I. BASIC ESTATE PLANNING
Regardless of estate size or how your assets are structured, there are four absolutely necessary elements in estate planning. These four things are the beginning building blocks to good planning.
1. Will
2. Living Will(s)
3. Financial Power of Attorney
4. Medical Power of Attorney
II. THE WILL
A will is a legal method to transfer your property when you die. Should you die without a will, State law will determine what happens to your property. Generally, it will go to your spouse and children or, if you have neither, to your other closest relatives. Should you die without a will, anyone can claim rights to your property through a court of law. Even in a situation of death without heirs or beneficiaries, if your property is not claimed by a blood relative, all proceeds go to the State.
Guidelines
1. Decide what property to include in your will.
2. Decide who will inherit your property.
3. Choose an executor to handle your estate.
4. Choose a guardian for your children (if dependent).
5. Sign your will in front of witnesses (notary).
6. Store your will safely.
Technical Requirements
Any adult of sound mind is entitled to make a will.
- The document must expressly state that it's your will.
- You must date and sign the will.
- The will must be signed by at least two witnesses. The witnesses must watch you sign the will, though they don't need to read it.
III. THE LIVING WILL
A living will is a legal document that states in advance a person's desire to receive, or to withhold life-support procedures. This is put into use if someone becomes permanently unconscious or terminally ill and unable to make decisions.
When does it apply?
The living will applies only when two doctors determine that the patient is either in an irreversible coma or is suffering from a terminal illness and is unable to make decisions for him/herself. As long as a patient is able to make health care decisions, the living will cannot be used.
Why is it a crucial element in planning?
Every individual has the right to choose. If you do not make a choice now and have it documented, then your wishes may not be carried through. The choice of life support (or no life support) is a difficult decision under any circumstances for family or loved ones. Although having a living will does make this decision easier, it's existence prevents any confusion as to your wishes, and removes any emotional burden from the person who would otherwise have to make this difficult decision. A living will also prevents doctors, hospitals or other family members overriding your final wishes.
IV. THE POWERS OF ATTORNEY
What is the difference between a General Power of Attorney and a Durable Power of Attorney?
A power of attorney is a legal document you can use to give someone else the authority to take specific actions on your behalf, such as signing your checks to pay your bills or selling a particular piece of real estate for you. If a power of attorney is durable, it remains valid and in effect even if you become incapacitated and unable to make decisions for yourself. If a power of attorney document does not explicitly say that the power is durable, it ends if you become incapacitated.
There are Two types of Durable Powers of Attorney:
1. Durable Financial Power of Attorney
Allows you to name someone to manage your financial affairs if you become incapacitated
2. Durable Healthcare Power of Attorney
Allows someone to make medical decisions for you if you are no longer able to speak for yourself
V. COMPREHENSIVE ESTATE PLANNING
Why is there always a mile long line at the post office on April 14th? Procrastination.
At some point, we are all going to leave this earth. It's not a matter of if, it's a matter of when. Estate planning is one thing you don't want to "put off." For some, basic estate planning tools such as your will, living will and powers of attorney are the only tools necessary to protect you and your estate. But for many, these basic estate planning tools aren't nearly enough.
VI. THE BENEFITS OF PURPOSEFUL PLANNING
Comprehensive estate planning isn't complicated, nor is it only for the benefit of your family at your death. With planning suitable for your unique situation, you can experience many living benefits. Considerable tax savings, steady growth and/or income and protection from medical catastrophes are just a few of the advantages of purposeful planning.
VII. WHEN SHOULD I BEGIN PLANNING?
Now.
No matter your age, as a minimum, you need to have in place your basic planning: Will, Living Will, and Powers of Attorney. We also suggest that, if your personal situation warrants, a more comprehensive financial plan be utilized. This will provide you with tax-advantaged tools as well as secure and strategic ways to preserve your nest egg in any type of economic environment.
VII. HOW DO I KNOW WHAT I NEED?
Why do most people get a physical check-up each year? The answer in most cases, is to make sure that they are in good shape. When it comes to your finances and your estate planning, it's always a good idea to get a financial check-up for the same reason: to ensure that you are in good shape. Although there is no cookie-cutter plan that fits everyone, you need to ask yourself some direct questions to determine your potentially problematic areas, if any.
IX. WHAT HAVE I FORGOTTEN?
1. Am I utilizing every tax-advantaged program available to me?
2. Are my assets designated to go to whom I want them to go, and will they be inherited in the best tax-advantaged method available?
3. Will my estate go through probate?
4. Have I appointed a power of attorney to make my financial and healthcare decisions for me if I am not able to do so?
5. Should I set up a trust to shelter or protect my assets from catastrophes and unnecessary taxes?
6. Will my funds last as long as I do?
7. Do I have a detailed record of all of my important documents, easy to find and easy for my family to sort and settle upon my death?
8. Do I have a list of my important contacts (banks, brokers, attorney), including phone numbers and addresses?
9. Does my family know my final wishes?
I. REDUCING YOUR OVERALL ESTATE TAXES
The "Death Tax"
Your estate, which consists of real estate, property, life insurance, liquid cash assets and all of your worldly possessions is subject to estate taxes imposed by the Federal Government upon your death. The government allows a 1.5 million dollar estate tax exemption per person or 3 million per married couple. If your estate is over this amount, it can cost your heirs up to 53% of the gross value of your estate!
II. A SIMPLE AND EFFECTIVE WAY TO AVOID PAYING THIS TAX
The most safe and effective way to legally avoid paying estate taxes is to place your assets inside of a Living Trust. A trust is created for the purpose of holding ownership to an individual's assets during the person's lifetime, and for distributing those assets after death. Although a trust may or may not be the answer for you, for many, this is an ideal way to shelter assets from estate taxes and probate. There are several types of trusts available and many options as to how they can be constructed ideally for your personal situation.
A trust will range in average cost $1,500.00 to $5,000.00 depending on your area and the size of your estate. The fees cover all title transfers and paperwork associated with placing your assets in the name of your trust.
III. DO I STILL HAVE CONTROL OF MY ASSETS?
In most cases, ABSOLUTELY! There are two categories of trusts:
1. Revocable Living Trust - Owner maintains all rights and powers of assets.
2. Irrevocable Living Trust - Owner waives all rights and powers of assets.
The Irrevocable Trust, although has it's advantages, is used primarily for insurance planning. Of the two, the Revocable Trust is more widely used for personal estate planning.
The Revocable Living Trust: There are several types of Revocable Living Trusts, each having it's unique purpose in the estate planning process. The gross value and complexity of your estate, in combination with the positioning of your cash assets, will determine which type of trust is appropriate for your situation. Once this has been determined, you must fund your trust. This simply means that your assets have to be titled in the name of the trust. If you fail to title your assets in the name of the trust, then the trust will fail in it's purpose to protect and/or shelter your assets.
IV. WHICH TYPE OF TRUST IS RIGHT FOR ME?
Concerning trusts, one size does not fit all. We strongly encourage you to seek the advice of an attorney who specializes in Estate Planning to elicit appropriate advice. However, we can provide you with information as to which types of trusts are available and what purposes they serve in Estate Planning.
Types of Trust
Joint Partner Trust ( A B Trust) - If you are 65 or older and are planning on leaving your property and assets to your spouse, you have the option of transferring your assets into a Joint Partner Trust. While you are alive you will still have use of your assets and will continue to receive income or capital gains on the assets in the Trust. At your time of death your assets held by your Joint Partner Trust will pass to your spouse under the terms of the Trust, not the terms of your Will.
Family Trust - A Family Trust can be very useful for holding assets or investments to later benefit your children or other dependents. For example, you could create a family Trust that will be used to fund your children's education. If this Trust is designed properly it can provide significant tax savings over the years because your children will be taxed on the capital gains at lower tax rates than you would be taxed.
Alter Ego Trust - Similar to a Joint Partner Trust, an alter ego Trust is for people who are 65 or older but do not have a spouse. At the time of death your assets would be disposed of at fair market value for capital gains tax purposes just like your assets would be disposed of if you did not have a Trust. Benefits of an Alter Ego Trust include avoiding probate fees, preserving secrecy regarding your level of net worth and how your estate is to be distributed after your death as well as avoiding the requirement to file a list of assets you are passing to your beneficiaries.
Life Insurance Trusts - Another form of insurance trust is the Life-Insurance trust. This trust, similar to a Living Trust, is created to receive proceeds payable under a life insurance policy. It is normally established to exclude those proceeds from taxation in the decedent's estate. A life-insurance trust can also be used to provide a vehicle for continued management and distribution of insurance proceeds for a beneficiary who may need assistance in those matters.
Charitable Remainder Trusts - This type of trust allows you to give a future interest in an asset to charity, while keeping an income stream for yourself or for another beneficiary. A Trustor may specify that a certain portion of the trust income be distributed to a non-charitable beneficiary for a certain period of time, with the charity to receive the money or property thereafter (e.g., upon the death of the non-charitable beneficiary).
Testamentary Trusts - Testamentary Trusts are created as part of a will and must conform to the statutory requirements that govern wills. This type of trust becomes effective upon the death of the person making the will (the "decedent") and is commonly used to conserve or transfer wealth. The will provides that part or all of the decedent's estate will go to a trustee who is charged with administering the trust property and making distributions to designated beneficiaries according to the provisions of the trust. Before the trust property becomes subject to the Testamentary Trust, it will normally pass through the decedent's estate. When the estate is probated, those trust assets will be subject to probate. The assets, which will form the corpus of a Testamentary Trust, also are potentially subject to an estate and generation-skipping transfer tax at the time of the decedent's death.
Special Needs Trusts - These types of trusts, which are taxed at the same rate as a natural person, may only be created to benefit a person suffering from serious mental illness as described in the Mental Illness Act Nr 18 of 1973, or that suffers from serious physical deformity. Testamentary Trusts benefiting any living family member, of whom the youngest turns 21 in a tax year, may in certain cases also be classified as a special trust.
Guardian's Trust - These trusts are created as an alternative for monies due to minors that must, under certain circumstances, be paid into the Guardians' Fund of the Master of the High Court. Examples of such monies are yields from policies and cash inheritances for which no provision had been made with trusts. This trust is authorized to receive, and to manage to their advantage, any benefits accruing to minors from the Guardian's Fund ? from death claims to life and endowment policies. It is a safe alternative for the Guardian's Fund to pay benefits into the trust rather than to the remaining guardian, who will not necessarily act in the best interest of the child.
I. WHAT IS PROBATE?
In simple terms: Probate is a legal proceeding dealing with matters of administration and distribution of assets following death. Probate occurs upon the death of the surviving spouse. Any assets which are held in the name of a deceased person, and which do not transfer automatically upon death (such as property held in joint tenancy, or proceeds from an account which has a beneficiary designation), are subject to court supervised probate administration following death. Certain exceptions in most states allow an abbreviated transfer process if the value of assets is less than a certain sum, or the only heir is the decedent's spouse.
II. "I HAVE A CURRENT WILL. WILL I STILL GO THROUGH PROBATE?"
If your assets (home, property, cash assets, etc.) are valued over your state's designated limit, it is very likely that your estate will go through a formal probate, even with a current Will in place. What does this mean to your heirs or beneficiaries?
1. Your assets can be frozen for an average of 6 months to 2 years. During this time, your estate is settled (unpaid balances are paid,
stocks are sold, etc.)
2. Attorney fees and court costs usually range from 6% to 10% of the gross estate value.
III. POTENTIAL WAYS TO AVOID PROBATE
Money and liquid assets, such as stocks, mutual funds and bank accounts can easily be placed inside a financial vehicle which automatically avoids probate. Properties and real estate, however cannot be placed into a financial vehicle, but can be sheltered within a living trust. Many seniors use both vehicles to shelter their assets. There are a few other avenues, as well. However, these may be financially dangerous or subject to taxes. Although "joint tenancy" is a legal way to bypass probate, we're going to dispel the notion that sharing title with anyone other than your spouse is a good way to avoid probate. We could site hundreds of cases nationwide where holding a joint title financially devastated one or both parties.
As an example: We have a 73 year old widowed client. She came to us with three IRA accounts, the only accounts she was not able to place in joint tenancy with her son (IRA's can only belong to the owner for tax purposes). Client privacy is necessary, so we'll refer to this lovely woman as "Grace." Grace's son was a very responsible young man who worked in upper management for a solid company. The son and his wife gave birth to twins born nearly four months early. The bill for Neonatal Intensive Care was in excess of 5 million dollars. The son's insurance only covered 2 million in claims. Having no choice, the son filed medical bankruptcy. But due to the fact that the son was joint owner of 550,000.00 of his mother's assets, the joint property was seized to pay the hospital bills. Grace lost nearly 85% of her assets due to joint tenancy because of an unforeseen mishap. Simple mistake. Devastating results.
IV. MOST EFFECTIVE WAYS TO AVOID PROBATE
Concerning assets that will be subject to probate upon death of the survivor, two things must be considered. Initially, it has to be determined the value of your Tangible Personal Property and the value of your Intangible Personal Property. Assets such as real estate, antiques, gold, coins, land and life insurance proceeds are considered Tangible Personal Property. These things have a physical presence, so therefore are considered Tangible. Assets such as bank accounts, stocks, bonds, IRA's, mutual funds, annuities are considered to be Intangible. Should you have nothing but Intangible Personal Property, you can avoid probate rather easily by choosing the proper investment vehicle, such as accounts that are designated to be inherited by a named beneficiary. Accounts such as an IRA's, 401k's or retirement accounts automatically bypass probate and proceeds go directly to your beneficiary. Mutual Funds, stocks, bonds and bank accounts are included in the gross value of your estate and most likely will be subject to probate proceedings. You can easily transfer these types of accounts into vehicles which automatically shelter those assets from probate. Annuities, for example can hold any type of money, whether it is an IRA, a mutual fund, or bank account and will not be subject to probate. However, if you own Tangible Personal Property, such as a home or land, a Trust might be the best answer for you. By placing your tangible personal property in the name of your trust, probate can be avoided.