Why Estate Planning Is So Important

Frequently, trust provisions are built into a Will. Sometimes a separate trust will be more appropriate. For instance, a family or revocable living trust is a popular and flexible way to manage your affairs during your lifetime, preserve privacy, avoid probate and provide for the continuation of your trust after your death to educate and support your minor children. You can control the trust during your lifetime, and on your death, the trust continues as you direct and the trust assets are not part of your probate estate. If avoiding death taxes is your primary goal, there are a variety of irrevocable trusts that may work for you. Often a combination of estate planning techniques are used to gain the maximum benefit.

Probate is the formal legal process of administering your estate after your death. Everyone has an "estate" no matter how small. Everything you own is part of your estate. If you die with a Will you will have a testate estate. If you die without a Will, you will have an intestate estate.

The process begins with opening the estate by reporting the death and handing in the Will, if any, to the Register of Wills for your County. The Personal Representative is appointed and empowered to act only once the Register of Wills has issued Letters of Administration. The Personal Representative is responsible for filing all the required forms accurately and in a timely manner with the Register of Wills, for collecting, and preparing an inventory of, the decedent's assets, preparing a list of and notifying and paying creditors, and various other functions. The probate process typically takes anywhere from several months to several years, depending on the issues involved. Costs include inheritance taxes, appraisal and advertising expenses, personal representative commissions, possibly attorneys' fees and court costs.

Avoidance of Probate; Family Trusts. The main reason to avoid probate or at least reduce the size of your probate estate is to protect assets against the claims of creditors. Another reason is reduce or eliminate probate expenses, which, in some cases, can be substantial. Probating the estate may be preferable in certain cases, and in others the costs of probate may not be of any significance.

The way to avoid probate is to remove your assets from your estate before you die or to ensure that the assets pass to your heirs automatically upon your death without becoming part of your probate estate. One may avoid probate, achieve privacy, and save considerable time and expense, by, among other things, establishing a revocable living trust or through a life estate deed in appropriate cases.

On the other hand, various types of trust, including a revocable living trust, can be very effective as a family trust to provide for the management and continuity of management of one’s assets in the event of disability and death, and to provide special consideration for minors, individuals with disabilities and the care of elderly parents and other relatives.

An experienced estate planning attorney can guide you toward making a decision that addresses your needs and concerns.

If you should become physically or mentally incapacitated, there ought to be someone you trust with clear legal authority to make decisions on your behalf. You accomplish this by signing a power-of-attorney. The person you appoint may be given broad powers to do whatever you could do, or limited powers to perform specific acts, depending on the circumstances. One has to be mentally competent in order to make a power-of-attorney. Therefore, you should not wait until illness or injury occurs. If it is too late to make a power-of-attorney, it may be necessary to apply for guardianship. Having a power-of-attorney in place will make it easier for your representative to act quickly on your behalf and avoid the stress, delay, inconvenience and expense of a guardianship proceeding.

The two types of power-of-attorney documents most people should have, are: (1) a general power-of-attorney where you appoint someone to manage your business affairs when you are no longer able to, such as paying your bills, and depositing your Social Security and other checks; and (2) the other is a medical or health-care power-of-attorney to authorize someone you trust to make health-care decisions for you when you are no longer able to. It is important that these documents be "durable," otherwise they will be ineffective when you are incapacitated.

Senior citizens or family members faced with a medical or other crisis may need more than powers-of-attorney. Frequently, a key concern to the family is how to pay the high cost of nursing home care yet preserve assets and income to avoid impoverishment. Consultation with an attorney experienced in elder law matters can be most helpful to enable the older person and the family to recognize and understand these important issues, engage in asset protection planning and to take advantage of the benefits available under the Medicaid regulations.

A living will, also known in some states as an Advance Medical Directive With Health-Care Instructions, is one's declaration to the world not to keep one alive on life-support machines or by receiving nutrition through feeding tubes, in certain limited circumstances. Since State law varies regarding the language that may be used, you should consult with an attorney in your area to ensure that your Living Will complies with the requirements of your State.

In short, the Living Will applies in very limited circumstances, namely when one is terminally ill and death is imminent, or one is in a vegetative or end-stage condition with no reasonable prospects of recovery and unaware of one's surroundings. One may include special individualized health-care instructions.

Since the Living Will is very limited in its scope, it is important to appoint someone you trust to make health-care decisions for you when you are no longer able to do so. You appoint such a person by appointing a health-care agent in an Advance Medical Directive or by granting a durable medical power-of-attorney.

Although most of us do not know when a serious disability will occur, we know that almost everyone will experience some form of disability at some time. If the disability results in mental or physical incapacity, you will not be able to manage your own affairs. Don't you want to be the one to decide who should act on your behalf and what they may and may not do? If you do not act, the decision may have to be made by a court, and the Court may appoint someone other than whom you would have chosen.

The most simple and inexpensive approach is to appoint someone you trust as your attorney-in-fact by signing a power-of-attorney. You should have a medical power-of-attorney for health-care decision-making, and a general power-of-attorney for your business affairs. One has to be mentally competent in order to make a power-of-attorney. Therefore, you should not wait until the illness or injury occurs. If it is too late to make a power-of-attorney, it may be necessary to apply for guardianship. Having a power-of-attorney in place will make it easier for your representative to act quickly on your behalf and avoid the stress, delay, inconvenience and expense of a guardianship proceeding.

If you want to provide for the support of a disabled child, an aging parent or other loved one, consider a trust. Trusts are an highly effective vehicle for disability planning, and there several different types, depending on what you need to accomplish. Popular trusts include revocable living trusts, family trusts, spendthrift trusts, irrevocable life-insurance, supplemental needs and other irrevocable trusts.

A life estate is created where an owner of a property conveys the property to another while reserving certain rights to the property, typically for the remainder of his or her life. One may reserve only the right to live in the property and have no other powers, or one may retain control and have the right to sell, lien or otherwise deal with the property, including undoing the deed that created the life estate interest. The type of life estate interest one creates depends on the planning objectives of the grantor.

Life estate deeds can be effective to avoid probate, the claims of creditors, capital gains and generally to preserve the property for one’s family. Used correctly, life estate deeds without powers can provide asset protection benefits in the Medicaid context too. However, the use of life estate deeds in the Medicaid context must be carefully evaluated, since such deeds may not protect the property from a Medicaid lien and may impair eligibility for Medicaid. Life estate deeds without powers can be very limiting and cause undue burdens on one’s spouse. In general, life estate deeds are an inexpensive, sensible way to protect one’s most important asset. One should nevertheless consult with an attorney who can evaluate the various issues to be considered before determining whether a life estate is appropriate in your case.

Many people add a child, relative or friend to a bank account to enable that person to take over the account and pay the bills if one should become disabled. This is not a wise approach. When you add someone to an account, that person becomes a co-owner, and has the right to withdraw and use all your funds for himself or herself. Upon your death, that person owns everything in the account, regardless of any beneficiary provisions on the account or in your Will. The better approach is to appoint the person you trust as your attorney-in-fact under a power-of-attorney. That way, the person has a fiduciary legal responsibility to manage and use the funds prudently for your benefit.

Appropriate beneficiary designations on bank accounts is an effective way to keep the funds out of your probate estate. However, you need to be careful not to give up control of your funds or expose yourself to unnecessary risk. You also want to make sure the manner in which your account is titled and designated does not undermine your estate planning objective.

There are several types of taxes that impact one's estate, most of which can be avoided or reduced with proper planning. You do not necessarily have to have a large estate to be affected by taxes, or to benefit from basic tax planning.

Most people have worked hard to earn what they have, and wish to ensure that as much as possible is preserved for their loved ones. Because the tax laws have many technical requirements, attempts to protect one's estate or redistribute one's wealth without professional guidance could result in a lost opportunity to avoid a substantial tax impact.

For instance, a substantial capital gains tax may be due on life-time transfers of assets that have appreciated, such a house or stock. Under certain circumstances, recognition of the capital gains tax can be deferred.

In addition to federal and state income tax issues, estate planning, - or the failure to plan, may be impacted by the estate tax, capital gains tax, gift tax, inheritance tax, transfer taxes and other lost opportunities to preserve one’s assets and income. In the case of estates over $675,000, the failure to plan can be all the more devastating, because the effective federal estate tax rate ranges between 37% and 55%.

Marital Deductions

What is a "Q-TIP" Trust?

The IRC and Maryland law permit an unlimited marital deduction in the estate of the first spouse to die, for a trust which provides for all income to the surviving spouse for life. Upon his or her death, the balance in the trust will pass to the person or persons named in the trust clause. This kind of trust - called a "Q-TIP" trust - enables the executor to elect to qualify all or a portion of the trust for the marital deduction, thereby allowing flexibility in post-death planning.

Substantial estate tax benefits can usually be obtained by combining the use of the marital deduction with a trust of the amount of property that can pass free of Federal estate tax in the estate of the first spouse to die. A trust (a "credit shelter trust") of this maximum amount in the first estate will be sheltered from Federal and Maryland estate and inheritance taxes in the estate of the surviving spouse. This trust is most often either a family trust (for the benefit of all family members), or a marital trust (for the sole benefit of the surviving spouse). The balance of the first estate over the amount of the credit shelter trust can pass tax-free to the spouse under the marital deduction, either outright or in trust. All Federal taxes are avoided in the first estate, and the property in the credit shelter trust escapes taxation in the survivor’s estate. The credit shelter amount can also be passed outside a trust by direct transfer to other family members if that is an appropriate step to take in the overall plan. Thus, when the credit shelter and the surviving spouse’s exemption are combined, a maximum of approximately $1.2 million in 1996 can pass through both estates free of Federal estate taxes. The combined amount increases as a result of the 1997 federal legislation as follows: 1998, $1,250,000; 1999, $1,300,000; 2000 and 2001, $1,350,000; 2002 and 2003, $1,400,000; 2004, $1,700,000; 2005,
$1,900,000; 2006, $2 million.

All outright bequests to churches, synagogues and other qualified charities are deductible for estate tax purposes. The value of trust principal which is given to charity following the death of the income beneficiary - usually a family member - is also partially deductible if the trust is properly drafted. Other trusts paying "income" to charity with the assets going to a family member at the termination of the trust generate significant charitable deductions. People who have supported charities during their lifetime may wish to consider charitable gifts in their Will as long as the security of the family is not affected.

Where appropriate, provision may be made in a Will which anticipates a disclaimer (i.e., a renunciation) by the surviving spouse or other beneficiary of all or a portion of a bequest or devise, with the effect that the disclaimed property passes without gift tax to others or is added to a credit shelter trust. Disclaimers must be made within 9 months of the death of the first decedent if they are to avoid gift tax.

How is jointly held property handled?

How will employee benefits be taxed?

Although an estate tax deduction is no longer available for lump sum distributions under qualified pension and profit-sharing plans, there are some planning possibilities that remain for approved plans. For example, the designation of a spouse as a beneficiary of a plan would qualify the employee benefit for the marital deduction. There also are a variety of critical income tax options available to a plan participant or a beneficiary of a plan which should be discussed with your tax advisor, especially if you are planning your retirement.

An important way of avoiding estate taxes continues to be the ownership of life insurance by a trust. If a new policy is purchased by a properly drawn trust, the entire proceeds of the policy can pass through the estate of both spouses, without tax. If an existing policy owned by the insured is transferred to a trust, the insured must survive such transfer by three years in order for the proceeds to be free of estate taxes. In each case, the trust must be irrevocable - a fact which requires that the most serious consideration be given before such a trust is created. The trust agreement must be carefully drafted to assure family security and tax avoidance.

The amount of gifts that an individual can make without incurring gift tax liability is now $10,000 per donee per year. This amount will be indexed after 1998. This means that $20,000 may be given by a married couple per year to each child, grandchild, or others without incurring gift taxes (regardless of whose property is given). Moreover, an unlimited gift tax exclusion is provided for amounts paid on behalf of the donee for medical expenses and school tuition, provided that the payment is made directly to the school, doctor, hospital, etc. who or which provides the service. A payment made directly to a child or grandchild for tuition will not qualify for the exclusion. The IRC eliminates most of the income tax advantages of trusts for children. Nevertheless, various trust options are still available to achieve income, gift and estate tax savings in relation to gifts for children or grandchildren. These include "grandparent trusts" which permit funding of educational or similar trusts up to the $10,000-$20,000 annual gift exclusion and various forms of charitable trusts.

The Generation Skipping Transfer Tax in general imposes a tax at a rate of 55% on all transfers outright or in trust for grandchildren or more remote descendants to the extent that the aggregate of such transfers exceeds a $1,000,000 total exemption per transferor. This amount will also be indexed after 1998. Thus, for example, once the exemption has been consumed, a trust for a child for life, with remainder to grandchildren, is subject to the tax when the child dies notwithstanding a gift or estate tax was paid upon the initial transfer. The provisions of the GST are enormously complex. Good estate planning can avoid or minimize the imposition of the tax.

Rob Goldman Legal Solutions is dedicated to helping individuals and businesses solve life’s challenges by providing clear explanations and practical solutions at an affordable price. With over 15 years of experience, Rob Goldman has the knowledge and practical experience to guide you in this most important decision-making process. A member of the National Academy of Elder Law Attorneys ("NAELA"), Rob Goldman is committed to providing seniors and families with Peace of Mind.