores. You can also purchase software programs for this purpose. As with any standard form, you should consult with legal counsel to ensure that the form is current, meets state law requirements, and addresses all of your personal concerns and wishes.
One of the biggest problems with most living wills and durable powers of attorney for health care is simply that they cannot be found when needed. For that reason, you should discuss the issue with members of your family and be sure to store your documents in an accessible location. You may even want to provide a copy to family members as well as to your doctor, along with your medical records. Our firm typically recommends a Durable Power of Attorney for Health Care, in conjunction with a regular will rather than using a Living Will, because Living Wills are more confusing at death and the provisions which cause the will to be “living” are unnecessary for the disposition of your assets. We also feel that simplicity is more desirable than to make a will (which is merely a roadmap for the disposition of assets) bear the burden of health care requirements also. Furthermore, typically a living will may be required to be delivered to a health care institution in serious cases, and most clients tend not to want their property revealed to unnecessary parties.