ESTATE PLANNING - WILLS. Your "Estate" is all you own or control. A will is one tool in the larger process of "estate planning." There are specific requirements for preparing and signing wills, established by state law. Basic terms. Will. - In simple terms, this is the written document which provides direction as to how you want the property you own at death to be managed. Most states have statutes which will be used to "fill in the gaps" in an area where the will is not clear. Testator / Testatrix. The person (male/female) who is signing the will expressing their property distribution and other desires. Executor / Executrix. The person (male/female) who is designated in the will as the one responsible for taking the steps necessary to implement the terms of the will, also often referred to as the "personal representative" of the estate. Please note, if you are designated as the executor of an estate, you may decline to serve. Guardian. If you are responsible for a minor (child) or an incompetent person, the guardian is the person you select to take over your care duties. Trustee. If you are creating a trust by your will, or have already created one, you may designate in your will a change of manager for your trust. Probate. Refers to the court proceeding for an estate, debts are settled, and legal title to property is formally passed from the decedent to his/her heirs. The "probate estate" simply refers to any property subject to the authority of the probate court. Assets disposed of outside the probate process are part of the "non-probate estate." Who needs a will? If you die without a will, or other arrangements for your property, care of your children, etc., a Judge will make all such decisions for you, based on applicable local law. For example, if you die without a Will while you are: 1. Married with children: Most states award one-third to one-half of the decedent's property to the surviving spouse, and the remainder to the children, regardless of age. 2. Married with no children: Most states one-third to one-half of the estate to the surviving spouse. The remainder generally goes to the decedent's parent(s), if alive. If both parents are dead, many states split the remainder among the decedent's brothers and sisters. 3. Single person with children: When a single person with children dies without a Will, state laws uniformly provide that the entire estate goes to the children. 4. Single person with no children: In this situation, again, most state laws favor the decedent's parent(s) in the distribution of his/her property. If both parents are deceased, many states divide the property among the brothers and sisters. What cannot a will control? Your will CANNOT control every aspect of your property. Community Property. The term "community property" often comes up in discussions about estate planning (and divorce). It is recognized in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. The general concept is that everything earned and purchased with earnings during a marriage is jointly owned by the spouses. While it is possible to will-away your share of community property, if the surviving spouse objects it may be that a transfer is effectively stopped. Consider: During a long-term marriage where both spouses worked and there are joint investments and investments in just separate names. That fact that only the name of one spouse is on title to property DOES NOT necessarily mean that it is separate property of that spouse, such that it can be given freely in a will. If the husband bought a tract of remote land with marital earnings, titled in just his name, and wanted to leave it in his will to a nephew, could he? Even though the wife's name is not on the property, due to community property she is still legally the owner of a 1/2 interest in the land. If she does not receive a large enough share of other community property, she could object, and potentially become a joint owner with the nephew, or be awarded the husbands share of other community property. Joint Tenants with Rights of Survivorship. (JTWROS) If property is held with the title in this legal format, it is not possible to pass the property by a will. Legally, if you die owning property in a JTWROS title with someone else, at the moment of your death your interest in the property also dies. Predesignated Beneficiaries. Your accounts at financial institutions, life insurance, etc. have probably required you to fill out and sign a form designating a beneficiary for purposes of your account with that institution. If your life insurance policy still shows your parents as beneficiary, and you try to change it by a clause in your will, it will not work. How long is a will valid. In general, if a will was properly prepared and executed for the law of the time and place where executed, it remains valid indefinitely unless revoked. Altered by law. In many jurisdictions, including Arizona, the birth of a child, marriage, or divorce, serves to revoke that Will, at least as regards that person. Codicil. This is a separate document that modifies one or more terms of an earlier executed will, without the necessity of completely rewriting the will. Destruction or Alternation. If the testator destroys the original will, or otherwise marks the will such that it is clear to a Judge that it has been revoked. New will. A standard phrase in a new will is that it revokes all preceding wills. Will Advantages vs. a Trust. For the testator, preparing a will that provides for all property owned, guardianship, etc. can be a short simple process. A general phrase in a will can serve as legal justification for the transfer of any property, anywhere. New wills can be written at the discretion of the testator. A will does not generally pose any barrier to the testator's handling of property after execution of the will, including that the testator may freely dispose of property. The burden of actually changing legal title to property falls on the executor, not the testator. If the estate is under certain limits, the probate process can be a few simple documents. Will Disadvantages vs. a Trust. If real estate is owned in more than one state, it may be necessary to probate the will in every jurisdiction where there is real property. Depending on the size of the estate and the probate rules, probate can take significant time, and impose a trying burden on the executor at what may already be a stressful period. The probate process creates public court documents of the property and its disposition, and even if done without paid legal counsel, involves at the least court fees. Summary. A will is the foundation of the estate planning process, with the capability of legally transferring every aspect of an estate that is not handled in some other manner. But it is just one of many such legal tools. Please do not make any tax or estate planning decisions based solely on the brief outlines presented. Keep in mind, too, that estate planning itself must be seen as but one step in the overall process of "financial planning." This should include risk management and insurance, as well as tax, investment, and retirement planning. You should visit your legal assistance office, or other attorney, accountant, and other trusted professionals.
POWERS OF ATTORNEY.
Your estate is all you own and control. While you are alive and healthy you should expect to handle your affairs yourself. But short of death, you may still reach a point from accident, illness or unavoidable absence where you are physically or mentally incapable of acting for yourself.
In these instances, a durable power of attorney can give someone else authority to make decisions and sign documents on your behalf.
Power of Attorney. This is a document, which you sign, granting to someone else the authority to make decisions for you, and to sign your name, fully binding you to the contract signed just as though you signed it personally.
Principal. The person who signs a document granting the power and authority to someone else to act in their place.
Attorney in Fact. The person (Ignore the word attorney, you DON'T need to be a lawyer) who receives authority to act and sign on behalf of another.
Incapacity. The event which causes you to no longer be capable of taking care of your own affairs. In general statutes would set this as a physical or mental state in which you are not capable of communicating. (i.e. unconscious or in such a diminished mental state that you clearly appear to those around you to not be aware and responding to normal communications) In your document though, you can refine the definition.
Durable. By law in most states, a power of attorney is valid for only so long as you, the person who granted it, remain mentally capable. In those jurisdictions if you want the power to continue in force during incapacity, you must clearly indicate this.
Springing. This refers to setting out terms or preconditions in your power of attorney such that it is NOT valid until your attorney in fact can prove to third parties that the conditions have been met.
What can a Power of Attorney Do? Special and Limited. If you can't be present when household goods are being picked up or delivered, can't take weekday time off to go to motor vehicles, a closing on a house, etc., you can have a power of attorney drafted that authorizes someone else to go in your place and to sign all documents required for just that one transaction. The power would not be valid for any other purpose.
Health Care. You can select in advance someone to make medical decisions for you. In the absence of you making this designation, it may be necessary to have a Court Order before someone could act for you. The Court may put restrictions on your agent (or grant powers) that you would not want, and of course, the Court may PICK someone you would not want.
When you are proactive, you select who makes decisions for you, and you can be as detailed in your instructions as you like, or as broad in granting power as you like.
Child Care. If you have children, and you become incapable of taking them to school, the doctor, or caring for them at home, who fills in for you? In an extreme example, if you're suddenly hospitalized and unconscious, your children may be subjected to being picked up by the state "child protective" office, and placed in a "foster home", even over their objection and the objections of your family and best friends.
You should work out in advance with family or friends who will take care of your children if you are suddenly and temporarily "out of the picture", and most importantly, PUT IT IN WRITING.
General. At the far opposite from special or limited, you can grant a power of attorney that lets someone else do (almost) anything you could. This is a very dangerous document if you do not clearly trust your "attorney in fact", as they COULD give your property away, put you significantly in debt, etc., and all of the documents WOULD be binding on you.
If you grant someone a general power, the limits by state law imposed on what they do that is binding on you would be minimal, typically they could not change your will, change or take out life insurance.
In most states, if you can prove your attorney in fact acted contrary to your best interests, you would be able to sue them for breach of their fiduciary duty. In Arizona, an attorney in fact who acts against your best financial interests would be committing a criminal offense. (Which still doesn't help YOUR situation, if they robbed you and spent the money, which you must repay.)
Revoking (canceling) a Power of Attorney.
Cancellation Date. First, you can put an automatic cancellation date into your power. This "safety" simply makes the document invalid after the set date. It means you will have to keep signing a new document, and reconsidering your designation on a regular basis.
Formal Revocation. If a power of attorney is in effect, and in the possession of your attorney in fact, to revoke it you need to put the revocation in writing, clearing telling you attorney in fact that the power has been revoked. If that person refuses to surrender the document, and uses it after you've revoked it, YOU'RE STILL "ON THE HOOK" for what they do, but if you can prove you told the attorney in fact of the revocation, you've got a clear-cut lawsuit against them, as well as good evidence for a criminal prosecution.
Pocket Revocation. If you're PREPARED the documents, told you attorney in fact where you're keeping them, but NOT actually given the documents out, you can simply destroy the originals.
Summary. A power of attorney is a very useful estate tool, which you can make as broad and all-encompassing as you desire, or extremely narrow in scope and effective time. It allow you to select in advance someone you trust to act in an emergency if you cannot, and make your wishes clear for those times when you cannot speak for yourself. Estate planning is but one step in the overall process of "financial planning." This should include risk management and insurance, as well as tax, investment, and retirement planning. You should visit your legal assistance office, or other attorney, accountant, and other trusted professionals.
ESTATE PLANNING - TRUSTS Your "Estate" is all you own or control. A trust is one tool in the larger process of "estate planning." There are several widespread misconceptions regarding trusts. Use of a trust is NOT a subject of interest only to the wealthy. In fact there are many situations where a trust is appropriate. Despite the "infomercials" presented on TV, and in live seminars, trusts are not a cure-all for estate planning, and they are not necessarily appropriate for everyone. Basic terms. Trust - In simple terms, this is the written document which provides direction to the trustee as to how the property held by the trust is to be managed. Most states have statutes which will be used to "fill in the gaps" in an area where the trust is not clear. Trustee - The person selected to manage the trust. Grantor - The person who creates the trust. Beneficiary - The person for whose benefit trust assets may be used. General types of trusts. Within these types, there are many more options in the management of assets. Living Trust - Created by your voluntary action during your lifetime. (Revocable or Irrevocable) Testamentary Trust - Created by a requirement set out in your will. (Revocable or Irrevocable) Revocable Trust - One where you can change your mind, and withdraw property which you had transferred to the trust.
Irrevocable Trust - One where you CANNOT change your mind. Once property is owned by an irrevocable trust, you and the beneficiary are in most cases firmly bound by the terms set out.
Why use a trust? Provide for your children. Anyone with young children should consider a testamentary trust. This can require that your property (which can include your life insurance, if paid to your estate or your trust) be held for your children's future needs, rather than being immediately available to the children, or to whomever receives guardianship of your minor children. Absent an age restriction set by you, Arizona law would require distribution of each child's share to them at age 18. You can though select essentially any age you want, and set reasonable conditions. For example, you could require everything be held in trust until your child reaches the age of 65, unless they complete a college education, after which they may receive the remainder immediately, thus prompting the child to at least get an education before they embark on a party with their inheritance. Families today may be second, third, etc. marriages for at least one of the spouses. There may be children from prior marriages on both sides, who may be living in the home, or elsewhere with the other parent. In the typical "first thought" will, spouses leave everything to each other. But if the surviving spouse re-marries, or in their will the surviving spouse simply ignores the children of the deceased spouse, the children receive nothing. The children can be protected by leaving property to a spouse in trust, with the property eventually passing to the children. Long Term Care. If you believe you might need nursing home care, and don't have adequate insurance, under current law the government will not pay for your care while you own certain combinations of assets and values. Further, even if a government program does pay, there may be a lien imposed against your property. Trust planning for this possibility is often referred to as a Medicaid Trust. Disability planning. Whether by illness or accident, or just plain old age, any of us may find we are no longer physically or mentally capable of managing our own affairs. If you do not prepare for this in advance, the Court may find you incompetent. In that event, the Judge will appoint a guardian to handle your affairs for you. This person may not necessarily be the individual you would have selected, had you acted earlier. Your guardian will have access and control of your assets, and may use them in a manner contrary to what would otherwise have been your intentions. If however, you had placed your assets into a trust, the guardian would be bound by the terms of the trust. When disability planning is appropriate, the Trust can be a useful tool. Assets in a living Trust are already under the control of a Trustee, who can make financial decisions. If you initially serve as your own trustee, it is imperative that a back-up Trustee be named. Asset Protection in a Lawsuit. People will sue, at times over what may appear to be insignificant issues. Juries will at times make decisions and grant damage awards that are difficult to comprehend. If you are on the losing side of a lawsuit, you may see your lifetime savings and investment disappear to satisfy a judgment against you. Enter the "Living Irrevocable Trust". If, prior to the event upon which a lawsuit is based, you have transferred ownership of your assets to an irrevocable trust, you will probably be found to not be the owner, and the assets held in trust will be exempt from consideration. Depending on the facts, merely having your assets held in the name of the trust may discourage a lawsuit against you. Estate Tax Planning. Whatever you own or control on your death may be subject to federal and/or state "death taxes". As currently written, the law on federal estate taxes provides that amounts exempt from the tax increases each year until 2010. The general discussion in the news is that the federal estate tax "disappears" in 2010. However, despite the news, as worded what disappears in 2010 is any EXEMPTION to the tax. BEWARE OF INFOMERCIALS! If a "living Trust" ad or proposal claims to save death taxes - as opposed to probate "costs" - either it is NOT so "simple," or it is a scam. The assets of any Trust you control are subject to estate taxes, as if no trust existed. Period. Unfunded Trusts. Although an empty Trust can exist, in order to function at all, a Trust must have assets formally transferred to the Trustee. If you want your car, home, bank account, etc., to be held, managed, and passed on by a trust, you must first transfer all titles and ownership to the trust. Trust advantages vs. a Will. If you own real estate in multiple states, a Trust would allow for immediate distribution of the property after death, and avoid the potential need to probate your Will in each state in which property is owned. Probate of a Will takes time - at least several months. Probate records are open, but a Trust document is private unless challenged in court. Trust DISADVANTAGES vs. a Will. You can make arrangements to transfer your property by will with a statement as simple as, "I leave all my property to my favorite niece, Jane Doe". To transfer property by a trust, you must actually transfer title of the property to the name of the trust. If you fail to transfer title to an asset, you STILL need a will to cover the "forgotten" property. The burden is on YOU to keep your transfer's up to date. If you are paying for your legal services, you will probably find that the cost is higher for a trust than for a will. The trust is a separate legal "person". If the trust earns income, you may need to file an income tax return for the trust. Examples of Specialized Trusts. Marital Deduction and Bypass Trust (the "A/B Trust"). This is the tax-planning cornerstone for many combined marital estates (i.e., all property owned by the husband, the wife, and jointly) worth over the federal estate tax exemption amount. It allows the surviving spouse to use the entire estate while they live, yet preserves the maximum amount of exemptions. If you own a home, have some investments, and life insurance, you might be surprised to find you ARE approaching the level where the estate tax would apply. (Although life insurance payouts are not taxed as INCOME tax, unless properly set up, they ARE part of your estate.) Medicaid Trust. This is an IRREVOCABLE trust, which removes the assets you place in it from your direct ownership and control. These assets are therefore unavailable for lien by the government, nursing home, other creditors, etc. This type of trust must meet certain other requirements set out in Medicaid regulations, such as a waiting period. This waiting period requires that 60 months pass (five years) from the date that assets are transferred into the trust, before the government will agree that they are truly beyond your control. If you must enter nursing home care during the 60-month period, the government may refuse to pay until the waiting period has passed. The Life Insurance Trust. Why use a Trust to own insurance policies? First, remember that proceeds from policies you own will be included in your estate, even though paid to a third party. If an irrevocable Trust owns the policy, however, death proceeds can be received by the family income tax-free (as usual), yet not be included in your taxable estate. But a Trust is not necessary to get this result. For example, if a child owns, pays for and is beneficiary of a policy on the life of a parent, he/she can receive the policy proceeds with no tax consequences to anyone. The real value of using a Trust to hold insurance is to provide for the use and management of the policy proceeds according to your wishes. (For example, held to pay for college for your child, or for the old age of your spouse.) The Crummey Trust. (Please no jokes about the name) This Trust takes its name from the court decision in the case of Mr. Crummey versus the IRS. The purpose is to create an estate through annual gifts, made in a way that discourages the beneficiaries from spending the gifts immediately. The simple way to do that is to make outright gifts, and just tell the recipients of your wish that the money be saved for college, for example. If however, you don't think you teenager will spend the money wisely, the trust adds a layer of control. This Trust was "invented" by Crummey's attorney so that his client could make gifts in Trust, but still take advantage of the annual gift tax exclusion from federal gift and estate tax. That is the important feature of the Crummey Trust because gifts to many other kinds of Trusts do not qualify for the $10,000 annual exclusion. Annual gifts are a great way to slowly reduce the taxable estate, while passing along wealth to the next generation. As long as the gifts are made in amounts under the annual limit none of the estate owner's overall estate tax shelter is used by the gifts. Yes, the federal government imposes a pile of paperwork if you give any one individual "too much" in any given year. One faces special problems when making gifts in Trust, however. The annual tax exclusion pertains only to gifts of a present interest in property (e. g., cash, free and clear) - not a future interest. It means that a gift to many Trusts would NOT qualify for the tax exclusion: Since the terms of many Trusts would not allow the beneficiaries to have unrestricted, immediate access to that gift, it would be a non-qualifying gift of a future interest. The Crummey Trust is intended to get around this problem. Gifts are made to the Trust, which is irrevocable. The Crummey Trust beneficiaries are given only a short period of time each year (e.g., 30 days) in which they are permitted by the Trust document to withdraw the gift money from the Trust, free and clear, for completely unrestricted use. The Grantor hopes they will not do that - and is free to say so - but there can be no formal agreement that the gift money will not be withdrawn. The Charitable Remainder Trust (CRT). Here, the Grantor has a charitable motive and wants a big current income tax deduction, too. Often, however, the Grantor does not want to give up all benefit of the property to be donated. If the Grantor needs lifetime income, a CRT, which is irrevocable, can be an extremely useful tool. This is a very complex topic, with many variations on a common theme. Great flexibility is possible, but very competent advice is required. Tax laws and rulings pertaining to CRTs will always be subject to changes that could drastically affect what was a well-conceived arrangement when drafted. The Qualified Terminable Interest in Property (QTIP) Trust. This is often used for those entering second marriages with substantial estates already. It provides lifetime income for the surviving current spouse, while leaving the remainder of Trust property to the children of a previous marriage (or others). A bequest to a QTIP Trust, by law, "qualifies" for the unlimited marital deduction for estate tax purposes, even though the surviving spouse's rights to Trust assets are less than total. Note that all Trust assets are included in valuing the survivor's estate for tax purposes, just as they would be if left outright to the survivor. The Grantor Retained Annuity Trust (GRAT). This is an irrevocable Trust, good for shifting some of the value of an asset out of the estate. The Grantor places assets in Trust for the ultimate benefit of the children (i.e., they have a remainder interest), but retains the right to an annual pay out for a period of years. Example: Grantor creates a GRAT and transfers $300,000 in mutual fund shares into it. The Trust provides that the Grantor will get a $6,000 annual pay out for 15 years, after which the Trustee will make a complete and final distribution of the shares to the Grantor's children. At this point, there has been a taxable gift - but not of the full $300,000, because there are "strings" attached. After all, the money is not available to the children for 15 years. This is how tax savings are possible. At the end of 15 years - IF the Grantor is still alive - the value of the mutual fund shares, including any price increase, will have been removed from Grantor's estate and will not be subject to tax upon his death. The GRAT is also a good way for the owner of a growing, closely held business to retain an income for himself, while passing the business along to his heirs before any more (taxable) growth occurs. The Qualified Personal Residence Trust (QPRT). This is an irrevocable Trust, similar in concept to a GRAT, with a confusing name. It is a good method of shifting the value of the family home out of your estate, for the purpose of lowering the ultimate estate tax. The house is placed into Trust for the future benefit of the children. The value today of this remainder interest is a taxable gift. As with a GRAT, the Grantor accepts some federal gift tax liability now, to save more on federal estate tax later. What the Grantor retains here is not income, but the right to live in the house for a term of years. If the Grantor outlives that term, the value of the house - plus any property appreciation since it was transferred to the Trust - passes to the children with no additional federal estate tax. As with a GRAT, if the Grantor does not survive the term of the Trust, it has no tax effect. Two significant drawbacks: First, the children will have received the house by lifetime gift, not inheritance, so there is no step-up in the tax basis of the property. Secondly, if the Grantor does survive, he/she must start paying the children fair market rent, or the IRS might look at this as a sham transaction. Summary. Many complex issues are involved in estate planning. As mentioned above, a trust may be an appropriate tool to use in your estate, but it is just one of many such legal tools. Please do not make any tax or estate planning decisions based solely on the brief outlines presented. Keep in mind, too, that estate planning itself must be seen as but one step in the overall process of "financial planning." This should include risk management and insurance, as well as tax, investment, and retirement planning. You should visit your legal assistance office, or other attorney, accountant, and other trusted professionals.