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Frequently
Asked Questions - FAQ's
- What
is estate planning?
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What
is an estate?
-
What
are some typical estate planning documents?
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What
is Probate?
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How can an
estate plan avoid probate of my estate?
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What are
estate taxes?
-
How can
an estate plan avoid or minimize estate taxes?
-
What is a Bypass
Trust?
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What is a
Crummey Trust?
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What is a Special
Needs Trust?
-
What
is a conservatorship?
-
How
can an estate plan avoid a conservatorship proceeding?
- What
is Elder Care Law & Planning?
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What
is Estate Planning?
Estate planning is the process of accumulating, managing, and
disposing of your property to maximize the goals of the estate
owner. The various goals of estate planning include making sure
the greatest amount of the owner’s property passes to
the owner's intended beneficiaries, including paying the least
amount of taxes and avoiding steep probate and executor fees
and years of probate court involvement. Additional goals include
providing for and designating guardians for minor children,
planning for incapacity, medical care, privacy protection, and
protection against creditor claims.
On the personal side, a good estate plan includes directions
to carry out your wishes regarding health care matters, so that
if you ever are unable to make medical decisions yourself, someone
you select would do that for you according to the guidelines
you set, including authorizing heroic measures and other end-of-life
decisions. |
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What
is an Estate?
The term "estate" consists of all the property a person
owns or controls, whether 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: |
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(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, and
(7) all claims you have against
others, such as for the pain and suffering from an auto
accident. |
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What
are some typical estate planning documents?
Several of the following documents are typically used as part
of the estate planning process: |
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Will.
A Will, sometimes called a "Last Will and Testament",
is used to distribute property you own at your death to
the person(s) and/or organization(s) you want to have
it. A Will also names someone you select to be your Personal
Representative (or "Executor") to carry out
your instructions. A Will only becomes effective upon
your death, and must be probated with the court, and subject
to executor fees, legal fees, and potentially unnecessary
taxes. Probate also is a very long process taking 1-3
years to complete. Living Trust.
A "Living Trust" is used to hold your property
and provide a mechanism to manage and distribute property
during your life and upon your death. You can select
the person or persons you want -- often even yourself
-- as the Trustee(s) to carry out the instructions you
want in the Trust and name one or more Successor Trustees
to take over if you cannot. 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 allow you to avoid or
minimize the expenses, delays and publicity of probate.
Advanced Health Care Directive.
An "Advanced Health Care Directive” allows
you to appoint a person or persons to make health care
decisions for you in the event you cannot such as in
the case of your permanent incapacity; for example an
irreversible coma or persistent vegetative state. A
health care directive also provides your stated wishes
and instructions regarding the nature and extent of
the care you want should you suffer permanent incapacity
as well as end of life decisions. A health care directive
also allows one to provide other wishes as it pertains
to making anatomical gifts, donating parts of your body,
authorizing an autopsy, and specifying burial or cremation
arrangements.
Living Will. 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. The Living Will is an
inferior document to the Advanced Health Care Directive
which allows greater flexibility and powers.
Durable Power of Attorney for Assets.
A "Durable Power of Attorney for Assets" allows
you to appoint a person or persons to act for you and
handle financial matters should you be unable or perhaps
unavailable to do so. These powers can be immediate,
or “springing” by allowing a person or persons
to act for you in financial matters such as when two
licensed physicians state you are mentally incapable
of doing so.
Nomination of Guardianship.
A “Nomination of Guardianship” document
is a comprehensive document that allows you to nominate
individuals to serve as the guardian of your minor children.
The guardian can be nominated to handle the personal
care of your minor children or the assets set-aside
for your minor children or both. In the Guardianship
document you can also provide specific instructions
concerning, medical insurance for your minor children,
moving out of state, religion, contact with other family
members, et cetera. |
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What
is Probate?
Probate is the legal process with the court by which your property
is transferred from your estate to your beneficiaries upon your
death. Since you can't take it with you, the court determines
who gets it.
If you die with a Will ("testate"), the probate court
determines if the Will is valid, hears any objections to the
Will, orders that creditors be paid and supervises the process
to assure that property remaining is distributed in accordance
with the terms and conditions of the Will.
If you die without a Will ("intestate"), the probate
court appoints a person to receive all claims against the estate,
pay creditors and then distribute all remaining property in
accordance with the laws of the state. The major difference
between dying testate and dying intestate is that an intestate
estate is distributed to beneficiaries in accordance with the
distribution plan established by state law which may differ
considerably from what you want; a testate estate (after payment
of debts, taxes and costs of administration) is distributed
in accordance with the instructions you provided in your Will.
The cost of probate is set by state law. Below is a schedule
of charges and costs to probate an estate in California. The
probate and executor fees are calculated as a percentage of
the gross value of your property. Gross value is the total value
before deduction of any debts or liabilities. This means if
you own a home worth $500,000 and carry a mortgage of $400,000
you are charged a percentage of $500,000 which could completely
wipe out the net value ($100,000) of the home.
Probate is also a public proceeding where private details of
your life and property are disclosed to the public.
The fees listed below are the California statutory fees used
to compensate attorneys and executors in probate cases based
on the gross value of the estate.
In addition to the fees shown below, there are filing fees charged
by the Superior Court, appraisal costs, and extraordinary legal
fees are routinely added at the attorney’s hourly rate
depending on the nature of the work performed. |
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| $200,000 |
$14,000 |
| $300,000 |
$18,000 |
| $400,000 |
$22,000 |
| $500,000 |
$26,000 |
| $600,000 |
$30,000 |
| $700,000 |
$34,000 |
| $800,000 |
$42,000 |
| $1,000,000 |
$46,000 |
| $2,000,000 |
$66,000 |
| $4,000,000 |
$106,000 |
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How
can an estate plan avoid probate of my estate?
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. Property placed in your Trust is not
part of your estate at the time of your death. The instructions
for the management and distribution of your property are set
forth in the Trust, and carried out by your Successor Trustees
in the event of your incapacity or death; there is no need to
have the court grant authority to someone. By getting a Trust
in place and transferring ownership of particular properties
to it, you avoid the need to get a court involved with a Conservatorship
in the event of your incapacity, or probate in the event of
your death. A well coordinated estate plan can help you maintain
a semblance of control over your property even after your death. |
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What
are estate taxes?
Estate
taxes are taxes calculated against the net value of your estate.
These taxes are in addition to probate and executor fees covered
in the preceding sections. Unlike probate and executor fees,
estate taxes are charged as a percentage of the net value of
your estate. Below is a schedule of projected estate taxes on
various size estates as of 2006, 2007 and 2008. |
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| $2,500,000 |
$230,000 |
| $3,000,000 |
$460,000 |
| $3,500,000 |
$690,000 |
| $4,000,000 |
$920,000 |
| $4,500,000 |
$1,150,000 |
| $5,000,000 |
$1,380,000 |
| $6,000,000 |
$1,840,000 |
| $7,000,000 |
$2,300,000 |
| $8,000,000 |
$2,760,000 |
| $9,000,000 |
$3,220,000 |
| $10,000,000 |
$3,680,000 |
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2011, the estate taxes shown in the table above will increase
dramatically, unless Congress passes legislation to renew the
current estate tax system. Of course, it is impossible to predict
what Congress will do at that time. Therefore, it is important
to consider all possibilities and contingencies when planning
your estate. |
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How
can an estate plan avoid or minimize estate taxes?
Everyone gets a "credit"
against Federal Estate Taxes on an exemption amount of $2 million
in 2006, 2007 and 2008. (Unless previously used up, in whole
or in part, as a result of gifts of more than $12,000 to any
person in any year starting in 2006. Individuals and married
couples with a total estate value less than the current exemption
level don't have to worry about Federal Estate or Gift Tax (the
exemption amount slowly increases in steps to $3.5 in the year
2009 but then drops back to $1 million when the estate tax is
reinstated in 2011).
For those who are married, there is an unlimited marital deduction.
All estate taxes can be avoided upon the death of the first
spouse to die. However, the surviving spouse would have to remarry
and give his/her entire estate to the new spouse in order to
get another unlimited marital deduction. Most people would rather
their children or other relatives benefit from the estate than
a new spouse and his/her family.
An estate plan can take advantage of certain tax avoidance techniques
for those who have accumulated some wealth; this gets more of
your property to your intended beneficiaries and less to the
federal government.
By using a By-pass Trust at your death to hold property for
your children but enable it to provide for your surviving spouse
during his/her lifetime. This enables you to place up to $2,000,000
(or the current exemption amount) in a Trust for the benefit
of your surviving spouse and children (which will not be subject
to estate tax upon the death of your surviving spouse). Coupled
with your surviving spouse's estate and gift tax credit, this
enables your spouse and you to send up to $4,000,000 (or the
applicable exemption level in that calendar year) to your children
free from Federal Estate and Gift Tax which would translate
into a huge tax savings.
Additionally, by utilizing Irrevocable Life Insurance Trusts
and/or devising a gift program employing other “Crummey”
Trusts it is possible to savings hundreds of thousands more
in estate taxes. |
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What
is a Bypass Trust?
A
bypass trust is the same as a Living Trust except that it provides
greater estate tax savings. A bypass trust is particularly useful
for spouses who plan their estates together. By leaving property
to each other in bypass trust form, they can guarantee that
the property will only be taxed once between the two of them.
Each person can pass $2,000,000 (the exclusionary amount in
2006) free of estate taxes. However, in a Living Trust when
the first spouse dies all of the property typically passes to
the surviving spouse. Then, when the surviving spouse dies the
property is typically passed to children or other family members
and friends. As a result, the first spouse to die did not use
his or her $2,000,000 exclusionary amount and when the second
spouse dies they can only exclude their own $2,000,000 exclusionary
amount. A bypass trust is set-up to utilize both spouses exclusionary
amounts so that they can pass up to $4,000,000 without paying
any estate taxes.
To effectively save taxes, a bypass trust must follow certain
rules laid out by the IRS. Let's suppose your will sets up a
bypass trust for your husband, and you die first. In order to
keep the trust from being subject to estate tax when your spouse
dies, the following conditions must be placed on the trust: |
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You
must limit your spouses's power to access the trust during
their lifetime.
Your spouse must not have an unrestricted right to withdraw
principal on a portion of the trust assets. However, they
do have the unrestricted right to withdraw principal to
provide for his health, education, maintenance, or support,
in any amount up to the whole of the trust estate, and
they can also have the right to withdraw up to $5,000
of principal per year for any purpose, or 5% of the total
principal, whichever is greater.
You can also give your spouse the unrestricted right to
all income from the trust property (e.g., interest, dividends,
etc.), and you can appoint your spouse. As trustee, they
would have full discretion to decide whether principal
is needed for their "maintenance" or "support."
Thus, this condition is ultimately quite flexible.
You must limit your spouse's power to
distribute trust assets upon their death.
Except as provided above, your spouse cannot have the
right to give the trust assets in a portion of the trust
to themselves, their creditors, their estate, or their
estate's creditors. You can, however, give your spouse
the right to name in their will specific persons who will
succeed to the trust upon their death. For example, you
could authorize your spouse to leave the trust to any
of your nieces and nephews, or to divide it as they please
among your children. Alternately, you can specify who
gets the trust next and leave your spouse no discretion.
Although a bypass trust can be very flexible in practice,
it is critical that the trust be drafted with absolute
precision. The IRS has specified the words that may be
used in a bypass trust, and if these words aren't duplicated
perfectly, the trust might not be excluded from tax in
the second estate. Even the slightest drafting error can
cost hundreds of thousands of dollars in taxes, so be
sure your bypass trust is being drafted by an attorney
who is knowledgeable about federal tax law.
What
is a life insurance trust?
A life insurance trust is a trust that
is set up for the purpose of owning a life insurance policy.
If the insured is the owner of the policy, the proceeds
of the policy will be subject to estate tax when he dies.
But if he transfers ownership to a life insurance trust,
the proceeds will be completely free of estate tax. (The
proceeds will be exempt from income tax either way.)
Given the current estate tax rate of 46%, a life insurance
trust can save hundreds of thousands of dollars in estate
taxes. However, there are several drawbacks to such an
arrangement:
You can't change the
beneficiary of the policy.
The insured must give up the right to
change the beneficiary of the policy (the trust itself
will be the beneficiary). The trustee alone has that right,
and the insured cannot serve as trustee of his own life
insurance trust. Of course, the insured will designate
the beneficiaries of the trust (for example, his children).
But because this designation cannot be changed after the
life insurance trust has been set up, the insured will
lack the flexibility to deal with changed family circumstances
with this particular policy.
You
can't borrow from the policy.
The insured can no longer borrow against
the policy. If the trust allows him to borrow against
the policy, he will be deemed to be an owner of the policy
for estate tax purposes.
You can't
transfer an existing policy to the trust -- unless you
live for at least 3 more years.
If the insured transfers an existing policy
to a life insurance trust and dies within the next three
years, he will be treated as the owner of the policy and
it will be taxed in his estate. Even if he survives another
three years, he will have made a taxable gift in the amount
of the cash value of the policy (of course, this is usually
preferable to having the entire face value subjected to
estate taxes). If the life insurance trust takes out a
new policy on the insured's life, however, the insured
will never be deemed to own the policy. Furthermore, no
cash value will have built up yet, so no taxable gift
will be made.
The life insurance trust must be irrevocable.
Once you set up and fund the trust, you cannot get the
policy back. If you become uninsurable, you will be committed
to this trust as your only life insurance.
Premium
payments may use up your estate tax exemption.
If the policy has not yet endowed, you must find a way
to pay the premiums without using up your estate and gift
tax exemption. If you transfer securities to the trust
so that the trustee will have income with which to pay
the premiums, the full value of the securities will be
a taxable gift. If you transfer cash to the trust each
year to pay the premiums, each transfer will be a taxable
gift. However, you may be able to exempt these premium
payments from gift or estate taxes by setting the life
insurance trust up as a Crummey Trust (see the FAQ on
Crummey Trusts). Then each premium payment can be sheltered
by your annual gift tax exclusion, which is $12,000 (indexed
for inflation) per trust beneficiary.
You
must find or hire a trustee.
The insured cannot serve as trustee of the life insurance
trust. That means that he will have to find or hire a
third party trustee. However, many banks and trust companies
offer reduced fees for life insurance trusts because they
involve essentially no investing decisions.
Despite these drawbacks, many people find that the tax
saving potential of a life insurance trust is worth the
cost and hassle. It allows you to remove from your estate
a significant asset that you are unlikely to want access
to during your life. And it ensures that the life insurance
proceeds go 100% to the beneficiaries, not the federal
government. |
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What
is a Crummey Trust?
Many
people wish to make lifetime gifts to their children in order
to save estate taxes. As long as a parent gives his child no
more than $12,000 per year, the gifts will be entirely excluded
from gift or estate taxes. (That $12,000 limit increases regularly
with inflation.)
The problem with gifts so large is that children do not have
the legal capacity, or in many cases the maturity, necessary
to handle so much money. You can solve the issue of legal capacity
by appointing yourself as custodian of the funds you have given
your child (such as by making the gift subject to the Uniform
Transfers to Minors Act), but under a custodial arrangement,
the child obtains access to all of the money upon turning 21,
or in some states 18. To many parents, this is still too young.
To keep the money out of a child's hands until he is, say, 28
years old, you must set up a formal trust. You would then make
your gifts to the trust, and the trustee would invest the money.
To conserve costs, you could even serve as trustee yourself.
The trust documents would direct that the assets be distributed
to the child when the child reaches age 28. Some people have
the trust distribute the funds in steps: the child receives
one-third when he turns 25, one-third when he turns 30, and
the final third when he turns 35.
The one catch to all of this is that the $12,000 annual exclusion
only applies to gifts in which the recipient has a "present
interest" in the gift (as opposed to a "future interest").
In order to completely avoid gift or estate tax on the money
you give to the child's trust, you must give the child some
right that qualifies as a "present interest."
What qualifies as a present interest? Generally, the child has
to have the right to take the money and spend it immediately.
However, you can place significant restrictions on this right
without losing the gift tax exclusion. A common method of doing
so is to set up what is known as a Crummey Trust. It's named
after the Crummey family, who set up such a trust. The IRS tried
to deny them the annual gift tax exclusion, but they went to
court and won.
A Crummey Trust does not give the child any rights to the income.
It does, however, give the child the right to withdraw the amount
of each gift for up to 30 days after each gift is made. Since
the withdrawal right begins immediately after the gift is made,
it is considered a present interest. If the child does not withdraw
the gift within the 30 days, the withdrawal right lapses and
the money remains in the trust until the child reaches the designated
distribution age.
Of course, the parent must still convince the child not to withdraw
the money during those 30 days. However, even if the child decides
to withdraw the money, he can only withdraw the amount of the
most recent gift, not the entire trust. And after that the parent
can eliminate all future withdrawal opportunities simply by
ceasing to make any more gifts. The property in the trust will
still remain intact and growing until it's ready to be distributed. |
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What
is a Special Needs Trust?
A Special Needs Trust allows
a parent, grandparent or guardian to provide funds for a disabled
child without disrupting the child’s eligibility for government
aid. If your family is caring for a child with disabilities,
you may not be aware of options that would allow you to use
funds from your child's inheritance or personal injury settlement
/ award to help your family provide care and enhance quality
of life for your child now, while maintaining his or her eligibility
for Medicaid at a later date. |
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What
is a conservatorship?
If you suffer from an incurable
disease or are involved in a debilitating accident and are unable
to manage your own affairs, state law might require someone
to go to court to have a conservator appointed by the court.
The conservator is given the authority to make financial decisions
and handle your financial affairs, under court supervision,
when you lack the capacity to manage them on your own.
The conservator has to make periodic reports to the court and
petition the court for additional authority under certain circumstances.
Typically, the conservator may be paid for services rendered
on your behalf and there will be attorney fees as well. In addition,
the court will often require your conservator to purchase a
"surety bond" which is a type of insurance policy,
to protect the conservatorship estate. The costs and expenses
of a conservatorship are paid by your estate. |
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What
is a conservatorship?
If you suffer from an incurable
disease or are involved in a debilitating accident and are unable
to manage your own affairs, state law might require someone
to go to court to have a conservator appointed by the court.
The conservator is given the authority to make financial decisions
and handle your financial affairs, under court supervision,
when you lack the capacity to manage them on your own.
The conservator has to make periodic reports to the court and
petition the court for additional authority under certain circumstances.
Typically, the conservator may be paid for services rendered
on your behalf and there will be attorney fees as well. In addition,
the court will often require your conservator to purchase a
"surety bond" which is a type of insurance policy,
to protect the conservatorship estate. The costs and expenses
of a conservatorship are paid by your estate. |
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How
can an estate plan avoid a conservatorship proceeding?
An estate plan uses several tools
which can prevent the court from gaining jurisdiction over your
affairs.
A Living Will or Directive to Physicians is used to determine
if artificial life support systems are to be used or withheld.
A Durable Power of Attorney for Health Care is used to provide
authority to a person, in whom you have the utmost trust and
confidence, to make decisions regarding health care treatment
when you are unable to provide informed consent.
A Durable Power of Attorney for Property enables you to authorize
a person to act in your place and stead in the event of your
incapacity; this attorney-in-fact can manage your financial
affairs without the need to have intervention by the courts.
A Trust is used to hold property; the Trustees manage the property
held just like you would if you were not incapacitated.
Thus, a properly prepared estate plan can enable you to avoid
a Conservatorship proceeding over your estate. Compared to the
cost of a Conservatorship proceeding, an estate plan can be
very attractive. |
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What
is Elder Care Law & Planning?
Elder law deals with the legal,
financial, and health needs of senior citizens. The country's
average age is advancing all the time, and now even baby-boomers
are dealing with health issues and legal concerns they had not
anticipated. Estate planning is part of the elder law field,
but elder law lawyers also help with preparing for long-term
health care needs, applying for government programs, addressing
financial fraud, and combating physical abuse of the elderly.
Attorneys can also assist in establishing guardianships and
conservatorships when needed. A competent and experienced estate
planning lawyer should be consulted on these issues. |
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Health
Concerns, Medicare, Medicaid, &
Nursing Homes
When nursing home care is needed, Medicare is of only
marginal assistance. Medicare covers the first 20 days
and a portion of the next 80 days of care in a nursing
home as long as you are receiving treatment and you are
improving. Long-term health care and extended time in
a home is not covered by Medicare. The only government
program that will pay for long-term care is Medicaid,
which is designed to help low income people with medical
bills. Medicaid will cover long-term care costs for qualified
people and it will even cover some costs left over from
Medicare. Unless an individual is impoverished, the assets
accumulated over a lifetime can be wiped out by a nursing
home stay.
To avoid this occurrence, an estate plan can give away
an elderly person's assets over time for the purpose of
qualifying for the Medicaid program. The goal is to reduce
the assets below the minimum amount for Medicaid. This
strategy prevents an elderly person's assets from being
used up to pay for uninsured health care expenses or nursing
home costs, and allows the assets to be transferred to
children or other family members.
Medicaid rules prevent a person from receiving benefits
by transferring assets right before going into a nursing
home. A skilled estate planning attorney can plan ahead
for residential care needs and minimize the financial
impact on an elderly person's estate. It is certainly
advisable for people to prepare for these issues prior
to becoming senior citizens, but it is never too late
to take control. |
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