ESTATE PLANNING

NOTICE: None of these questions and answers constitute legal advice. To obtain legal advice, consult with an attorney. This is especially important in divorce and family law matters, in which outcomes are often peculiar to the particular facts and circumstances of the case.

1. What is an ‘estate’?
2. What is estate planning?
3. Who should have an estate plan?
4. When should I start my estate plan?
5. How can an estate plan prevent probate of my estate?
6. What are some typical estate planning documents?

Question: What is an ‘estate’?

Answer: The term "estate" consists of all the property a person owns or controls. This property may be in his or her sole name, held in a partnership, in a joint ownership arrangement, or through a Trust, and all other monies that would be generated on the person's death, such as through life insurance. It includes:

(1) Real property and things attached to it (houses, buildings, barns, etc.);

(2) All personal property (including automobiles, bank accounts, stocks and bonds, mutual funds, stock options, cash, furniture, jewelry, art, collectibles, etc.);

(3) 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.);

(4) Powers of appointment (the right to direct who gets someone else's property);

(5) Life insurance and annuity contracts, pension benefits, IRAs, 403(b)s, etc.;

(6) All debts and obligations owed to others;

(7) All debts and obligations owed to the person or estate; and

8) All other claims against others, such as for the pain and suffering from an auto accident.

An estate does not include assets a person has transferred to an irrevocable Trust during his or her lifetime. If a Trust is irrevocable, it means the assets can’t be taken back. So once the transfer is made, the person no longer owns or controls those assets, even if the Trust continues to benefit that person. When a person dies, other property a person owned is no longer included in that person’s estate. Property that the deceased has placed in a revocable Trust, such as a Living Trust, irrevocably belong to the Trust when the person who set up the Trust (Trustor) dies, and all the assets of the Trust are no longer part of the deceased’s estate (though they may be considered for tax purposes). Other property is also excluded from the estate when the property passes directly to another on the former owner’s death. For example, insurance policies, pension funds, and U.S. Savings Bonds with named beneficiaries, property owned with a right of survivorship, and bank accounts that pass directly to a named party (also called pay-on-death accounts and Totten Trusts) are not considered part of a deceased’s estate.

Question: What is estate planning?

Answer:Estate planning is a process to consider what you want if something happens to you or those you care about, such as injury, incapacity or death. In setting up an estate plan, you will need to consider various alternatives, think through your options, and set up legally effective arrangements that would meet your specific wishes. 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. On the financial side, a good estate plan 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 became disabled or if you die.

On the personal side, a good estate plan includes directions to carry out your wishes regarding health care matters. If you ever become unable to give the directions yourself, someone you select would do that for you. Because they would be relying on your instructions, they would know when you would want them to authorize heroic measures and when you would prefer they pull the plug.

Question: Who should have an estate plan?

Answer: You should have an estate plan if:

(1) You are the parent of minor children;

(2) You have property that you care about; and

(3) You care about your health care treatment.

If you have minor children you will want to name a guardian for your minor children in case both parents die, and you may want to nominate a different guardian to look after your children’s financial affairs. Minor children are not allowed to inherit more than a few thousand dollars directly. Their inheritance must go into a trust, with an adult to manage it. If you don’t set up this trust in your estate plan, a probate court will have to do it at a greater expense, and the cost of that will come out of your child’s inheritance.

Property you care about includes property that has a sentimental value, not just a high monetary value. Just saying that you want your daughter to have your jewelry and your son to have your boat, for example, won’t be legally binding. You need to put all this in writing. Each state has laws about where property will go if it is part of a decedent’s estate at death and there isn’t a Will. These are called laws of intestate succession. If you want your property to be passed differently than it otherwise would under the laws of your state, then you need an estate plan.

If you have strong feelings about how long your life should be preserved if something should happen, such as falling into a vegetative condition or needing life support, then you will want to write out your instructions in a Living Will or use a Designation of a Patient Advocate to appoint someone you trust to make these decisions for you should you become incapacitated and unable to make these decisions for yourself. If you don’t do that, someone you wouldn’t have chosen might make these decisions for you, and the decision they make might not be the decision you would have wanted.

Question: When should I start my estate plan?

Answer: The best time to start an estate plan is now, while you have the capacity to do so. Estate planning isn’t only about deciding what to do if you die; it’s about making plans to take care of yourself, your affairs, and your loved ones if you should become temporarily or permanently disabled or incapacitated. We all tend to think we don’t have to worry about this sort of thing until we’re old or sick, but we know from experience that isn’t true. If you drive a car, ride in a motor vehicle of any kind, fly, take medicinal drugs, or otherwise live a normal life, you could be in an accident, suffer a sudden drug reaction, or catch the latest superbug like SARS or swine flu. What will happen to your life and your affairs if you’re in a coma for 2 months? An estate plan will allow you to name the person to oversee your medical care and make health care decisions for you. If you don’t appoint someone and there is no family member to fill this role, the courts could appoint a stranger to decide what kind of care you should receive and whether you should receive life support or not. We also don’t know when we’re going to die, so if you have family or loved ones you want to see cared for or have property of sentimental value you want to go to a specific person or persons, it makes sense to make your plans right away. Effective planning can save money in taxes and probate costs that can go to people you care about instead. If you die without planning, your property could go to people you don’t want to have it and property you wanted to pass on could be sold to pay taxes and costs. 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. If you wait until you are unable to manage your own affairs or suffer from some other disability that affects your legal capacity, it will be too late to make an effective estate plan. Any estate plan you make at that point may be effectively challenged by those who assert that you lacked capacity at the time the documents were created or that you were subject to fraud, coercion or undue influence during the creation and implementation of your plan. So, again, the best time to start an estate plan is now.

Question: How can an estate plan prevent probate of my estate?

Answer: Just as with a Conservatorship, an estate plan uses several tools to prevent a court from gaining jurisdiction over your estate in the event of your death. The Durable Power of Attorney for Property enables your attorney-in-fact to handle your financial affairs and make last minute arrangements should your death be imminent. A common technique used by your attorney-in-fact, who is often your Successor Trustee as well, is to transfer property which is not currently held in your Trust into the Trust, so legal title to the property is held by the Trust at the time of your death. Both the Trust and Family Limited Partnership are legal entities which survive you after your death. Property held by a Trust or a Family Limited Partnership in legal title is held by that entity, and is thus not part of your estate at the time of your death. The instructions for the management of your property are set forth in these documents, and such property is managed by. An estate plan uses several tools to prevent a court from gaining jurisdiction over your estate in the event of your death. Both Trusts and a Family Limited Partnership are legal entities which survive you after your death. Property held by a Trust or a Family Limited Partnership is owned by that entity and not by you. Since you no longer own the property, it is not part of your estate at the time of your death. Only property you own at your death is subject to probate, so the assets owned by these entities would not have to go through that process. The instructions for the management of your property are set forth in the Trust and Partnership documents, and the Trust or Partnership assets are managed by Successor Trustees or other Partners in the event of your incapacity or death. In probate, the court oversees the transfer of assets from the deceased to others, but since the assets already belong to these entities there is no need to have the court involved, and the Trust or Partnership operates outside the court’s supervision. By getting a Trust or Family Limited Partnership in place and transferring ownership of particular properties to it, you avoid the need to get a court involved either with a Conservatorship in the event of your incapacity, or probate in the event of your death. A Durable Power of Attorney for Financial Affairs can help your representative deal with property that has not been transferred to a Trust. This document enables your attorney-in-fact to handle your financial affairs and make last minute arrangements should your death be imminent. A common technique used by your attorney-in-fact, who is often your Successor Trustee as well, is to transfer property that is not currently held in your Trust into the Trust, so legal title to the property is held by the Trust at the time of your death. This removes your property from your estate for purposes of probate and puts it in the control of your Successor Trustee. Property can also pass outside of probate if it goes directly to a beneficiary on the death of the deceased. This is true for example of insurance policies, pension plans, and bonds that have a named beneficiary. It’s true of property that is jointly owned with a right of survivorship. On the death of one owner, the other owner(s) own that person’s interest automatically. Bank accounts can also be set up to pass directly to a beneficiary when the person who set up the account dies. These are sometimes called pay-on-death accounts or Totten Trusts. A well coordinated estate plan can not only avoid probate but help you maintain a semblance of control over your property even after your death. Although you can't take it with you, you can tell the deliveryman where to ship it (and how to avoid detours).

Question: What are some typical estate planning documents?

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

(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/Executrix") 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 "Designation of a Patient Advocate”, also called a “Durable Power of Attorney for Health Care" or ”Health Care Proxy” or” Advance 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" (understand the pros and cons of treatment and choose the appropriate one).

(3) A "Living Will" or "Directive 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. This concerns life support services of various kinds, from respiratory assistance to feeding tubes.

(4) A "Durable Power of Attorney for Financial Affairs" 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 "Living Trust" can be used to hold legal title to and provide a mechanism to manage your property. You can select the person or persons you want—often yourself—as the Trustee(s) to carry out the instructions you have set out in the Trust. You can name one or more Successor Trustee(s) to take over if you can no longer act. 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. Most Trusts are "revocable," which allows the person who creates the Trust to make future changes, modifications, and even to terminate it. (If the Trust is "irrevocable", changes, modifications, and termination are very difficult (and sometime impossible), although such Trusts often carry some tax benefits.) Trusts also help you avoid or minimize the expenses, delays and 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 allows 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.