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Frequently Asked Questions

Q: What is Estate Planning?

A: Estate planning is a process to consider alternatives for,to think through, and to set up legally effective arrangements that would meet your specific wishes if something happens to you or those you care about. Good estate planning is more than just a simple Will. Estate planning also typically minimizes potential taxes and fees, and sets up contingency planning to make sure your wishes regarding health care treatment are followed, and protects your assets for your family.

On the financial side, a good estate plan saves taxes and coordinates what would happen with your home, your investments, your business, your life insurance, your employee benefits (such as a 401K plan), and other property in the event you become disabled or die.

On the personal side, a good estate plan includes directions to carry out your wishes regarding dispositions of your property and health care matters. It protects your spouse and children from subsequent husbands and wives, sons and daughters-in-law, creditors, Medicaid, and poor investment decisions. The personal side is often even more important than the financial side.

What is an Estate?

The term estate consist of all the property a person owns or controls, whether in his or her sole name, held in partnership, in a joint ownership arrangement, or through a revocable trust, and all other monies that would be generated on the person’s death, such as through life insurance. It includes:
• Real property and things attached to it (houses, buildings, barns, etc.)
• All personal property (including automobiles, bank accounts, stocks and bonds, mutual funds, stock options, cash, furniture, jewelry, art, collectibles, etc.)
• All businesses and business interests (sole proprietorships, partnerships, corporations, joint ventures, and the goodwill, inventory, tools and equipment, accounts receivable, and other business property, etc.)
• Powers of appointment (the right to direct who gets someone else’s property)
• Life insurance and annuity contracts, pension benefits, IRA’s, 403(b)s, etc.)
• All debts and obligations owed to others
• All claims you have against others, such as those for pain and suffering from an auto accident, etc.

When should I start my estate plan?

The only time that you can prepare and implement an estate plan is while you are alive and have legal capacity to enter into a contract and will. If you are unable to manage your own affairs or suffer from some other disability which affects your legal capacity, your estate plan may be effectively challenged by those who want to assert you lacked capacity at the time the documents were created, that you were subjected to fraud, coercion, or undue influence during the creation and implementation of your plan.

What sort of instructions are made as part of an estate plan?

An estate plan consists of one or more documents that set forth instructions. Some documents are used to control health care decisions, others control your property in the event of your incapacity, and still other documents will control the distribution of your property in the event of your death.

What about books on estate planning?

Buyer beware! There is a lot of good information out there; while some of it is very good, some of it is misleading at best. There are many over the counter guides to estate planning available at bookstores. Some are pretty decent, most are awful. If are planning to do it yourself, be prepared to spend a fair amount of time on this project. And please remember that the laws of each state are different, so that what’s good in California, for instance, may not be good in South Carolina.

What are some typical estate planning documents?

Several of the following documents are typically used as part of the estate planning process are:

1. A Will, sometimes called a Last Will and Testament, to transfer property you hold in your name to the person(s) and/or organization(s) you want to have it. A Will also typically names someone you select to be your Personal Representative (or Executor) to carry out your instructions and names a Guardian if you have minor children. A Will only becomes effective upon your death, and after it is admitted to probate.
2. A Durable Power of Attorney for Health Care or Health Care Directive appoints a person you designate to make decisions regarding your health care treatment in the event that you are unable to provide informed consent.
3. A Living Will or Directives to Physicians is an advance directive which gives doctors and hospitals your instructions regarding the nature and extent of the care you want should you suffer permanent incapacity, such as an irreversible coma.
4. A Durable Power of Attorney for Property appoints a person you designate to act for you and handle financial matters should you be unable or perhaps unavailable to do so.
5. A Irrevocable Insurance Trust, which can be used to receive and hold legal title to and provide a mechanism to manage your property. You can select the person or persons you want –often even yourself—as the Trustee(s) to carry out the instructions you want in the Trust and name one or more Successor Trustees to take over if you cannot. Unlike a Will, a Trust usually becomes effective immediately, continues in force during your lifetime even in the event of your incapacity, and continues after your death. If the trust is irrevocable, changes, modifications, and termination are very difficult (though not impossible), but such Trusts often carry some tremendous tax benefits. Trusts also help you avoid or minimize the expenses, delays, or publicity of probate.
6. A Family Limited Partnership can be used to own and manage your property, in a similar manner to a Trust, but allowing additional tax planning techniques to be employed. Family Limited Partnerships are typically used for those who have large estates and thus have a need for specialized estate planning in order to minimize federal and state estate/death/inheritance taxes as well as provide elements of asset protection.

Q: Durable Powers of Attorney - Are They Really Important?

A: When Mrs. Doe reached an advanced stage of Alzheimer’s Disease, her husband had to place her in a nursing home sothat she could receive needed care. He then faced the high cost of nursing home care without insurance coverage Mrs. Doe had never signed a power of attorney, and she was too confused to sign one by the time she entered the nursing home. Although Mr. Doe had been paying Mrs. Doe’s bills from their joint bank accounts for years, he discovered he was not legally authorized to access her IRA, stocks and bonds. Therefore, he had to become his wife’s legal guardian in order to gain access to her funds.

Mr. Doe had many hoops to jump through before he could become his wife’s guardian. He had to obtain a doctor’s report, have his lawyer file a court petition stating that Mrs. Doe was incapable of handling her own affairs, and send notice and copies of the guardianship petition to their adult children, Mrs. Doe’s brothers and sisters and the nursing home. A lawyer, called a Guardian ad Litem, was appointed by the Judge to inform Mrs. Doe of her legal rights (although she did not understand), and to investigate the need for a guardian.

Mr. Doe succeeded in being appointed guardian. Additional court documents were then required to file an inventory of Mrs. Doe’s income and property, to seek permission to pay her bills, and to seek permission to use Mrs. Doe’s property to pay bills. The lawyer’s or accountant’s services would also be needed to prepare and present Mrs. Doe’s annual accounting to the Court, to show every penny received and spent by him on behalf of his wife.

All of the papers filed in the guardianship case, except the doctor’s report, are now public records in the Probate Court, albeit in sealed files. Significant costs were also involved, including court filing fees, the Guardian Ad Litem fees, and legal fees.

All of this loss of privacy, intrusion of the Court into the Doe’s private affairs, and expense, might have been avoided if Mrs. Doe had signed a durable power of attorney prior to the onset of her disability. A power of attorney is a legal document which shows that a person appointed someone else to act as her representative. The person who signs a power of attorney is called the “principal.” The person who is appointed to act as the principal’s representative is called the “agent.” If Mrs. Doe had signed a durable power of attorney, she would be the principal. It is common for married persons to appoint their spouses to serve as agents under powers of attorney.

Durable powers of attorney are special kinds of powers that are designed to remain in effect after the principal becomes incompetent to handle their own affairs. In fact, most people intend that a durable power of attorney will not be used until they are unable to make decisions for themselves. This is called a “springing” power.
Mrs. Doe could have signed a power of attorney when she was mentally capable of understanding the document, and able to make responsible judgments about choosing a trustworthy agent. Mr. Doe, as her agent, would have had clear legal authority to act on Mrs. Doe’s behalf. If Mrs. Doe failed to exercise her right to modify or revoke the power of attorney at any time, the document would remain in effect until its termination date or her death.

A power of attorney document signed by Mrs. Doe would have determined the type and extent of powers granted to Mr. Doe as agent. It is likely that Mrs. Doe would have granted broad powers to her husband, as agent, including most of the powers adults normally exercise themselves, including opening and closing bank accounts, writing checks, paying bills, filing tax returns, prosecuting and defending legal claims, buying and selling property, and making investments.

Since she was diagnosed with Alzheimer’s Disease, Mrs. Doe would have probably been advised by her lawyer to include some special powers to assure that Mr. Doe would be able to engage in estate planning on her behalf, and to make gifts. Mrs. Doe would have had the right to limit her agent’s powers, if she wanted to, such as by requiring her agent to give periodic reports on his activities to another person.
If Mrs. Doe had signed a power of attorney for health care decisions, she would have been able to control who made such decisions for her. Not only could she have designated her husband as agent, but she could have designated successor agents to act in his absence. Without guardianship or a health care power of attorney, if Mr. Doe were unable to make medical decisions for her, the law would allow the majority of Mrs. Doe’s children to make health care decisions, regardless of the quality of the relationship with her. If Mr. Doe as guardian became unable to handle medical decision making for his wife, more court proceedings would be necessary to appoint a successor guardian.

Although she could have legally prepared the power of attorney document herself, Mrs. Doe would not have been aware of the legal consequences of the powers omitted by and from the standard form, and probably would not have achieved her goals and objectives. Also, she may have needed other legal documents to achieve her goals, either in addition to the power of attorney, or instead of it. Without an experienced legal advisor, if Mrs. Doe had prepared the power of attorney herself, she would not have known of potential problems until it was too late to correct them.

Q: Trusts and the Estate Tax Bill - What Are They?

A: The estate tax law, passed by Congress in 2001 and in effect until 2011, offers annual, increasing estate tax exemptions, descending estate tax rates, and pitfalls for taxpayers who fail to set up properly structured “bypass” trusts.
Bypass trusts are often used in estate planning to decrease high taxes faced by non spousal heirs. This unique trust is created to make the increasing estate tax exemption work to the heirs’ advantage on a year- by – year basis. (Surviving spouses generally do not pay estate or gift taxes on money or property inherited until they subsequently pass away. However, up to a 49% tax rate can be faced by any non-spousal heirs).

To illustrate, a bypass trust may be created to stipulate that the maximum exemption in the year of the taxpayer’s death be left in a bypass trust for spouse and children with the rest of the estate being left in a marital trust for the living spouse. Since $1.5 million was the exemption amount for taxes paid in 2004 and 2005, no estate taxes would be paid on this amount, and it would be kept in the bypass trust until the other spouse dies. It escapes taxation even at that time.

The amount that can be left in a bypass trust would increase according to the estate tax law. For example, the tax exemption was $1.5 million in 2004, and it climbs up to $3.5 million in 2009. However, as the law now stands, in 2011 the exemption returns to the 2001 tax rate of 55% with a 1 million exemption.

Let’s look at a scenario to see what happens without a bypass trust:
Bill and his wife Lauren together had $4 million in money and property. Bill dies in 2005 leaving his wife his entire estate. Lauren dies in 2015 with wealth that grew to $5.4 million at 3% inflation. All of her assets go to the children. After paying an estate tax of $2.25 million, the children are left with $3.1 million.
Now, here is a version of what would happen if Bill and Lauren had placed $1.5 million in a bypass estate trust in 2005. Bill dies in 2005 leaving $1.5 million in a bypass trust. The balance of the couple’s assets goes to Lauren in a marital trust. No estate tax was due in 2005, since the amount going to the bypass trust matched the estate tax exemption for 2005. Lauren’s assets reach $5.4 million by the time of her death in 2015. After payment of $1.1 million in estate taxes, the children receive $2.2 million from their mother’s estate and $2 million from the bypass trust (the money put into the trust grew) for a total of $4.2 million. Since the children do not have to pay taxes on the money from the bypass trust, they save $1.1 million that they would have paid in taxes had their parents not established a bypass trust. Note, also, that the children would have to pay capital gains taxes on the appreciation of the assets sold from the bypass trust based on the value of those assets at the time the first spouse died.
What would happen if Bill dies in 2010, when the estate tax is not in effect, and what if Lauren then lives another 5 years? If the trust formula dictated that all of Bill’s assets could go in the bypass trust because there is no estate tax, would all of Bill’s property and money go to the couple’s children, leaving Lauren broke?
Probably not, as most bypass trusts allow spouses to use money from the principal in the bypass trust. However, depending on the time of funding formula in the trust, the bypass or the marital trust could end up with all the assets. Thus it is critical that existing estate plans be reviewed by a competent estate-planning attorney and that new plans be prepared with great care.


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