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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Navigate probate, tax issues, and state laws Create an estate plan and protect your family's interests Need a will, but have no idea where to start? This friendly guide shows youhow to prepare a legal will or trust -- either on your own or with professional help -- and ensure that your wishes are honored. You'll handle everything from planning your bequests and writing and signing a will to selecting a trust and drafting your durable power of attorney. Discover how to: * Provide for your children * Hire and work with professionals * Minimize tax liabilities * Amend or revoke a will or trust * Avoid common estate planning mistakes Note: CD-ROM/DVD and other supplementary materials are not included as part of eBook file.
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Seitenzahl: 559
Veröffentlichungsjahr: 2009
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Wills & Trusts Kit For Dummies®
Table of Contents
Introduction
About This Book
A Special Note for Residents of Louisiana
Conventions Used in This Book
What You’re Not to Read
Foolish Assumptions
How This Book Is Organized
Part I: Getting Started with Your Will or Trust
Part II: Everything You Need to Know about Wills
Part III: Trust Me! How Trusts Work
Part IV: Carrying Out the Intent of Your Will and Trust
Part V: The Part of Tens
Part VI: The Appendixes
About the CD
Icons Used In This Book
Where to Go from Here
Part I: Getting Started with Your Will or Trust
Chapter 1: Ensuring That Your Last Wishes Are Honored
The Good, the Bad, and the Ugly: What Can Happen When You Don’t Plan Your Estate
Reaping the Benefits of Planning Your Estate
Planning for your care while you’re alive
Ensuring that your assets go where you want
Looking Out for Common Pitfalls
Benefits and dangers of jointly titling real estate, property, and bank accounts
Benefits and dangers of life estates
Danger of subjecting an asset to Medicaid spend-down rules
Potential for increased tax exposure
Realizing What Happens If You Don’t Have an Estate Plan
Following the laws of intestate succession
Determining the custodian of your minor children
Creating Your Will or Trust
Deciding who should create it
Understanding the process
Thinking about your kids, money, life insurance, and more
Chapter 2: Making Crucial Decisions
Going It Alone
Are you comfortable doing it yourself?
How complicated is your estate?
Choosing a Will or Trust for Your Estate
What a will can do for you
What a trust can do for you
You may benefit from having both
Going with a Pro
How lawyers and accountants can help
Do you save money in the long haul?
Working with a Professional
Hiring a lawyer
Meeting with your lawyer
Reviewing and executing the documents
Taking the final steps
Safeguarding Your Estate Plan
The problem of the disappearing document
Storing your will or trust
Registration of wills and trusts
Chapter 3: Gathering Pertinent Information
Asking Yourself Some Basic Questions
Identifying Your Assets
Real estate
Personal property
Titled personal property
Savings
Investments
Insurance policies and annuities
Retirement savings
Pensions
Considering Community and Jointly Owned Property
Valuing Your Property
Chapter 4: Planning Your Bequests
Calculating Your Assets
Determining Your Intended Heirs and Beneficiaries
Individuals
Institutions or charities
Other bequests
Thinking about Your Family Circumstances
Estate Planning for Second Families
Giving your new spouse a life estate
Using trusts to hold your assets
More tools to consider
Estate Planning for Your Business
Inheritance of your sole proprietorship
Inheritance of your share of a business
Appointing the People Who Will Carry Out Your Estate Plans
Choosing your personal representative or trustee
Choosing a successor
Discussing your estate plan with your helpers
Finding Professionals to Assist You
Getting help from a lawyer
Hiring an accountant
Using professional trust services (institutional trustees)
Chapter 5: Providing for Your Children and Dependents
Choosing a Guardian
Making the decision
Choosing a guardian other than the noncustodial parent
Managing Your Child’s Assets
Providing for Your Child’s Needs
Your child’s education
Your child’s special needs
Your child’s financial stability
Chapter 6: Dipping into Your Pocket: The Tax Man (and Others)
Tallying Up Your Estate’s Tax Liabilities
Federal estate taxes — a moving target
The generation-skipping transfer tax
State estate taxes
Gift taxes
Minimizing Tax Costs and Liabilities
Leaving your estate to your spouse
Making gifts
Using trusts to avoid estate taxes
Creating a Family Limited Partnership
Seeing the Big Picture: Tax Avoidance Should Not Dictate Your Estate Plan
Paying Your Estate’s Debts
Medical costs and Medicaid reimbursements
Payment of bills, loans, and mortgages
Payment of funeral expenses
Covering Administration Costs
Court costs
Legal fees
Administrator’s fees
Trustee’s fees
Part II: Everything You Need to Know about Wills
Chapter 7: Writing and Signing a Will
Deciding Whether a Will Serves Your Needs
Simplicity often leads you to a will
Assets not covered by a will
Exploring the Types of Wills
The statutory will
The handwritten (holographic) will
A will of your own
Other wills
Elements of a Will
Who you are
What are your assets
Who are your beneficiaries
What are your bequests
Reference to a tangible personal property memorandum
What happens with the residue (if any) of the estate
Payment of debts by the estate
Describing your funeral and burial wishes
Designating a personal representative
Designating a guardian for any minor children
Your signature
Executing a Valid Will
Choosing the right witnesses
Signing and executing your will
Chapter 8: Navigating the Land Mines
Identifying Common Land Mines
Disinheriting heirs, known and unknown
Avoiding invalidating part or all of your will
Lashing out from beyond
Handling simultaneous death of spouses
Realizing Why You Must Update Your Will
Your goals and wishes may change over time
Your assets may change over time
Family changes may invalidate your will
Family changes may dramatically alter who inherits under your will
Knowing What to Do If You Lose Your Will
Chapter 9: When You Already Have a Will
Reviewing and Updating Your Will
Changes in your family circumstances
Changes in your wishes
Changes in your financial situation
Changing Your Will
Adding to your will (amendment by codicil)
Executing a valid codicil
Revoking Your Will
How to revoke a will
What to do with a revoked will
Chapter 10: Estate Administration: What Happens in Probate Court
Navigating Probate Court
Discovering How Estate Size Affects Probate Procedures
Probate for small estates
Probate for larger estates
Understanding the Role of the Personal Representative
Giving notice to legal heirs
Collecting property for distribution
Notifying and paying creditors
Distributing bequests
Hiring a Lawyer
Overseeing Probate: The Judge
Avoiding Will Contests
Validity
Mental incapacity
Undue influence
Part III: Trust Me! How Trusts Work
Chapter 11: The Anatomy of a Trust
What’s a Trust and Why You Need One
Benefitting from Trusts
They’re flexible
You can provide for your incapacity
You can avoid taxes
You can avoid probate
A trust can help protect your privacy
Selecting a Trustee
Choosing Your Beneficiaries
Transferring Assets into Your Trust
Staying in control
Giving (or limiting) your trustee powers
Cancelling the trust
Distributing trust assets
Putting Your Trust into Effect
When the Trust Ends
Chapter 12: Dead or Alive: Picking Your Trust
Why So Many Choices?
The Revocable Living Trust
The benefits
Possible drawbacks
Choosing from Other Trusts
Trusts to avoid the tax man: Asset protection trusts
Trusts for people who can’t manage money: Spendthrift trusts
Trusts for doing good: Charitable trusts
Trusts to avoid gift taxes: Crummey trusts
Trusts for people who receive government benefits: Special needs trusts
Trusts to protect your estate plan if you predecease your spouse: Bypass trusts
Trusts where you control the trust assets
Trusts that own life insurance: Irrevocable life insurance trusts (ILITs)
Trusts for multiple generations: Dynasty trusts (generation-skipping trusts)
Trusts to postpone estate taxes: Qualified terminable interest property trusts (QTIPs)
Trusts for your pet
Deciding Which Trust Is Right for You
Serving your personal needs
Serving the needs of your family
Thinking about the tax man
Chapter 13: When You Already Have a Trust
Creating the Trust Isn’t the End of the Story
Transferring Assets into Your Trust
Real estate
Financial accounts
Other assets
Reviewing Your Trust
Does the trust still serve your needs?
Does the trust still fulfill your goals?
Is the trust adequately funded?
Amending Your Trust
Restating a Trust
Revoking a Trust
What Happens If You Die?
Can you avoid probate?
Should you also have a will?
Part IV: Carrying Out the Intent of Your Will and Trust
Chapter 14: Planning for Your Incapacity
Planning for Incapacity Has Many Benefits
You avoid guardianship and conservatorship proceedings
You get to choose who cares for you
You ensure that your wishes are followed
Drafting a Living Will
Discussing your wishes
Executing a living will
Distributing copies of your living will
Reviewing your living will
Looking into Other Advance Directives
Healthcare proxies
Your medical advocate
Special instructions: Your wishes for your care
Executing a Healthcare Proxy
Distributing copies of your healthcare proxy
Revoking a healthcare proxy
Designating Your Financial Powers of Attorney
Selecting power of attorney
Deciding between durable powers of attorney or periodic renewal
Drafting your durable power of attorney
Executing power of attorney
Revoking a power of attorney
Chapter 15: Those Cushy Retirement Funds
Exploring Retirement Savings Accounts
Retirement savings accounts available to anyone
Employment-based retirement savings accounts
Self-employed retirement savings accounts
Putting Off the Tax Man
Moving Assets from One Tax-Deferred Investment to Another
Designating a Beneficiary
Selecting your beneficiary
Changing your beneficiaries
Maintaining Control Over Your Accounts
The Tax Consequences of Putting Your Retirement Savings into Your Estate
Chapter 16: Life Insurance: Making Sure It Doesn’t Backfire
Taking a Look at the Different Types of Life Insurance
Term life
Whole life
Universal life
Variable life
Deciding Who Owns the Life Insurance
Ownership by a spouse
Ownership by a child or children
Ownership by a qualified plan
Ownership by a trust
Designating Beneficiaries for Your Insurance Policy
Spouse
Child or children
Another individual
Multiple beneficiaries
A trust
Your estate
Chapter 17: Your Castle: How It’s Owned Makes a Huge Difference
House, Condo, Co-op, or More: Exploring the Types of Residential Properties
The single-family home
The condominium
Housing cooperatives (co-ops)
When your residence is a manufactured home or boat
Ownership of Your Residence
Ownership by one person: Sole ownership
Ownership by two or more people
Life estates
Community property laws
Special issues for domestic partners
Should Ownership of Your Home Be Held by Your Trust?
The Drawbacks Of Adding Your Heirs to the Title
The cons outweigh the pros
Possible tax consequences
Possible Medicaid consequences
Leaving Real Property by Will or Trust
Remembering Other Properties
Vacation properties
Investment properties
Business real estate
Farmland
Part V: The Part of Tens
Chapter 18: Ten Common Will Mistakes
Not Updating Your Will
Being Too Specific in Your Bequests
Forgetting to Address the Residuary of Your Estate
Leaving Everything to Your Spouse
Leaving Nothing to Your Spouse
Including Items in Your Will That Pass Outside of Your Estate
Improper Witnessing of Your Will
Losing Your Will (or Making It Impossible to Find)
Forgetting to Leave Good Financial Records
Forgetting That Your Estate Needs Cash
Chapter 19: Ten Reasons to Have a Trust
You Avoid Probate
You’re Prepared for Incapacity
You Avoid a Will Contest
You Protect Your Heirs
You Can Protect Estate Assets from Creditors and Lawsuits
You Plan for Second (and Third, and Fourth) Marriages
You Plan for the Future of Your Business
You Can Transfer Real Property Located in Another State
You Have Continuity of Investments
You Avoid Taxes
Chapter 20: Ten Tax Traps to Avoid When Planning Your Estate
Not Planning Your Estate
Focusing Too Much on the Estate Tax
Assuming that the Estate Tax Will Not Change
Trying to Guess How the Estate Tax Will Change
Not Taking Advantage of Your Lifetime Gift Exclusion
Not Engaging in Business Succession Planning
Hiding Property Transfers and Gifts from the IRS
Having Your Estate Be the Beneficiary of Your Life Insurance
Not Preparing Your Estate to Pay Any Estate Tax Owed
Forgetting That Your Estate Will Grow Over Time
Part VI: Appendixes
Appendix A: State Signing Requirements
Appendix B: State Inheritance Taxes
Appendix C: Estate Planning Worksheet
Personal information
Goals and priorities
Family information
Assets
Debts
Bequests
Your advisors
Estate planning documents
Personal representative
Guardian for minor children
Bequests
Estate taxes
Disinheritance
Trust provisions
Funeral and burial arrangements
Trustees and alternates
Property to transfer into trust*
Disinheritance
Distribution of trust assets
Conditions on distribution
Special concerns
Choice of agent
Powers granted
Preferences for the sale of property
Choice of medical advocate
When should treatments cease
Treatments that may prolong life
Comfort and pain relief
Place of death
Appendix D: About the CD
Wills & Trusts Kit For Dummies®
by Aaron Larson
Wills & Trusts Kit For Dummies
Published byWiley Publishing, Inc.111 River St.Hoboken, NJ 07030-5774www.wiley.com
Copyright © 2009 by Wiley Publishing, Inc., Indianapolis, Indiana
Published simultaneously in Canada
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com, Making Everything Easier!, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendor mentioned in this book.
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About the Author
Aaron Larson is an attorney practicing law in Ann Arbor, Michigan, where he lives with his wife and daughter. After graduating from the University of Michigan Law School, Aaron started practice as a quintessential small town lawyer, providing legal services that included estate planning, probate, and guardianship services. He subsequently worked for the Institute of Continuing Legal Education in Ann Arbor, Michigan, where he developed professional education programs for lawyers in areas including estate planning, litigation, and family law. His present legal practice focuses on civil appeals. He operates the ExpertLaw Web site (www.expertlaw.com), offering free legal information and assistance to consumers, as well as resources for legal professionals.
Dedication
To my wife Laura and our wonderful daughter Emma.
Author’s Acknowledgments
I would like to thank the following people for their invaluable contributions to this book.
Publisher’s Acknowledgments
We’re proud of this book; please send us your comments through our online registration form located at http://dummies.custhelp.com. For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002.
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Introduction
Congratulations. Simply by opening this book you have put yourself a step ahead of most people. Yes, it’s tough to think about what will happen to your family after you die, but confronting these issues is part of taking care of your family.
My goal in writing this book is to give you the information and resources you need to create an estate plan. This book includes do-it-yourself tools to help you draft your own estate planning documents.
But don’t go thinking that this book will help you only if you want to create your own will and trust. It’s much broader in focus. I want you to be comfortable with estate planning documents, but also to recognize when you’ll benefit from professional estate planning services.
I am of the strong opinion that everybody needs an estate plan, and especially a will. With this book, anybody can create a simple will, even if it serves just as a stopgap before hiring a professional.
About This Book
Wills and Trusts Kit For Dummies is written in language that is easy to understand. It covers the basic issues in planning your estate, but also delves into the details and complications you can encounter in choosing your estate plan and creating a will or trust.
You probably won’t read this book and conclude, “This is easy,” but you’ll probably conclude, “I can do this.” If not, or if you realize that you simply don’t want to plan your own estate, that’s fine, too. You’ll be an educated consumer when you hire a professional to draft your estate plan.
Everybody needs an estate plan, so I’ll immodestly claim that anybody who doesn’t have an estate plan will benefit from reading this book. You’ll also benefit if your estate plan is out-of-date, and you’re not sure whether or how to update your plan.
A Special Note for Residents of Louisiana
If you’ve been shopping around for books on drafting your own will, you’ve probably found that most of them say, “This book is valid for all states except Louisiana.” You see this warning for two reasons:
Louisiana’s laws governing the execution of a will are more complicated than those of other states, and a mistake can invalidate your will.
More importantly, Louisiana’s unique forced heirship laws will trump inconsistent bequests in your will, and you’re severely limited in your ability to deviate from the state’s mandatory bequests.
Even if you create an otherwise valid will, without a good understanding of forced heirship laws, a court may end up largely disregarding your will or allocating your estate in a way that bears little resemblance to what you directed.
It’s beyond the scope of this book to give you the state-specific understanding you need to be sure that a Louisiana court will uphold your will. I thus reluctantly urge residents of Louisiana to have their wills drafted by a legal professional.
Conventions Used in This Book
Whenever you see a word in italics, I’m either introducing a new term or using it for emphasis. Likewise, all Web addresses appear in monofont type.
What You’re Not to Read
Throughout the book, I include sidebars that contain information and anecdotes that expand on the topics discussed in the chapters. You’ll easily spot the sidebars by their gray background color. The sidebars can be amusing and informative, but there’s nothing in them that you have to read to understand the material in this book. If you’re pressed for time, skip over the sidebars. If you find the time to read them later, they’ll still be there.
Foolish Assumptions
When writing this book, I had to make a few assumptions about you, the reader. If you meet any of these qualifications, you can find what you need in this book:
You don’t know much about estate planning and want to get a comprehensive understanding of what is involved.
You have a small to average estate and want to create your own estate plan composed of a will and possibly a living trust.
You have a large estate and want to do the basics of your estate plan yourself while getting professional assistance with specialized trusts and tax planning.
You have absolutely no desire to plan your own estate, but want to know how the estate planning and probate processes work and want to know what you’re doing when you hire an estate planning professional to create your estate plan.
I also assumed that you have a computer and can use it to print the worksheets from the accompanying CD to create your own estate planning documents. (You don’t have a computer? Then I’m assuming you have a friend who can print the forms for you.)
How This Book Is Organized
This book is organized into six parts that guide you through the estate planning process and specific estate planning documents. I include some stories and anecdotes to help you understand the concepts I discuss.
Part I: Getting Started with Your Will or Trust
This part explains why you need to plan your estate, the dangers of failing to do so, and the many benefits you get from completing your estate plan. I also cover some of the most important aspects of estate planning, and some of the biggest mistakes people make. You find out when you should get help from an estate planning professional, what professionals can do for you, and how to work with them.
Part II: Everything You Need to Know about Wills
This part helps you understand the central role of your will in your estate plan and the importance of keeping your will up-to-date. You also find out what you need to know about probate court.
In addition, you discover common landmines that can disrupt your estate plan and what you can do to avoid will contests.
Part III: Trust Me! How Trusts Work
If you’re considering using a trust for your estate plan, it’s important to know exactly what trusts are and what they can do for you. You’ve heard of a revocable living trust, but what about other types of trust. How can trusts help you avoid estate taxes? This part has all the answers.
Part IV: Carrying Out the Intent of Your Will and Trust
After you figure out the basics of your estate plan, you still have a bit more work to do. You need to take a look at how your retirement and life insurance plans figure into your estate and the special issues that can arise from your real estate holdings. You also need a plan for your personal and financial care in case of illness or disability. This part addresses those topics and more.
Part V: The Part of Tens
This part contains lists to help you with common estate planning issues and traps. I describe mistakes people often make when planning their wills and highlight situations where you may benefit from having a trust. I also tell you how to avoid traps that may increase your estate taxes.
Part VI: The Appendixes
This part contains supplemental information to help you complete your estate plan. Appendix A describes state law signing requirements for wills. Appendix B summarizes state estate and inheritance taxes. Appendix C is a form that you can use to help gather information for your estate plan. Appendix D lists the forms provided on the accompanying CD.
About the CD
The CD accompanying this book includes forms and worksheets for creating your estate planning documents. You can print them and mark them up by hand or fill them in on your computer and use them to produce your final documents. See Appendix D for a lot more information about the CD and the forms it contains.
Icons Used In This Book
In the margins of the pages of this book, you’ll find little pictures, called icons. These icons call your attention to important points about estate planning and help you avoid mistakes:
When you see the Tip icon, you find hints and suggestions to help you with your estate plan.
The Warning icon flags a potential trap or pitfall that you may encounter and helps you avoid costly mistakes.
The Remember icon highlights important actions to take and elements of your estate plan that you truly should not forget.
The Louisiana icon flags unusual aspects of that state’s laws, which make it very difficult to draft your own will.
This icon lets you know that you can find a form on the accompanying CD corresponding to the estate planning document or process described in the passage you’re reading.
Where to Go from Here
You don’t have to start at the beginning of this book and read straight through if you don’t want to. This book is designed so that you can look at a topic you’re interested in and flip straight to that discussion. However, if you’re new to estate planning, consider reading through this book to get an overview of what’s involved.
If you’re about to do something dangerous and need an estate plan “yesterday,” you need a will so start with Chapter 7.
If you’re concerned about how much of your estate will get eaten up by taxes, the news (good and bad) is in Chapter 6.
If you have young children and want to be sure that they’re taken care of, proceed to Chapter 5 for some quick guidance.
If you have a will or trust already, Chapters 9 and 13 cover how to update your estate plan and amend or replace wills and trusts.
Part I
Getting Started with Your Will or Trust
In this part . . .
This part explains why you need to plan your estate and the dangers of failing to do so. You find out the process of planning your estate, the tools you can use, and when you need to get help from a professional estate planner. You also discover the process of gathering information about your heirs and assets and planning your bequests. You discover how to plan for special family and personal circumstances, including the care of your children, and avoiding taxes.
Chapter 1
Ensuring That Your Last Wishes Are Honored
In This Chapter
Understanding the estate planning process
Creating your estate plan
Getting help when you need it
Making your wishes known
Avoiding common estate planning pitfalls
You’ve worked hard all your life, have accumulated some assets, and have bought a copy of this book. You’re ready to plan your estate.
My best guess? You’re not excited about planning your estate. You have already figured out that you have a lot of work to do. You must also think about unpleasant things, including your death, the possibility of your incapacity, and how your family will cope without you.
What’s the primary purpose of an estate plan? Taking care of your loved ones after you’re gone. Why plan your estate now? Because the sooner you start, the more certain you can be that your plan will take care of your family’s needs in the way that you want.
As you proceed with this process, you’ll probably find out your estate planning needs aren’t as complicated as you thought. You may discover that all you need is a will, perhaps backed up by a simple living trust. You may discover that your needs are more complicated and enlist the help of an estate planning professional. Yet even then, your understanding of the estate planning process and tools will help you communicate your needs and choose your best options.
Having an estate plan also provides a great deal of comfort. You’ll be able to plan for your family’s financial needs. And after your death or incapacity, your loved ones won’t have to fret about what you would have wanted them to do. They’ll know your actual wishes.
The Good, the Bad, and the Ugly: What Can Happen When You Don’t Plan Your Estate
Simply put, if you don’t plan your estate, the government has an estate plan in store for you. Your state’s laws of intestate succession will apply, and the state will decide who inherits your assets, usually your spouse and children. But that’s not all:
In the event of your incapacity, a court may appoint people to make decisions for you regarding your personal and medical care and the management of your money. A stranger may end up deciding where you live, what medical treatment you receive, and perhaps even whether you really need $20 for a haircut.
If you have minor children, a court will have to decide who will care for them, but will not have the benefit of your input.
The business you spent a lifetime building may end up failing or in the hands of a court-appointed receiver.
Planning your estate isn’t a one-time task. Changes in your life circumstances can dramatically alter both your wishes for your estate, and whether your original estate plan even remains viable.
Sometimes it seems like your life doesn’t change much, so you may be wondering what sort of changes I am talking about. Consider the following:
Your estate will probably grow substantially over the course of your life, although it may also shrink.
You may marry, divorce, separate, have or adopt a child, or experience a death in your family.
Your children will grow up and establish their own households.
You may move between states, buy and sell property, or start your own business.
Your designated trustee or personal representative may no longer be available, or your relationship with that person may change.
Laws may change. In fact, they will. You can expect a new estate tax bill to be working its way through Congress within the next year or two, and it won’t be the last.
In all probability, you’ll update your estate plan several times during your life, and on occasion you may even start over from scratch.
If you don’t update your estate, over time your estate plan may become largely ineffective. When that happens, you’re not much better off than you were before you created the outdated estate plan.
Reaping the Benefits of Planning Your Estate
The biggest advantage of planning your estate is that your wishes will be respected, both while you’re alive and after your death.
Your estate plan helps you in several ways:
Incapacity planning helps ensure that you receive the type of medical care and treatment you want, that your assets are managed according to your own wishes, and that your end-of-life decisions are respected.
Your will and trust ensure that your assets are distributed to the heirs you choose, under terms and conditions you define.
Your business succession plan helps ensure that your business doesn’t fail following your incapacity or death, and that control of your business passes to a suitable successor.
When you don’t plan your estate, your incapacity plan will be defined by a court, and your estate will be carved up according to state law. The result may be far different from what you desire.
Planning for your care while you’re alive
In addition to planning for the distribution of your assets after you die, a complete estate plan looks at what will happen to your estate if an accident or illness leaves you unable to properly care for yourself.
Your incapacity plan includes your durable power of attorney, healthcare proxy, and living will:
Your durable power of attorney appoints an attorney-in-fact who can make financial decisions for you if you become incapacitated.
Your healthcare proxy appoints a healthcare advocate who can help you make medical decisions if you’re unable to make or communicate those decisions yourself.
Your living will describes what care you want to receive, and don’t want to receive, during the final days of your life.
If you don’t appoint people to help with your medical and financial needs, your family may have to go to court to have somebody appointed to make decisions for you. Your loved ones will face unnecessary burdens and confusion:
Your family will have to go to court to have somebody appointed to manage your personal and financial needs, at a time when they’re already under stress due to your incapacity.
The court won’t know who you’d prefer to assist with your medical and financial decisions, and may appoint somebody who you would find unacceptable.
Your helpers won’t know your wishes or the limits you’d impose on their choices if you were able to communicate them. They’ll have to try to guess what you would have wanted.
The impact of these choices may be profound. Whatever your plans, with a court-appointed guardian supervising your medical care, you’re more likely to undergo more intrusive medical care and to spend your last days in a hospital or nursing home. (Chapter 14 discusses incapacity planning in more detail.)
Ensuring that your assets go where you want
When you plan your estate, you pick your heirs and decide how much you want to leave to them. Although state laws do restrict your ability to disinherit certain heirs, especially your spouse, for the most part you can leave your money to family, friends, schools and charities, or anybody else you choose.
In defining your bequests, you may choose to simply distribute your assets to your heirs upon your death. But you may also choose to be very creative in how you distribute your assets.
You can defer your bequests to a later date (for example, “When my son turns 25”).
You can mete out your gifts in installments (for example, “$20,000 to my daughter upon her 18th birthday, $20,000 on her 23rd birthday, and $60,000 upon her 30th birthday”).
You can impose conditions on your bequests, requiring your heirs to satisfy those conditions before they receive the inheritance (for example, “$50,000 to my son upon his graduation from college”).
If you don’t plan your estate, the state will make all those choices for you. Your estate will go to your heirs according to your state’s laws of intestate succession, described later in this chapter in the section “Realizing What Happens If You Don’t Have an Estate Plan.” If you have minor children, the probate court may appoint a conservator to look after their assets until they turn 18. But any adult heir will immediately receive their legally defined inheritance. Your wish to support your alma mater or to give to charity? Forget it.
The only way to be sure that your assets are distributed the way you want is to plan your estate. (Chapters 3 and 4 detail the process of collecting information about your assets and planning your bequests.)
Looking Out for Common Pitfalls
Everybody makes mistakes, but some mistakes get made a lot. Actions that may seem like they’ll simplify your estate may in fact make it more complicated, burden your ability to use and enjoy your own assets, or increase the tax burden to your estate and heirs.
At the same time, once you understand the common pitfalls, most are pretty easy to avoid. You can avoid some mistakes simply by planning your estate now, rather than putting it off until your health starts to fail. (For more discussion of common estate planning mistakes, see Chapters 8 and 18.)
Benefits and dangers of jointly titling real estate, property, and bank accounts
A common shortcut to estate planning involves adding your desired heir to the title of your real estate, financial account, or other titled asset. You can choose between a number of different types of joint ownership, discussed in Chapter 17. In all likelihood, when you add somebody as an owner, you’ll create a joint tenancy with right of survivorship, meaning that they automatically inherit your share if you die before them.
Some huge risks can arise from joint ownership of a home. Take a common example, where you add your child to the deed as a joint tenant:
Your son gets divorced, and his wife asks the divorce court to award him half of “his share” of your house.
Your son may decide that the home is “more than you can handle” and ask a court to force the sale of the property.
Your son decides to move in. It’s his home too, isn’t it?
Your son suffers financial problems or doesn’t pay his taxes, and his creditors or the IRS try to collect against “his share.”
Also, adding a joint owner can increase that person’s capital gains tax exposure when the property is eventually sold.
Other issues may also arise:
What happens if you can no longer afford to support your home, or are no longer physically able to care for it, but your child won’t agree to a sale?
What happens if you want to refinance your mortgage to improve the property, get a better interest rate, or withdraw equity from your home, but your child refuses to cooperate?
What if you want to sell your house and move into a smaller home or condo, but your child wants to keep “the family home?”
What happens if you have to move into a long-term care facility?
When you give up your full ownership interest, you run the risk that your children will suddenly decide that they know what is best for you, and prevent you from making perfectly reasonable decisions relating to your own home.
Similar issues arise with joint ownership of bank accounts. As the law presumes that both you and your joint account holder have equal rights to the money, your co-account holder may empty the account. His creditors may try to garnish the account to satisfy his debts. If it truly is a joint account, with both of you contributing toward the balance, the IRS will still try to include the entire account balance in your taxable estate, and your child will have to prove to the IRS that he contributed part of the money and that his contribution should not be taxed.
Possible alternatives to joint ownership include the use of a living trust, or transfer-on-death titles and accounts. (Part III discusses living trusts. For discussion of joint ownership of real estate, see Chapter 17.)
Benefits and dangers of life estates
You own your home, and you want your children to inherit your home. So how about a life estate? In a life estate, you retain the right to use and control your home for the rest of your life, and you provide for your ownership of your home to pass to specific people upon your death. You’re called the life tenant, and the people who eventually receive your home are your remaindermen. Although I’m speaking in terms of your marital home, you can create a life estate for other property as well, which is called a retained life estate.
In a typical arrangement, once you create a life estate, you retain the exclusive right to the use and possession of your home. You pay the day-to-day expenses of your home, including routine maintenance, homeowner’s insurance, and property taxes. You pay the interest on the mortgage, but your remaindermen pay the portion of the mortgage payment that goes to the principal balance.
“My children wouldn’t do that to me”
You probably have thought at one time or another that your offspring would never do any of these awful scenarios to you. While other people may have children who will abuse joint ownership or empty a joint bank account, your children would never do such a thing. You know what? You’re probably right. The worst abuses happen in exceptional cases, and most children try to respect their parents’ wishes. But not all the problems arise from malice.
Your child may encounter financial troubles. It’s easy to “borrow” a car payment or a house payment from your joint bank account. Maybe your child even repays the loan the first time or two. But then she finds herself having borrowed two or three payments. Then four. And before she even appreciates what she’s doing, she’s “borrowed” far more of your money than she can realistically pay back. Do you sue your child? Call the police? The odds are that you won’t. You’ll suffer a strain in your relationship and have a less comfortable retirement than you had previously expected.
On the flipside, your child may be far more concerned with your financial stability than you are. Every time you make a purchase, your child may be demanding to know what you spent “all that money on” and “did you really need it.” I recently encountered a case where a child emptied out her mother’s joint bank account, not because her mother was spending inappropriately but because the daughter was afraid she might. She didn’t approve of her mother’s new boyfriend and was concerned that her mother might make excessive gifts.
As a life tenant, you face the same type of dependence upon the goodwill and cooperation of your remaindermen as you do with joint ownership (see preceding section). You need your remaindermen’s consent to refinance or sell your home, and difficulties can arise if you become unable to pay the home’s ongoing expenses.
A life estate may also appeal to you if you have children from a prior marriage who you wish to eventually inherit your home, but want your current spouse to be able to live in your home following your death. You can provide in your estate plan for your spouse to receive a life estate in your home, with your children as the remaindermen. But consider the consequences:
Say that you’re considerably older than your spouse. You die at age 82, and your spouse is 63. At this time, your children are nearing retirement age. If your spouse lives for another 20 years, your children will be elderly by the time they inherit your home. By then, they may have little need for an inheritance.
Your spouse may neglect the property, causing your children to have to pay insurance, taxes, and repairs and possibly having to take your spouse to court.
You may create acrimony between your spouse and your children, who see your spouse as standing in the way of “their inheritance.”
Your spouse may remarry. Do you want to subsidize your spouse’s new family?
An alternative? Keep your house in a trust for five to ten years, or whatever other time period you desire, and let your spouse have full use and enjoyment of it during that period. Then have your trust convey your house to your children.
Danger of subjecting an asset to Medicaid spend-down rules
Medicare is a federal health insurance program that provides payment for certain hospital and medical expenses for people aged 65 and older. But as you age, you face a huge potential expense that Medicare doesn’t ordinarily cover: long-term care.
If you’re wealthy enough, lucky enough, or hold sufficient long-term care insurance, you may not need to worry about the cost of your long-term care. But most people, even those with some insurance, can face significant financial hardship from the high cost of residential care.
This is where Medicaid comes in. Medicaid is an additional federal program that covers medical costs, including the cost of long-term care, if you’re financially unable to pay for that care yourself.
But before you can qualify for Medicaid, spend-down rules apply. If you have too much income or too many assets, you won’t qualify for Medicaid until your income or assets are spent down to a qualifying level. The goal here is to make you pay for your own care before the government takes over, while still protecting you and your family from becoming impoverished by the costs of long-term care. Note that spend-down rules don’t require that your assets be spent on your medical care, but you do face restrictions on how you can spend your excess money without affecting your qualification for Medicaid.
What if you give your assets away instead of spending them? Can you qualify for Medicaid? That’s where look back rules kick in. When you apply for Medicaid benefits to pay for long-term care, the government examines your financial transactions over the past five years to determine whether you’ve transferred assets out of your estate. If you have, the government will impose a penalty period before you can qualify for Medicaid benefits. Any gifts, including payment of tuition for an adult child, charitable donations, and even Christmas presents, can trigger a penalty period for long-term care benefits.
You benefit from a modest Medicaid exemption for income and savings. But you may benefit from a large exemption in the form of your home. If you’re in a nursing home but are expected to return to your own home, your home is exempt from the spend-down rules. Note that if you stay in a nursing home for six months or longer, Medicaid assumes that you won’t return home. Also, if you’re married, as long as your spouse remains in your home, it’s exempt from spend-down rules.
So how do you accidentally lose your exemptions? Usually in one of two ways:
You don’t understand the exemptions and believe that the government will take your house no matter what. You transfer title to an heir, probably your children. Your home is no longer yours, and the government will apply spend-down rules to its fair market value.
You aren’t even thinking about Medicaid. You decide that the easiest way to leave your home to your heirs is to add them to the title, giving them outright ownership. The transfer of an interest in your home for less than fair market value during the look-back period can trigger spend-down rules or penalties.
Traditionally, people often used life estates to try to avoid Medicaid spend-down rules. The value of a life estate isn’t counted toward your assets when you apply for Medicaid benefits. But states are eager to recover Medicaid expenses and are increasingly imposing liens against the property a Medicaid recipient has placed into a life estate.
One more thing to consider: Even when an exemption applies during your lifetime, the state may seek to recoup its costs by imposing a lien against your property after your death.
Your best approach is to engage in estate planning long before you end up in long-term care. If you plan for your long-term care needs and implement an asset protection strategy before the Medicaid look-back period begins, you can minimize the effect of spend-down rules and recoupment policies on your estate.
If you believe you or your spouse will require Medicaid benefits later in life, you can consult a lawyer who specializes in Medicaid planning. Your lawyer can help you create a strategy to minimize the effects of Medicaid’s spend-down and look-back rules, as well as helping you avoid or minimize liens Medicaid may attempt to assert against your estate after you die.
Potential for increased tax exposure
Most people won’t pay federal estate tax. The current estate tax exemption is $2 million, and the estate tax is scheduled to be totally repealed in 2010. But the law repealing estate taxes is scheduled to expire at the end of 2010. Most people expect that Congress will pass a new law sometime in 2009 that restores an estate tax, but with an exemption set somewhere between $1.5 million and $4 million.
The estate tax is substantial. Above the exemption, the current estate tax rate is 45 percent. If your estate is large enough to pay estate taxes and you do no advance planning, the government may turn out to be your biggest beneficiary.
Realizing What Happens If You Don’t Have an Estate Plan
Are there drawbacks to not planning your estate? Yes, and some of them are big.
If you have a large estate, you will maximize your estate tax liability (see the preceding section). But in addition to the possibility that you’ll increase the government’s cut, you have two huge reasons to have an estate plan:
If you don’t plan your estate, the government will decide who inherits your assets.
If you don’t designate a custodian for your minor children, the state will pick somebody for you.
You may enjoy many smaller benefits as well, including picking the person who will administer your estate and providing instructions for your funeral and memorial service. If you don’t draft a will, others will make those choices for you.
Following the laws of intestate succession
If you don’t make an estate plan for yourself, the state has already made one for you. State laws of intestate succession define who inherits the property of people who die without a will. Typically, your surviving spouse will receive half of your estate, with the remainder divided between your children. If you have no surviving spouse or children, your estate is distributed by formula to other surviving members of your family.
In some cases, the state’s plan for your assets may be very similar to your own. In others, it will be wildly different. But the only way to be certain that your estate is distributed the way you want is to create an estate plan.
Even if you plan your estate, intestate succession laws may apply to some of your assets in the following situations:
You forget to include an asset in your estate plan.
You direct an asset to an heir through your living trust, but forget to transfer ownership of the asset into your trust.
After all of your bequests are made, you’ll almost certainly have something left over in your estate, even if just a small amount of cash or your clothing and personal effects.
You should include a residuary clause in your will, describing how any assets left in your estate are to be distributed after all specific bequests have been made. That way, all your assets will be distributed consistent with your own wishes, and not through choices the state makes for you.
Determining the custodian of your minor children
Although uncommon, tragedy can strike your family and kill both you and your spouse. Families tend to travel together, so a terrible car accident or plane crash could leave your children as orphans.
If you draft a will, you may designate custodians for your minor children. You can pick people you trust to care for your children and raise them in a manner you approve. If you want, you can designate one person to care for your children, and another person to manage their money.
Although courts aren’t bound by your designation, judges usually defer to a parent’s wishes. But if you don’t make a choice, the judge will pick somebody for you. That person or persons could be
Your in-laws, who were abusive to your spouse throughout her childhood
Your sister, whose husband was adamantly opposed to caring for your children until he learned about their Social Security survivor’s benefits
Your cousin, who has never been able to manage money but will now be responsible for overseeing your children’s inheritance
Granted, often the court will make a good decision and pick somebody who will provide excellent care for your children. But why take the chance?
Even if you’re divorced from the other parent, you can designate a guardian. That way, you don’t have to update your will if something happens to their other parent. If you have custody of your children and have serious concerns about the other parent’s ability to properly care for them if something happens to you, you can include with your will an explanation of why you’d prefer somebody else to take custody of your children. Although courts will almost always give custody to a surviving parent, as that’s typically what the law requires, you will at least make the court aware of your concerns.
Issues you may face in providing for your children and dependents are discussed in Chapter 5.
Creating Your Will or Trust
If you’re reading this book, you’re probably considering drafting your own estate plan. If you don’t expect to owe estate taxes, don’t want to disinherit your spouse or child, and have the time to work through the process, you should be able to do it yourself. But if you lack the time or inclination, have a very large estate, are disinheriting an heir, are the owner of a business, or have a complicated plan for the distribution of your estate, you’ll almost certainly benefit from professional estate planning services.
Whatever you decide, your understanding of the estate planning process will help you. It’s essential to planning your own estate, but it will also help you understand your own needs and communicate your wishes to an estate planning professional.
Deciding who should create it
As you embark upon the estate planning process, you need to ask yourself, are you able to plan your entire estate yourself? You may discover that
You’re capable, but don’t have sufficient time or interest to go through the process of planning your estate.
You can plan the bulk of your estate, but require some specialized estate planning services that should be performed by a lawyer.
Whether due to the size and complexity of your estate, or your own discomfort with the process, you should hire a professional to plan your estate.
There’s absolutely nothing wrong with getting help with your estate plan. Most lawyers I know don’t plan their own estates. It’s not a matter of ability, as most are capable of figuring out what they would need to do. It’s a matter of getting things done quickly, and getting the benefit of an expert’s advice and knowledge.
Although you may cringe at the thought of paying money to a lawyer, remember that your time is valuable. How many hours of your time do you want to spend learning the intricacies of estate tax law or business succession, when an experienced estate planning lawyer will be able to do a better job in a fraction of the time, by dint of experience? And if you make a mistake, the increased capital gains tax, income tax, and estate tax exposure will probably dwarf the cost of professional estate planning services.
For more guidance on working with estate planning professionals and figuring out when you need an expert, see Chapter 2.
The state of Louisiana has chosen to make it very difficult to draft your own will. The steps you must take to execute a valid will are the most complicated in the nation. But that’s not all. The state’s forced heirship laws mandate minimum bequests to certain heirs and restrict your right to reduce their bequests or disinherit them. You can create what by all appearances is a valid, properly executed will, yet still have the state restructure your bequests to your heirs. Pretty much everybody in Louisiana, including most lawyers, should have a professional draft their will.
Understanding the process
Planning your estate can be a big job, but it’s something you can handle. Approach the process step-by-step:
1. Gather your facts.
Take stock of your personal situation, including where you live, who lives with you, your extended family, and other potential heirs, including friends and charities.
Take a thorough look at your assets, determining what you own, how you own it, and what it’s worth. Also review your debts, including what you owe and who you owe it to.
This process is covered in Chapter 3.
2. Determine your estate planning needs.
Ask yourself the following questions:
• You need a will, but do you also need a living trust?
• Do you want to use other trusts, to delay or structure inheritances, or to protect your heirs?
• Will your estate owe estate taxes? How complex does your estate planning strategy need to be? Do you also need a gifting strategy, to transfer wealth to your heirs during your lifetime?
• Do you own your own business? What sort of business succession plan do you need?
• What other special circumstances do you need to address? For example, do you have children from a prior relationship? Do you want to disinherit an heir?
• Who will serve as your helpers? Your personal representative manages your estate in probate court, pays your bills and taxes, and oversees your funeral and burial arrangements. Your trustee manages, controls, and distributes assets held in your trust. Your minor children need a custodian to take care of them if something happens to you, and perhaps a second person to take care of their money.
• If you’re creating a trust, what property do you want to put into your trust?
• How will you leave your assets to your heirs? Will they receive their inheritances immediately, or will they be held in trust until some point in time in the future? Will any of your gifts be conditional, with your heirs only receiving their inheritance when a condition (such as college graduation) is met?
• How will your estate pay its bills and expenses? Do you have enough money available to pay your debts and taxes, pay for the administration of your estate and trust, and cover funeral expenses? Should you carry some life insurance to cover those costs?
This process is described in Chapter 4.
3. Prepare your will and living trust, making sure that you address all your major assets, including those with sentimental value.
For some assets, you’ll want to designate contingent beneficiaries, in case an heir dies before you do or declines an inheritance.
You will also include a residuary clause, directing how any assets left in your estate will be distributed after all your specific gifts have been made.
For guidance on drafting your will, see Part II of this book. Trusts are covered in Part III.
4. Execute your estate planning documents to give them legal effect, obtaining proper witness signatures and notarization.
You can execute your documents as you complete them or, if you prefer, as you complete each document. Guidance for executing your will is provided in Chapter 7 and Appendix A. Instruction for executing your trust is found in Chapter 11.
5. Lather, rinse, repeat.
You’ll review your estate plan on a regular basis, perhaps annually (and not less than once every few years), to make sure that it still suits your needs.
You’ll also review your estate plan when you experience major changes in your life, including moving to another state, marriage, divorce, separation, childbirth or adoption, significant change in your financial situation, or the death of an heir.
For information on reviewing and updating your will, see Chapter 9. Guidance for updating your revocable living trust is provided in Chapter 13.
Throughout this process, ask yourself whether it’s realistic for you to plan your estate yourself. You can manage a will and living trust, but tax planning, business succession planning, more complicated trusts, or complicated plans for the distribution of your assets can change that. So can state laws, particularly if you want to leave your spouse less than the law requires, or if you live in Louisiana.
Thinking about your kids, money, life insurance, and more
You need a plan for your incapacity. That plan may include a living trust, granting the trustee authority over the trust’s assets if something happens to you. But you should also prepare a durable power of attorney and healthcare proxy and should consider a living will (see Chapter 14).
If you own a business, you probably need a business succession plan. This plan has two major components. First, how do you convey your business to your heirs while minimizing capital gains taxes and estate taxes, and second, who will take control of your business and manage it if you die or become incapacitated. Without a good succession plan, you risk that your business will collapse (see Chapter 4).
