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Estate Planning

Throughout our lives, we spend so much time worrying about making a decent living. Questions like, "Will we have enough for a new house? Can I afford that new car? Can I take that trip I've always wanted to take?" But the years pass. You've built up an estate and achieved success. Your focus starts shifting away from taking care of yourself to helping ensure your loved ones are cared for after you're gone. That's what estate planning is all about.

Some traditional methods of estate planning include:

  • Wills
  • Living Trusts
  • Durable/Medical Power of Attorney

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In-Depth Estate Planning

  • Introduction to Wills

    What's In a Will?
    Publicity vs. Privacy
    Can a Will Be Invalid?
    Wills and Probate
    What Happens If You Become Incapacitated?
    Nothing Worse Than Death And Taxes
    Drafting Your Own Will

    Living Trusts

    The Parties Involved
    Who Needs A Living Trust?
    Avoiding Probate
    Funding Your Living Trust
    Always There For You
    Reducing Estate Taxes

    Power of Attorney

    Durable Power of Attorney
    Medical Power of Attorney

    Introduction to Wills

    Wills are the most basic of estate planning documents. First introduced in medieval England, wills are basic instructions to a court on how a deceased person wanted to distribute money and property. Everyone concerned about how their estate will be divided should (at the very least) have a current and valid will.

    What's In a Will?

    Within a will, you describe several things:

    Who you are, and what right you have to give away property;
    A description of the property itself; and
    Exactly who you want it to be distributed to.

    Wills are straightforward to draw up. A qualified estate planning attorney, although recommended, is not always required. Many courts have accepted simple handwritten wills drawn up without any legal counsel. In addition, Internet and software companies manufacture programs that create a will right from your home computer. Some states even allow an oral will to be acceptable; however, it is best to execute a formal will (just to be sure).

    Publicity vs. Privacy

    While its simplicity is a definite benefit, a will has serious disadvantages. For instance, a will is only an instruction to a court of law; it can be contested. Once entered into court, your will is a public record, eliminating privacy.

    Relatives, friends, and associates can read a newspaper about your death and petition the court to share in your wealth. Family Court can be heartbreaking for many; not only do your loved ones have to cope with your death, but they have to battle other acquaintances and distant family members for the right to your estate.

    Can a Will Be Invalid?

    Unfortunately, when a will comes before a court, you can no longer vouch for it. A will can be found to be invalid for several reasons, including:

    • Improper execution
    • The grantor was not mentally competent and able to understand what they were doing when they executed the will
    • The will was made under duress or as a result of undue influence from another person.

    If the will is invalid for any reason, the court will usually treat it as though you had died intestate or without a will. At that point, your particular state will decide how your property will be distributed. And if there are no living relatives, the property reverts to the state.

    Wills and Probate

    The process of having an attorney present your will before a court is called probate. Unlike living trusts, every will must go through the probate process. Probate usually ties up the estate anywhere from 9 months to 2 years and can cost approximately 2% of your entire estate value.

    What Happens If You Become Incapacitated

    Wills only become effective when you pass away; they do nothing for you while you're still alive. For instance, if you should become incompetent and not have named a trustee or given power of attorney to someone else, the court will decide your proper medical care and distribution of assets. By the time you pass away and the will goes into effect, little of your original estate may be left for your family.

    Nothing Worse Than Death and Taxes

    Wills do nothing for estate taxes. Individuals that have assets, including real estate, over $1 million are subjected to extreme estate taxes that climb up as high as 50%. Plus, if you're married, a will may not maximize the Unified Credit exemption for both individuals; in some cases, the $1 million exemption meant per individual is reduced to $1 million per couple.

    Drafting Your Own Will

    Each family's situation is different. For some, a will is sufficient. However, it is the most basic of estate planning documents. If you wish to preserve your wealth for generations to come, then you may want to combine a will with other advanced estate planning techniques.

    While a will can be drafted with simple estate planning software, it's usually wise to have a professional estate attorney do it for you. Legal counsel may help you avoid many of the pitfalls associated with wills and ensure that the chances it could be contested are reduced.

    Living Trusts

    Over the last two decades, the popularity of Living Trusts has skyrocketed. No longer a tool just for the rich, Living Trusts are one of the most common estate planning tools in use today.

    Usually drafted by an estate attorney, this legal arrangement creates a separate entity called a Living Trust. A Living Trust is called that simply because it is created while you're alive (as opposed to a "testamentary" trust created after death).

    The Parties Involved

    The Living Trust document itself names three different parties. The individual (or couple) that establishes the Trust is named the Grantor (also referred to as the Trustor).

    The Trustee is the person named by the Trust as the controller of the Trust's assets (and in many cases, the Trustees are the same people as the Grantors). On the receiving end, the Beneficiaries are the heirs that will benefit from the Trust once the Grantor's have passed away.

    Who Needs A Living Trust?

    Almost anyone with an estate of $100,000 or more can benefit from having a living trust. Estates of $100,000 or more are often subjected to probate in their state of residence, which can cost anywhere from 2%-4% of the estate's value in court and legal fees.

    The living trust also is helpful for individuals subject to estate taxes. Through a living trust, a couple is able to maximize their Unified Credit to its fullest. It even accomplishes protection for individuals wanting to avoid conservatorship.

    Advanced living trusts can be structured for complicated family situations. Re-married spouses with children from a previous marriage can use an advanced revocable trust to ensure kids receive their proper inheritance.

    Avoiding Probate

    Living Trusts avoid probate since they are completely private. Because a trust is recognized as a separate legal entity, distributions can be made by a Trustee to named beneficiaries without any court involvement.

    The courts maintain no control over the Trust's assets and do not tie up the assets in a lengthy (and costly) probate process. The Trustee simply distributes assets to named heirs, but only if those assets have been placed inside the Trust.

    Funding Your Living Trust

    Once established, almost anything can be placed in a trust: bank accounts, stocks, bonds, real estate, life insurance, and personal property. In "funding" the trust, you simply change the name or title on your assets to the name of your Trust. Many people worry about losing control of assets; however, that is not the case within a carefully constructed Living Trust.

    Always There For You

    Because the Trust is essentially controlled by one individual (the Trustee), that person can carry out your wishes when you're unable to. For instance, if you have children from a previous marriage and wish to leave them an inheritance, specific instructions to the Trustee will ensure they receive what you requested.

    If you're institutionalized or unable to care for yourself, the Trust can still function and make distributions as needed. The Trustee has a fiduciary responsibility to ensure your requests are fulfilled exactly. They can even provide care and protection for disabled relatives or disabled children in accordance with your wishes.

    Reducing Estate Taxes

    The Living Trust also may minimize estate taxes by fully utilizing every individual's Unified Credit. The Unified Credit, as mandated by Congress, shelters up to $1 million from estate taxes. With only a will in place, a married couple will receive a single $1 million exemption. However, if a Living Trust with "A-B Provisions" is in place and one spouse dies, the Living Trust separates into two separate trusts (commonly referred to as an A-B Trust).

    In an A-B Trust, each of the two separate trusts receives its own $1 million exemption, meaning a total of $2 million is sheltered from estate taxes.

    Any amounts over that $2 million will be subject to estate taxes, with rates climbing as high as 50%.

    Living Trusts are easy to start up and require little ongoing maintenance. They afford an extra measure of protection against loss of control and ensure that your assets remain out of the public record even after your death. However, they do not protect creditors or divorce or reduce estate taxes for estates over $1 million in value ($2 million if married).

    Power of Attorney

    A power of attorney is used when an individual cannot be present, but that individual has entrusted someone to do the job in their place. When someone holds "a power of attorney," they are able to enter into contracts, negotiate, and settle matters as if they were that other person.

    An ordinary power of attorney expires when a grantor becomes incompetent or passes away. The theory is that if the principal couldn't do it independently, the agent shouldn't be able to do it either. In many financial and commercial situations, this makes little sense when dealing with elderly issues.

    Durable Power of Attorney

    A Durable Power of Attorney can act on a person's behalf even while that person is still alive. People suffering from dementia or senility, who are no longer competent to make their own decisions, need to continue to make financial and medical transactions long after they have the capacity to do so. A Durable Power of Attorney allows them to do that.

    Setting up a Durable Power of Attorney is as easy as signing a single legal document naming who you would like to appoint as your agent. There are no hearings or court proceedings to go through. What happens if you suffer from dementia or are incapacitated and have not signed a Durable Power of Attorney? If you have not named an agent to act on your behalf, you can only hope that someone will become a Conservator for you.

    Conservatorship is a lengthy and expensive court procedure requiring someone to volunteer to become your Conservator. Finding a volunteer, you trust with your affairs to suddenly appear and want to be your Conservator is rare. In many cases, it is also unreasonable to expect there will be enough money and time to go through the court proceedings necessary to establish the conservatorship.

    Individuals granted Power of Attorney must, by law, act in good faith at all times on behalf of the grantor. Suppose an elderly man is declared incompetent but has given his adult child a Durable Power of Attorney. The son cannot turn around and put his father's house in the child's name or sell off assets for his own use. The law maintains agents have a fiduciary duty to the grantor and cannot take advantage of their position.

    Medical Power of Attorney

    A Medical Power of Attorney (also known as a Durable Power of Attorney for Health Care) is critical because it allows a trusted agent to make healthcare decisions on your behalf. Few hospitals wish to be responsible for determining your healthcare decisions for you, especially in this litigious society.

    The Medical Power of Attorney helps your doctors determine when life-supporting measures should be stopped. If you wish not to use life-sustaining measures, you can convey this to the person you've named, and they can fulfill your wishes on your behalf. A Medical Power of Attorney only has this responsibility to you for healthcare decisions. It cannot make financial or other decisions on your behalf (unless you've granted both Powers of Attorney to the same person).

    Estate Planning FAQ

    1. Why do I need an estate plan?

    Most of us spend a considerable amount of time and energy in our lives accumulating wealth. As we do this, there also comes a time to preserve wealth for our enjoyment and future generations. A solid, effective estate plan ensures that your hard-earned wealth will pass intact to those you intend to be your beneficiaries instead of being siphoned off to government processes and bureaucrats.

    2. If I don't create an estate plan, won't the government provide one for me?

    YES. But your family may not like it. The government's estate plan is called "Intestate Probate" and guarantees government interference in the disposition of your estate. Documents must be filed, and approval must be received from a court to pay your bills, pay your spouse an allowance, and account for your property; it all takes place in the public's view. If you fail to plan your estate, you lose the opportunity to protect your family from an impersonal, complex governmental process that is a burden at best and can be a nightmare.

    Then there is the matter of the federal government's death taxes. There is much you can do in planning your estate that will reduce and even eliminate death taxes, but you don't suppose the government's estate plan is designed to save your estate from taxes, do you? While some estate planners favor wills and others prefer a Living Trust as the Estate Plan of Choice, all estate planners agree that dying without an estate plan should be avoided at all costs.

    3. What's the difference between having a will and a Living Trust?

    A will is a legal document that describes how you want your assets distributed at death. However, The actual distribution is controlled by a legal process called probate, Latin for "prove the will." Upon your death, the will becomes a public document available for inspection by all comers. And, once your will enters the probate process, your family no longer controls it but by the court and probate attorneys. Probate can be cumbersome, time-consuming, expensive, and an emotional trauma in a family's time of grief and vulnerability. Con artists and others with less than pure financial motives have been known to use their knowledge about the contents of a will to prey on survivors.

    Probate can be cumbersome, time-consuming, expensive, and an emotional trauma in a family's time of grief and vulnerability. Con artists and others with less than pure financial motives have been known to use their knowledge about the contents of a will to prey on survivors.

    A Living Trust avoids probate because the trust owns your property, so technically, there's nothing for the probate courts to administer. Whomever you name as your "successor trustee" gains control of your assets and distributes them exactly according to your instructions.

    There is one other crucial difference. A will doesn't take effect until you die and is, therefore, no help to you with lifetime planning, an increasingly important consideration now that Americans live longer. A Living Trust can help you preserve and increase your estate while you're alive and offers protection should you become mentally disabled.

    4. The possibility of a disabling injury or illness scares me. What would happen if I were mentally disabled and had no estate plan or just a will?

    Unfortunately, you would be subject to "living probate," also known as a conservatorship or guardianship proceeding. If you become mentally disabled before you die, the probate court will appoint someone to take control of your assets and personal affairs. These "court-appointed agents" must file a strict accounting of your finances with the court. The process is often expensive, time-consuming, and humiliating.

    5. If I set up a Living Trust, can I be my own trustee?

    YES. Most Living Trusts have the people who created them acting as their own trustees. If you are married, you and your spouse can act as co-trustees. And you will have absolute and complete control over all of the assets in your trust. In the event of a mentally disabling condition, your handpicked successor trustee assumes control over your affairs, not the court's appointee.

    6. Will a Living Trust avoid income taxes?

    NO. The purpose of creating a Living Trust is to avoid living probate, death probate, and reduce or even eliminate federal estate taxes. It's not a vehicle for reducing income taxes. If you're the trustee of your Living Trust, you will file your income tax returns exactly as you filed them before the trust existed. There are no new returns to file, and no new liabilities are created.

    7. Can I transfer real estate into a Living Trust?

    YES. All real estate should be transferred into your Living Trust. Otherwise, upon your death, depending upon how you hold title, there will be a death probate in every state in which you hold real property. When your real property is owned by your Living Trust, there is no probate anywhere.

    8. Is the Living Trust some kind of loophole the government will eventually close down?

    NO. The law has authorized the Living Trust for centuries. The government has no interest in making you or your family go through a probate that will further clog up the legal system. A Living Trust avoids probate so that your estate is settled according to your wishes.

    9. Isn't a Living Trust only for the rich?

    NO. A Living Trust can help anyone protect their family from unnecessary probate fees, attorney's fees, court costs, and federal estate taxes. If your estate exceeds $100,000, you'll find a Living Trust offers substantial benefits for you and your family.

    10. Can any attorney create a Living Trust?

    NO. You should choose an attorney whose practice is focused on estate planning. Members of the American Academy of Estate Planning Attorneys receive continuing legal education on the latest changes in any law affecting estate planning, allowing them to provide you with the highest quality estate planning service anywhere.

    The above is for informational purposes only. WCFG does not provide specific tax or legal advice. See your personal tax accountant or legal advisor for guidance related to your tax situation.

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