Estate Planning has three parts in its definition. First, estate planning is controlling your assets while you're are alive and well. Most individuals prefer to be in charge of their assets as long as they are able. However, many individuals prefer to use a financial advisor to make the most of their investments. Second, estate planning is preparing for a disability of yourself or a loved one. This planning may take some legal documents and advice in order to make the process as easy as possible. The documents and their functions will be discussed below as many of them serve a dual role during disability and after death. Finally, estate planning is legally arranging to give what you have, to those you want to receive it, when and how you want them to receive it, with the lowest possible cost and difficulty for you and your family. The many legal documents mentioned below explain how they can be used to accomplish your goals for these three areas of estate planning.
WHO SHOULD PLAN?
Everyone, single or married, who has accumulated any assets and wishes to determine how those assets will be managed in the event of incapacity, or distributed at the time of death. No estate is too small for planning. It is especially important if you have minor or special needs children or grandchildren; if you wish to control how your assets will be managed or transferred; or if you want to save estate taxes and probate costs.
WHAT IF MY ESTATE IS NOT VERY LARGE?
You should still plan. Otherwise, your estate is likely to go through the probate court and the statutes of Minnesota will determine who will receive your assets. Additionally, if you experience incapacity in your lifetime, the court may have to appoint someone to care for you through the guardianship process.
HOW DO I KNOW IF I NEED ESTATE TAX PLANNING?
The federal tax laws allow each of us a tax credit to protect a portion of our estate against the estate tax. In 2009, any individual can protect the first $3.5 million of their estate, and, if properly planned, a couple can easily protect up to $7 million from federal estate taxes. In many states like Minnesota there is a separate state "death tax" or estate tax. Although the tax rates are much less than the federal government, individuals with estates of over $1 Million need to do special planning to avoid paying unnecessary death tax. For estates larger than $2 Million there are advanced planning techniques that minimize taxes.
NOTE: The Federal Credit Equivalent amount is scheduled to increase and then become unlimited in the next two years, but returns to $1 Million per person, in the year 2011.
HOW MUCH WILL PLANNING MY ESTATE COST?
Planning discussions and preparation of basic Estate Planning trust documents often take several weeks to complete. There is an enormous range of available types of planning and fees. At our office, fees for this work generally range between $500-$600 for simple will planning and $2,500- $5,000 for trust planning; all depending on the complexity of your wishes, and may be several thousand dollars more depending on the scope of work. Estate Planning documents have significant legal and tax consequences. You should consult a qualified, experienced estate planning attorney who can customize your plan to meet your personal goals and objectives.
WHEN SHOULD I PLAN?
Now! Estate planning is done in order to prepare for the event of an injury or illness resulting in incapacity or death. None of us likes to think about our own mortality, or even the possibility of becoming incapacitated. That is why so many families are caught off guard and unprepared when incapacity or death strikes. You can only plan your estate before these events occur. Afterward, it is too late. Estate planning is one of the most thoughtful and considerate gifts you can give to your family.
WHAT IS AN ESTATE?
Everything you own. This includes life insurance, business interests, personal property, real estate and retirement plans. The "value" of your estate is determined by what the "fair market value" of the assets is.
WHAT IS PROBATE?
Probate is the public, court imposed legal process of protecting creditors, changing title and managing assets for people who have died. The assets that are required to pass through probate are those owned in your individual names on death or that pass through a Will. This means, if a Will is used it is required to go through probate. Most individuals choose to avoid probate to avoid the costs, publicity and difficulty it takes to go through the process. Although Minnesota attorneys are required to charge a reasonable fee based upon the time and difficulty of the case, most probates cost between 2% to 3% of the total value of the probate estate. Owning property in another state will require multiple probates.
WHAT IS A WILL?
The legal document that advises the probate court about a decedent's wishes for their choice of personal representative of the estate (once known as executor) and the distribution of their assets. A will is only effective after the willmaker's death, and a will must be probated.
MAY I AVOID PROBATE WITHOUT A TRUST?
Certain forms of ownership transfer property automatically on death. The most commonly used are beneficiary designations, transfer on death and joint tenancy. Both can cause unforeseen results and unanticipated taxes, and generally only postpone probate until the second spouse dies. Although these both will help to avoid the first probate, they are not recommended by estate planning attorneys in most circumstances.
WHAT IS A TRUST? Part A
A Trust is a legal document that provides instructions to a personally chosen trustee on how to manage and distribute the estate. This trustee is often a family member but may be a professional company or individual. A Living Trust is established during lifetime and is usually revocable and amendable. It avoids probate and can provide instructions for management of the estate in the event of death or incapacity. A Testamentary Trust is established as a part of a will, but like a will, is only effective on death and must also be probated. Special kinds of trusts can be used to provide for children, fund a charitable gift, use life insurance to replace wealth that will be lost to estate taxes, comply with tax law requirements to protect specific parts of the estate for heirs, protect the use of the estate for spouses who are not U.S. citizens, or any other legal purpose that the creator of the trust might wish.
WHAT IS A TRUST? Part B
When you create a trust, you (the Trustmaker) transfer your property into the name of the trust, to be managed by yourself (the Trustee) during your lifetime for the benefit of yourself or someone else (the Beneficiary). In a Living Trust you are generally the Trustmaker, Trustee and Beneficiary to begin with so that you retain total control over your assets. However, at the time of your death, if the trust is then the owner of everything in the estate, there is nothing to probate and that process is avoided. Your Successor Trustee simply follows your instructions for further managing and distributing your estate. A revocable Living Trust does not require any special or additional tax filings during your lifetime, and can generally be revoked or amended at any time.
DURABLE POWERS OF ATTORNEY
A Durable Power of Attorney authorizes someone to act on your behalf while you are alive, and if for some reason, you are not available, or capable of acting on your own behalf. The person appointed to act for you is called your attorney-in-fact or agent. There are basically two types of powers of attorney. A Statutory Power of Attorney authorizes the agent to act on your behalf immediately and in any way they choose. Also, Statutory Powers of Attorney can be limited by the state government changing the authority given in the statute. The second type, A Common Law Power of Attorney, authorizes the agent to do virtually anything you could do as well, but your agent may be limited to only using it if your are disabled. Most Elder Law Attorneys prefer to use the common law power of attorney for its flexibility and because it cannot be changed by a legislator's whim.
HEALTH CARE DIRECTIVE
A Health Care Directive, sometimes called a Living Will, is intended to be a legal document stating your preferences for health care decisions. It is most important for your end of life decisions. There is nothing about the Health Care Directive that is mandatory, or that requires anyone to do or not do anything. The person(s) you name as Health Care Agent, must follow your requirements about life support measures as well as any other health care decisions. It is very important that you discuss your preferences about this subject with your family now, when there is no crisis, rather than having them guess about what you would want. A new law called HIPAA (essentially the Health Care Information Privacy Act) creates the need for many people's Health Care Directives to be updated to authorize your agent to have access to your private medical information.
Beneficiary Designations determine how certain assets will be distributed at the time of your death. These are most often used with life insurance policies, annuities, IRAs and other retirement plans. You should be very careful with beneficiary designations because improper designations can result in assets being distributed to unintended persons, and can cause significant additional taxes to be due.
WILL or REVOCABLE LIVING TRUST
All properly planned estates should include either a Will or a Revocable Living Trust to describe who will benefit from the estate, and how the heirs are to receive their inheritance. There is no tax advantage to either a Will or a Living Trust. Trust tax planning can be built into both Wills and Living trusts. The only significant difference between the two is that a Will requires probate, and a Living Trust that holds all of the decedent's property avoids probate. A properly written Living Trust will also plan for you if you become disabled, helping to avoid guardianship
While a Will can do the job, if your most important goals in estate planning is to make the process of transferring your estate to your family and as easy and hassle free as possible, then the Living Trust is generally the better choice.
PREPARING TO MEET WITH YOUR ESTATE PLANNING ATTORNEY
All legal estate planning should be done by a licensed and qualified estate planning attorney. When you are preparing for your initial meeting with your estate planning attorney, you should be prepared with the following:
A list of all real estate and all other assets, with an estimate of the current fair market value.
Copies of any existing estate planning documents, i.e. wills, community property agreements, durable powers of attorney, and any existing trust documents.
A list of all insurance policies showing face amounts, cash values, named insured, and the names of all beneficiaries and contingent beneficiaries.
Copies of any business documents such as partnership agreements or stock purchase agreements.
Account and Beneficiary Designation information on any retirement plans and insurance policies.
PREPARING TO MEET WITH YOUR ESTATE PLANNING ATTORNEY (part 2)
You might also want to think about the following:
What are your goals, aspirations, needs and desires in doing this planning? You will want to design the plan so that it specifically satisfies those purposes.
Who will you want as your successor Trustee of your trust, or as Personal Representative in the case of a Will? You can select anyone you choose.
Who do wish to appoint as a guardian if you have minor children?
Do any of your children or grandchildren have special educational, medical or physical needs?
Are there any special planning needs or creditor protection issues to address for emotionally or financially unstable children or heirs, or for children from previous marriages?
Are there any Charities or others you wish to provide for, other than immediate family?