Blythe’s parents divorced when she was 5 years old. The court awarded joint custody with liberal visitation privileges. The divorce was not acrimonious and Blythe made a good adjustment to the new living arrangement, staying with her mom during the week and visiting her dad on weekends. Then, 3 months after the divorce, her father was killed in a car accident by a drunk driver.
IRS logo | Ben Franklin once opined, “In this world nothing can be said to be certain, except death and taxes.”
The will that her parents had drawn up together when they were married was invalidated by the divorce and her dad had not gotten around to making another will. The probate court intervened and divided the assets of her father’s estate evenly among Blythe and her two grown siblings. Because Blythe was a minor, her mother was appointed her personal guardian and the guardian of her property (the assets from her father’s estate). However, as the guardian of Blythe’s property, Blythe’s mother had to post a bond to assure the court that she would not run off with Blythe’s money. Blythe’s mother found this request from the court totally humiliating because she had nothing but her daughter’s best interests at heart. The thought that anyone would doubt that was crushing to her.
Thenceforth, until Blythe was 18 years old, Blythe’s mother had to go to a probate court hearing annually to defend each and every expenditure made on Blythe’s behalf during the year, right down to the package of gummy bears Blythe begged for in the grocery store. Hours of bookkeeping went into keeping accurate records for the court and accounting for every penny spent on Blythe. Blythe’s mother did all of the accounting herself to avoid spending money that she didn’t have and to keep from using money from Blythe’s estate, even though the court had told her that she could legitimately pay for the accounting with Blythe’s assets. To add insult to injury, at each hearing the probate court engaged an attorney to represent Blythe’s interests-making her mother feel like a criminal-and the fee for the court appointed attorney came from Blythe’s assets.
Before Blythe’s parents divorced, her father had managed all the family’s financial affairs; consequently, Blythe’s mom knew little about growing Blythe’s assets. Worse, her mother feared if she didn’t learn how to invest Blythe’s funds appropriately that the court might revoke her guardianship or view her as incompetent. So in addition to going back to college for her master’s degree, working part time and being home to take care of Blythe, Blythe’s mom was rabid about educating herself on investing and money management. In the little spare time that she had, she read and read and read, watched the market programs on TV and consulted with several different money managers. In the end, Blythe’s mother knew more about investing than the attorneys appointed to represent her daughter. The fact that the attorneys were obviously awed by her knowledge was of little comfort to Blythe’s mom who had spent many a sleepless night worrying that she would end up having to beg for every penny from a court appointed guardian for the care and support of her daughter.
The entire probate experience was a nightmare for Blythe’s mother; it ate up her limited time, sapped her energy and degraded her emotionally, not to mention the expense to Blythe’s piggy bank of 14 years of hired attorneys. All Blythe’s mother could think about was: There must be a better way!
Indeed, there is a better way. This scenario is just one of many millions of similar situations that could have been avoided had individuals or families thought carefully about estate planning.
What is an Estate Plan?
Simply put, an estate plan is a blueprint designed during a person’s life for the purpose of specifying the manner in which a particular estate will be disposed of after death. An estate plan typically attempts to conserve estate assets by reducing tax liability and other expenses as well as eliminating uncertainties with respect to the administration of a probate. (A probate is the process of certifying the validity of a will by judicial means.) Depending on your goals, your concerns regarding the legacy you want to leave behind, your family structure and the number and kind of assets you own, your estate plan could be simple or complicated. The process of estate planning usually entails the input of one or more specialized, professional advisors including your lawyer, financial planner, accountant, life insurance agent, banker and broker.
Why Do I Need an Estate Plan?
If you don’t own anything of value and have no living relatives, pets or children, then you probably don’t need a will. You can die “intestate” (without a valid will) and your personal items will be distributed according to your state’s laws. However, this description applies to a very, very few. The rest of us whether married or single, young or old and with or without children need to have some sort of estate planning in place in the event of our deaths.
As Ben Franklin once opined, “In this world nothing can be said to be certain, except death and taxes,” but with good estate planning, you may be able to at least reduce some of the taxes your estate will be required to pay upon your death. These taxes, called estate taxes, are determined by an assessment of the total gross value of your estate; they are levied when you die and can eat into the value of the estate you leave to your heirs or beneficiaries. If you want to control the disposition of your assets-home, car, pets, money, stocks & bonds, life insurance, personal valuables-as opposed to letting Uncle Sam decide for you, then you need a proper estate plan. You might not be able to take it with you, but you sure can decide who gets what you leave behind.
Getting Started on Your Estate Plan
To get started thinking about estate planning, ask yourself these questions:
- Who will care for my minor children should I die?
- Who will care for my spouse should I die?
- How will my disabled son/daughter be cared for?
- Who will care for my pet should I die?
- Where will my collections go?
- What will happen to my antique furnishings, silver service, jewelry, paintings, and antique car?
- Will my grandchildren have enough money for college?
- Could my alma mater or church benefit from an endowment?
- Do I want to decide what life support measures may be used if I become terminally ill?
- Who will make health care decisions for me if I become ill and am unable to make my own decisions?
- How will I pay my bills if I become forgetful or confused?
These are all simple concerns, one of which nearly everyone has or will have at some time in their life.
Important Considerations in Developing an Estate Plan
In developing an effective estate plan, it is important to be mindful of the federal and state laws governing estates. These laws can be complicated and confusing and vary from state to state. Not only that but estate planning laws are unfortunately not set in stone which makes it even more difficult to plan ahead intelligently. For example, the federal estate tax exemption (the amount you may leave to heirs free of federal tax) has risen gradually from $1 million in 2002 to $3.5 million in 2009. However, in the year 2011, unless a law is passed to extend the estate tax repeal beyond 2010, the exemption will revert to its prior amount before the repeal. That means that only $1 million of your estate will be free from federal estate taxes (see chart below).
ESTATE TAX EXEMPTIONS INCREASE
2002 $1 million
2003 $1 million
2004 $1.5 million
2005 $1.5 million
2006 $2 million
2007 $2 million
2008 $2 million
2009 $3.5 million
2010 Estate tax repealed
The ups and downs and continuous estate tax law changes make it vital that you engage an attorney (at the very least) who is experienced in wills and trusts and perhaps enlist the services of a financial planner and accountant. You may also have to consult with your banker and money manager depending on how large your estate is projected to be and how you want your estate distributed.
Primary Components of an Estate Plan
A basic estate plan includes: a will, an assignment of power of attorney, a living will and or a health-care proxy and in some cases a trust. More complicated plans can include various estate planning devices that are designed to put conditions on how and when your assets may be distributed in addition to reducing your estate and gift taxes. Some plans even protect your assets from creditors and lawsuits.
Wills - A will is a document that sets forth your wishes regarding how your assets will be distributed. As mentioned earlier, if you die without a will, the state will determine the disposal of your assets. The rules for disseminating estate assets in intestate cases vary from state to state but there are some generalities that can be drawn: If you die leaving a spouse and children, your assets will likely be split between them and if you are single with no children, the state will decide which of your blood relatives will inherit your estate. If you want to have control over where your assets go, you must have a will.
Wills are especially important for people who have minor children. You want to be the person who decides what is best for your child; you will want to name a guardian in your will and set up provisions for the care of your child in the event of your death. Don’t leave your child’s fate to a court.
A will may be amended at any time; in fact, you should review it periodically as your family structure, life circumstances and the ages of your children change. Situations that should prompt a review are: divorce, remarriage, loss of a spouse or child, birth or adoption of a child, evolving needs and aging of minor children, bankruptcy filings and prenuptial agreements among others.
Although 401(Ks), IRAs, pensions and life insurance policies are not included in your will (these account holdings will be transferred automatically to your named beneficiaries when you die), you should review your selection of beneficiaries at the same time you review your will for necessary changes.
Finally, a will, unlike a trust, addresses the sum total of your holdings; therefore, even if you have a trust or especially because you have a trust, assets that you failed to re-title in the name of the trust before your death will still be included in your trust. This is important because without a will to designate your heirs, any assets that are not re-titled in the name of the trust are subject to probate meaning the court will decide which heirs receive your assets.
Financial Power of Attorney - No one is immune from aging, disease or injury that may cause the possible loss of mental clarity. What happens to a person’s financial affairs if mental incapacity occurs? As our population ages and people live longer, more and more elderly need a family member or friend to assist them with paying bills and keeping financial accounts in order. To be prepared for the possibility that someday you may be unable to manage your own financial affairs, you should assign a financial power of attorney to someone you trust as part of your estate plan.
The assigning of a power of attorney means that the person (also called an agent or an attorney in fact) to whom you have granted this fiduciary authority must act in your best financial interest at all times and in accordance with your wishes. An agent can sign checks, manage bank accounts and handle of all your financial undertakings.
Usually a friend or a family member is selected as the power of attorney and no compensation is expected. However, if you name a bank, lawyer or other outside party, compensation for services rendered will need to be negotiated. Charges may range from hourly fees to an annual fee determined by percentage of the assets paid on your behalf.
What happens if you do not designate a power of attorney before becoming incapacitated? Unhappily, the court will intervene to appoint a guardian. This process could cost well over $1,000 and does not include what you will be charged for the guardian’s annual visits to the court to report on your financial situation. Will the person the court appoints be the one you would have chosen? Probably not. Don’t leave your financial decisions to an impersonal court; include a power of attorney in your estate plan.
There are several kinds of financial powers of attorney, but the two types most commonly used in estate planning are referred to as (1) a durable power of attorney and (2) a springing power of attorney. Both types of assignment are executed by a simple document that is notarized and signed by the parties named in the agreements. The difference between types is timing. The durable form goes into effect immediately and the attorney in fact is not required to prove the incompetence or incapacitation of the named individual. The second form of assignment, a springing power of attorney, goes into effect only under particular circumstances that are spelled out in the document, the most typical being incapacitation. A springing power of attorney may set forth directives requiring substantiation of incompetence by one or more physicians or in some cases, a court order verifying mental incapacity. Despite the use of medical evaluation, these powers of attorney are not to be confused with a health care power of attorney.
An attorney can help you decide which form of assignment makes the most sense for you with respect to your particular circumstance. The person that you select for your agent should be trustworthy, competent and willing to protect your financial security when assuming the burden of managing your financial affairs.
Durable Medical Power of Attorney (Health Care Proxy) and Living Wills - These two instruments of estate planning should not be confused.
- Living Will - A living will is a document that you complete directing how you want your end of life decisions handled. For example, do you want to be maintained on a respirator if you are brain dead or do you want to be resuccitated in the event of a cardiac arrest even if you have a terminal disease? A living will protects you from being treated in a manner that is not in agreement with your wishes. A living will is not just for old people either, everyone is vulnerable to accidental death at any age. Protect yourself from unwanted emergency heriocs and your family from the agony of trying to determine your wishes after the fact by incoporating a living will into your estate plan. You may also want to have your organs donated after death. A living will can include this directive sparing your family from having to make the decision for you.
- Durable Power of Attorney (also called a health care proxy or medical power of attorney) - The power to make all of your medical decisions, including end of life decisions, can be transferred by you to an appointee before you become unable to make these decisions for yourself through a durable power of attorney. You should select a trusted family member or friend to act as your health care advocate and let your wishes be known in advance. Many hospitals request that a health care proxy be instituted when an elderly or terminally ill patient is admitted and nearly all inquire as to the existence of a living will. Hospital authorites are understandably reticient about carrying out certain treatments and procedures on eldely or terminally ill patients (who may be confused one minute and lucid the next), preferring to consult with a health care designate rather than the patient.
Many individuals have both a living will and a durable medical power of attorney, a consequence of the increasing awareness by the general public of the complexities involved in making end of life decisions.
Trusts – A fourth common component of an estate plan, a trust, is a legal arrangement set forth in a written trust document that allows real, tangible or intangible property to be managed by some entity (a person or persons or an organization) for the benefit of another. The person who funds or establishes the trust is called the grantor and the person to whom the job of administering the trust falls is referred to as the trustee. A trustee holds legal title to the trust property, but is required by law to hold the property for the benefit of the beneficiaries of the trust.
The National Association of Financial and Estate Planning recommends a trust in any of the following circumstances:
- When the value of an estate is between or exceeds $75,000-100,000 and the property cannot be safely transferred to the beneficiaries by ordinary means such as naming beneficiaries on IRAs and life insurance policies or the holding of property by joint tenancy.
- When the estate might be challenged by an heir or would-be heir. A tidy trust document is less vulnerable to attacks than an estate that has to go through probate.
- When avoiding probate is desired. Probated estates are considered public knowledge whereas trust estates are private. Taking an estate through the probate process is time consuming, expensive and a lengthy ordeal that can delay the distribution of assets to beneficiaries that may need them sooner than later, such as in a circumstance where the family business is one of the assets.
- When there is a desire to control the timing of the distributions to beneficiaries. For example, you may want to give leave your granddaughter her college tuition over a four year period or keep your wastrel son’s portion in the trust until he turns 30.
- When death tax liabilities are considerable.
- When an estate needs to be protected from legal assaults or the assets require protection from a non-owner like a divorced spouse.
- When there is an event such as a mental collapse of the estate holder that requires the estate to be handled in a special way for a period of time.
Trusts are flexible, varied and complex. Each type, and there are many, has advantages and disadvantages. Ask your attorney to assist you in selecting a trust that meets your individual needs and make sure you understand the intricacies involved in the trust or trusts you do select.
Some of the advantages associated with various trusts are that you can:
- Determine the timing of when and how and your assets are distributed after you die.
- Reduce estate and gift taxes.
- Distribute assets to heirs efficiently without the delay and publicity engendered by probate court.
- Reduce probate costs (which can run from 5 percent to 7 percent of the value of your estate) significantly.
- Protect your assets from creditors and lawsuits more easily
- Name a successor trustee, who not only manages your trust after you die, but is empowered to manage the trust assets if you become unable to do so.
The main thing to remember about trusts is that they are independent, legal property owners and are recognized as such by both laws and courts. Just like a corporation, a trust may own property, file tax returns and pay taxes, distribute profits to beneficiaries, own brokerage and bank accounts and carry on other trust-related business activity.
In summation, estate planning is more than just what will happen to your assets when you die. Proper planning can allow you to make charitable donations while you are alive, pass money on tax-free to your children, provide contingency arrangements for minor children in the event they are orphaned, participate in your own medical decisions and have someone you trust assist you with handling your financial affairs while you are alive. Estate planning should not be put off until tomorrow because it may be tomorrow that you need it most.
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