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Q: What is estate planning?
A: Estate planning is a process that accomplishes the following objectives:
• Controlling property while you are alive and well
• Taking care of yourself and your loved ones in the event of a disability
• Giving what you have to whom you want, when you want and how you want upon your death.
Without a good estate plan, you and your family may lose control over your property, suffer through unnecessary court proceedings, and pay excessive taxes. The lack of an estate plan may also deprive your family of the opportunity to receive from you a lasting legacy designed to bring your family closer together.
Q: What happens if you do not plan your estate?A: If you do not plan your estate correctly, your assets may pass to beneficiaries in accordance with state law, not in accordance with your wishes. The court system will be in charge of choosing your executor and the guardians for your minor children. The court will have jurisdiction over the assets inherited by minor children until they reach the age of 18, at which time each the child will receive full control over the assets, without guidance or advice from others.
Q: What are some common estate planning documents?
A: Common estate planning documents include the following:
Will – A will is a written document that tells the court how to divide your property at the time of death. It also tells the court who should be the guardian for your minor children and your executor.
Trust – A trust is a written legal document that provides instructions on how the property titled in trust’s name is to be managed and distributed. Trusts have the advantages of increased privacy, increased asset protection for surviving spouses and children, planning in the event of a disability, legitimate tax avoidance and probate avoidance
Durable Power of Attorney – A durable power of attorney is a written document wherein you (“principal”) appoint someone else (“agent”) to have the authority to act on your behalf. The agent will have the authority to act even in the event you become disabled. The authority granted to the agent can include all financial transactions, managing investments and making gifts.
Health Care Power of Attorney – A health care power of attorney is a written document wherein you (“principal”) appoint someone else (“agent”) to have the authority to make health care decisions on your behalf when the you cannot make them yourself. Your agent should have a clear understanding of your views with regard to continuing health care decisions under certain circumstances.
Living Will – A living will is a document that instructs your physicians regarding specific types of medical treatment that you do and do not want to receive. They are mainly used by those who desire to authorize the withdrawal of life sustaining treatment if the treatment is simply prolonging life without any hope of a meaningful recovery.
HIPAA Authorization – The Health Insurance Portability and Accountability Act of 1996 (HIPAA) ensures the privacy of your health care information. These strict privacy rules may restrict your loved ones from obtaining access to this information when necessary. A HIPAA Authorization will allow the individuals you designate to obtain this information.</div
Q: What is a living trust?
A: A living trust is a written legal document that provides instructions on how property titled in the trust’s name is to be managed. There are generally three parties involved with trusts:
1. Trustmaker – the person who makes the trust
2. Trustee – the person on institution entrusted by the Trustmaker to carry out the trust’s instructions
3. Beneficiary – the person who benefits from the trust
Living trusts go into legal effect upon signing, when the Trustmaker is still alive. This distinguishes them from testamentary trusts, which become legally effective when the Trustmaker dies.
Q: What are the advantages of having a Living Trust?A: Like a Will, a Living Trust is a legal document that provides for the management and distribution of your assets after you pass away. However, a Living Trust has certain advantages when compared to a Will. A Living Trust allows for the immediate transfer of assets after death without court interference. It also allows for the management of your affairs in case of incapacity, without the need for a guardianship or conservatorship process. With a properly funded Living Trust, there is no need to undergo a potentially expensive and time-consuming public probate process. In short, a well-thought out estate plan using a Living Trust can provide your loved ones with the ability to administer your estate privately, with more flexibility and in an efficient and low-cost manner.
Q: Will I lose control over my assets if I establish a Living Trust?A: Absolutely not! During your lifetime when you are mentally competent, you have complete control over all your assets. You may engage in any transaction as the trustee of your Trust that you could before you had a Living Trust. There are no changes in your income taxes. If you filed a 1040 before you had a trust, you continue to file a 1040 when you have a Living Trust. There are no new Tax Identification Numbers to obtain. The Living Trust can be modified at any time or it can be completely revoked if you so desire. Upon your incapacity, your loved ones able to act on your behalf, as successor trustees may, according to the instructions you have laid out in the Living Trust. Upon your passing, the Trust becomes irrevocable so that no one can change your testamentary wishes. For married couples, the surviving spouse still has total control over his or her share of assets after its transfer to the survivor’s trust, and the trust becomes irrevocable only as to the deceased spouse’s share.
Q: What assets are left outside of my trust?A: Assets with beneficiary designations such as a life insurance policy or annuity payable directly to a named beneficiary need not be transferred to your Living Trust. Furthermore, money from IRAs, Keoghs, 401(k) accounts and most other retirement accounts transfer automatically, outside probate, to the persons named as beneficiaries. However, when you do your estate planning, it is important to seek the counsel of an experienced attorney who is familiar with the intricate regulations of retirement accounts and can coordinate the appropriate beneficiary designations with your overall estate plan.
Q: If I transfer real estate to my trust can the bank call my loan?A: In most cases, no. Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your Living Trust as long as you continue to live in that home. The only exception to the federal law, enacted as part of the 1982 Garn-St. Germain Act is that it does not provide protection for residential real estate with more than five dwelling units. However, we find that most clients who do own residential property with more than five dwelling units tend to own them through a business entity and not directly in their individual names and hence are not concerned with the five dwelling exception.
Q: Why do I need a Pour Over Will if I have a Living Trust?A: A Pour-Over Will is used first to name a guardian for minor children. Second, it protects against intestacy in the event any assets have not been transferred into the trust at the death of the Trustmaker/Owner. It will also invalidate any previous Wills which you may have executed. Its function is to “pour” any assets left out of the trust into it so they are ultimately distributed according to the terms of the trust.
Q: Will my estate be subject to death taxes?A: There are two types of death taxes that you should be concerned about: federal estate taxes and state estate taxes. The federal estate tax is computed as a percentage of your net estate. Your net taxable estate is comprised of all assets you own or control minus certain deductions. Such deductions can be for charitable donations as well as an “applicable exclusion amount”. The applicable exclusion amount varies from year to year: In the year 2009, it is set at $3,500,000 per year, which means that you may pass on up to that amount in those years without being subject to any federal estate tax. The federal estate tax is “repealed” for the year 2010, but the repeal “sunsets” on December 31, 2010 and the applicable exclusion amount goes back to $1,000,000 for 2011 and onward. Even if you believe that that you may not be affected by the federal estate tax, you still need to determine whether you may be subject to state estate taxes and whether you will have a taxable estate in the future as your assets appreciate in value. You should regularly review your estate plan with an experienced estate planning attorney to make adjustments to reflect changes in the tax laws as well as shifts in your individual circumstances.
Q: What is my taxable estate?A: Your taxable estate comprises of the total value of your assets including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies – minus liabilities and deductions such as funeral expenses paid out of the estate, debts owed by you at the time of death, bequests to charities and value of the assets passed on to your U.S. citizen spouse. The taxes imposed on the taxable portion of the estate are then paid out of the estate itself before distribution to your beneficiaries.
Q: What is the unlimited marital deduction?A: The federal government allows every married individual to give an unlimited amount of assets either by gift or bequest, to his or her spouse without the imposition of any federal gift or estate taxes. In effect, the unlimited marital deduction allows married couples to delay the payment of estate taxes at the passing of the first spouse because at the death of the surviving spouse, all assets in the estate over applicable exclusion amount ($2,000,000 in 2007) will be included in the survivor’s taxable estate. It is important to keep in mind that the unlimited marital deduction is only available to surviving spouses who are United States citizens.
Q: What is a Credit Shelter or A/B Trust and how does it work?A: A Credit Shelter Trust, also known as a Bypass or A/B Trust is used to eliminate or reduce federal estate taxes and is typically used by a married couple whose estate exceeds the amount exempt from federal estate tax. For example, in 2009, every individual is entitled to an estate tax exemption on the first $3.5 million of their assets.
Because of the Unlimited Marital Deduction, a married person may leave an unlimited amount of assets to his or her spouse, free of federal estate taxes and without using up any of his or her estate tax exemption. However, for individuals with substantial assets, the Unlimited Marital Deduction does not eliminate estate taxes, but simply works to delay them. This is because when the second spouse dies with an estate worth more than the exemption amount, his or her estate is then subject to estate tax on the amount exceeding the exemption. Meanwhile, the first spouse’s estate tax credit was unused and, in effect, wasted. The purpose of a Credit Shelter Trust is to prevent this scenario. Upon the death of the first spouse, the Credit Shelter Trust establishes a separate, irrevocable trust with the deceased spouse’s share of the trust’s assets. The surviving spouse is the beneficiary of this trust, with the children as beneficiaries of the remaining interest. This irrevocable trust is funded to the extent of the first spouse’s exemption. Thus, the amount in the irrevocable trust is not subject to estate taxes on the death of the first spouse, and the trust takes full advantage of the first spouse’s estate tax credit. Special language in the trust provides limited control of the trust assets to the surviving spouse which prevents the assets in that trust from becoming subject to federal estate taxation, even if the value of the trust goes on to exceed the exemption amount by the time the surviving spouse dies.
Even if an estate might not be exposed to estate taxes, a credit shelter trust is often used to provide protection from creditors and the remarriage of the surviving spouse.
Q: What is a Qualified Personal Residence Trust (QPRT) and how does it work?A: Our homes are often our most valuable assets and hence one of the largest components of our taxable estate. A Qualified Personal Residence Trust, or a QPRT (pronounced “cue-pert”) allows you to give away your house or vacation home at a great discount, freeze its value for estate tax purposes, and still continue to live in it. Here is how it works: You transfer the title to your house to the QPRT (usually for the benefit of your family members), reserving the right to live in the house for a specified number of years. If you live to the end of the specified period, the house (as well as any appreciation in its value since the transfer) passes to your children or other beneficiaries free of any additional estate or gift taxes. After the end of the specified period, you may continue to live in the home but you must pay rent to your family or designated beneficiary in order to avoid inclusion of the residence in your estate. This is may be an added benefit as it serves to further reduce the value of your taxable estate, though the rent income does have income tax consequences for your family. If you die before the end of the period, the full value of the house will be included in your estate for estate tax purposes, though in most cases you are no worse off than you would have been had you not established a QPRT. An added benefit of the QPRT is that it also serves as an excellent asset/creditor protection vehicle since you no longer technically own the property once the trust is established.
Q: What is an Irrevocable Life Insurance Trust and how does it work?A: There is a common misconception that life insurance proceeds are not subject to estate tax. While the proceeds are received by your loved ones free of any income taxes, they are countable as part of your taxable estate and therefore your loved ones can lose over forty percent of its value to federal estate taxes. An Irrevocable Life Insurance Trust keeps the death benefits of your life insurance policy outside your estate so that they are not subject to estate taxes. There are many options available when setting up an ILIT. For example, ILITs can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage. You can also provide for distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child.
Q: What is a Family Limited Partnership and how does it work?A: A Family Limited Partnership (FLP) is simply a form of a limited partnership among members of a family. A limited partnership is one which has both general partners (who control management) and limited partners (who are passive investors). General partners bear unlimited personal liability for partnership obligations, while limited partners have no liability beyond their capital contributions. Typically, the partnership is formed by the older generation family members who contribute assets to the partnership in return for a small general partnership interest and a large limited partnership interest. Then the limited partnership interests are transferred to their children and/or grandchildren, while retaining the general partnership interests that control the partnership.