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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Enjoy peace of mind knowing that your assets will pass to your family according to your wishes Regardless of your age or income, writing a legal will is one of the greatest gifts you can give your family. But where do you begin? Wills & Trusts Kit For Dummies walks you through the most important considerations to have in mind when you're deciding what will happen to your estate when you're gone. Writing a will or setting up a trust isn't as fun as binge watching the latest hot web series, but this book makes the task a little less daunting. Find out who needs a will or trust (spoiler alert: everyone!), when you should create one, and how to take the first steps. Handy online content includes practical worksheets, forms, and templates that simplify and explain the process of estate planning in language that doesn't require a legal education to understand. With the help of Wills & Trusts Kit For Dummies, you'll have a document that details your final wishes before you know it. * Navigate probate, tax, and state laws that govern how property is passed to the next generation * Avoid the most common estate planning pitfalls and mistakes * Choose qualified professionals and specialists to help you make the best decisions for your family * Designate a guardian for your children and plan for their financial needs You deserve to know that your loved ones will be properly taken care of when you're no longer with them. Wills &Trusts Kit For Dummies delivers straightforward guidance and peace of mind on a subject that, sooner or later, we all must face. *Please reference the Introduction to access a webpage where you will find a number of downloadable files and forms to create a will, living trust, living will, durable power of attorney, and healthcare proxy.*
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Veröffentlichungsjahr: 2023
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Wills & Trusts Kit For Dummies®, 2nd Edition
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Library of Congress Control Number: 2021946587
ISBN 978-1-119-83218-8 (pbk); ISBN 978-1-119-83219-5 (ebk); ISBN 978-1-119-83220-1 (ebk)
Wills & Trusts Kit For Dummies®
To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Wills & Trusts Kit For Dummies Cheat Sheet” in the Search box.
Table of Contents
Cover
Title Page
Copyright
Introduction
About This Book
A Special Note for Residents of Louisiana
Conventions Used in This Book
Foolish Assumptions
Icons Used In This Book
Beyond the Book
Where to Go from Here
Part 1: 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
Looking Out for Common Pitfalls
Realizing What Happens If You Don’t Have an Estate Plan
Creating Your Will or Trust
Telling Your Family about Your Estate Plan
Chapter 2: Making Crucial Decisions
Going It Alone
Choosing a Will or Trust for Your Estate
Going with a Pro
Working with a Professional
Safeguarding Your Estate Plan
Chapter 3: Gathering Pertinent Information
Asking Yourself Some Basic Questions
Identifying Your Assets
Considering Community and Jointly Owned Property
Valuing Your Property
Chapter 4: Planning Your Bequests
Calculating Your Assets
Determining Your Intended Heirs and Beneficiaries
Thinking about Your Family Circumstances
Property That Pays or Transfers on Death
Estate Planning for Second Families
Estate Planning for Your Business
Appointing the People Who Will Carry Out Your Estate Plans
Finding Professionals to Assist You
Chapter 5: Providing for Your Children and Dependents
Choosing a Guardian
Managing Your Child’s Assets
Providing for Your Child’s Needs
Chapter 6: Dipping into Your Pocket: The Tax Man (and Others)
Tallying Up Your Estate’s Tax Liabilities
Minimizing Tax Costs and Liabilities
Seeing the Big Picture: Tax Avoidance Should Not Dictate Your Estate Plan
Paying Your Estate’s Debts
Covering Administration Costs
Part 2: Everything You Need to Know about Wills
Chapter 7: Writing and Signing a Will
Deciding Whether a Will Serves Your Needs
Exploring the Types of Wills
Elements of a Will
Executing a Valid Will
Chapter 8: Navigating the Land Mines
Identifying Common Land Mines
Realizing Why You Must Update Your Will
Knowing What to Do If You Lose Your Will
Chapter 9: When You Already Have a Will
Reviewing and Updating Your Will
Changing Your Will
Revoking Your Will
Chapter 10: Estate Administration: What Happens in Probate Court
Navigating Probate Court
Discovering How Estate Size Affects Probate Procedures
Understanding the Role of the Personal Representative
Hiring a Lawyer
Overseeing Probate: The Judge
Avoiding Will Contests
Part 3: Trust Me! How Trusts Work
Chapter 11: The Anatomy of a Trust
What’s a Trust and Why You Need One
Benefiting from Trusts
Selecting a Trustee
Choosing Your Beneficiaries
Transferring Assets into Your Trust
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
Choosing from Other Trusts
Deciding Which Trust Is Right for You
Chapter 13: When You Already Have a Trust
Creating the Trust Isn’t the End of the Story
Transferring Assets into Your Trust
Reviewing Your Trust
Amending Your Trust
Restating a Trust
Revoking a Trust
What Happens If You Die?
Part 4: Carrying Out the Intent of Your Will and Trust
Chapter 14: Planning for Your Incapacity
Planning for Incapacity Has Many Benefits
Drafting a Living Will
Looking into Other Advance Directives
Executing a Healthcare Proxy
Designating Your Financial Powers of Attorney
Chapter 15: Those Cushy Retirement Funds
Exploring Retirement Savings Accounts
Putting Off the Tax Man
Moving Assets from One Tax-Deferred Investment to Another
Designating a Beneficiary
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
Deciding Who Owns the Life Insurance
Designating Beneficiaries for Your Insurance Policy
Chapter 17: Your Castle: How It’s Owned Makes a Huge Difference
Ownership of Your Residence
Should Ownership of Your Home Be Held by Your Trust?
The Drawbacks Of Adding Your Heirs to the Title
Leaving Real Property by Will or Trust
Remembering Other Properties
Part 5: The Part of Tens
Chapter 18: Ten Common Will Mistakes
Not Updating Your Will
Being Too Specific in Your Bequests
Forgetting to Address the Residue 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 6: Appendixes
Appendix A: State Signing Requirements
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Appendix B: State Inheritance Taxes
The Impact of Federal Estate Tax Reform
States That Don’t Tax Estates
States That Impose Only Inheritance Taxes
States That Impose Only Estate Taxes
States That Impose Both Estate and Inheritance Taxes
Appendix C: Estate Planning Worksheet
Estate Plan
Will
Living Trust
Durable Power of Attorney
Healthcare Proxy
Living Will
Index
About the Author
Advertisement Page
Connect with Dummies
End User License Agreement
Guide
Cover
Title Page
Copyright
Table of Contents
Begin Reading
Index
About the Author
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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 key estate planning documents.
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.
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 become comfortable with estate planning documents, but also to recognize when and why you may benefit from professional estate planning services.
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 if 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.
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 download and print the worksheets available with this book 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.)
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.
Beyond the Book
You can find a little more helpful related information at https://www.dummies.com, where you can peruse this book’s Cheat Sheet. To get this handy resource, go to the website and type Wills & Trusts Kit For Dummies Cheat Sheet in the Search box.
Additionally, at http://www.dummies.com/go/willsandtrustskitfd2e, you’ll find a number of files and forms to create a will, living trust, living will, durable power of attorney, and healthcare proxy. The forms you can find there are
Worksheets:
Estate Planning Worksheet; Trusts Worksheet; and Wills Worksheet.
Trusts:
Revocable Living Trust – Individual; Revocable Living Trust –Married Couple; Revocable Living Trust – Individual with A-B Trust; Pet Trust; Assignment of Property to Trust; Reversal of Assignment of Property to Trust; and Revocation of Trust.
Incapacity planning:
Living Will; Healthcare Proxy; and Durable Power of Attorney.
Wills:
Married with Children; Married without Children; Single with Children; Single without Children; Domestic Partnership with Children; Domestic Partnership without Children; and Self-Proving Affidavits.
General instructions that apply to all forms are included as well.
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 1
Getting Started with Your Will or Trust
IN THIS PART …
Learn why you need an estate plan and the dangers of not having one
Find out how to plan your estate
Discover how to plan for special family and personal circumstances, including the care of your dependent children
Decide whether you should plan your own estate or get help from a professional estate planner
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 instead discover that your needs are more complicated than you realized 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 never know when Congress will change estate tax laws, but give it time and it will happen.
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 than you might choose for yourself 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.)
Making things easier for your family
Most families want to carry out the wishes of an incapacitated or deceased relative, but to do that they must know what those wishes are. If you become unable to make your own medical decisions, your family may choose a treatment plan that you would not like. After your passing, your family will want to celebrate your life in the way you prefer, but they can only do that if you tell them what you want. They will want a good home for your minor children, but they need to know what home you think would be best. They will find a way to divide cherished items of property and heirlooms, but they may prefer to divide them in accord with your wishes.
When you create an estate plan and communicate your wishes to your family, you keep them from having to make difficult choices about your estate and assets. You significantly reduce the chances of disagreement or argument among your heirs, and make it much more likely that your wishes will be carried out. (Chapter 4 explains the benefits of discussing your estate plan with your helpers.)
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 her half of “his share” of your house.
Your daughter 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 daughter suffers financial problems or doesn’t pay her taxes, and her creditors or the IRS try to collect against “her 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 no longer can 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. Their creditors may try to garnish the account to satisfy their 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 their 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 3 discusses living trusts. For discussion of joint ownership of real estate, see Chapter 17.)
Benefits and dangers of having your assets “pay or transfer on death”
An alternative to the joint ownership of assets is to instead designate a beneficiary to the specific asset, such that the asset will transfer to your heir upon your death without going through probate. This type of provision can quickly get the asset into the hands of your heir. But it also carries some risk.
For example, you may forget that you have designated an account or asset as payable on death and have it go to the wrong heir, or give that heir more of your estate than you had intended. If the beneficiary tries to fix a mistake by redistributing the asset to your other heirs, there is a possibility that your heir will incur eventual gift tax liabilities. If they don’t, you may create a rift between the beneficiary and your other heirs over that unintended windfall. (For more discussion of payable-on-death designations, see Chapter 4.)
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 want to eventually inherit your home, but you 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 perhaps even to end up 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 age 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 even with some insurance, most people 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 exempted 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 well 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 over $11 million for an individual, and twice that amount for a couple. But sometimes it seems like whenever tax laws are settled, the laws change. The next big change to federal tax law will likely affect how estates are taxed.
The estate tax is substantial. Above the exemption, the current federal estate tax rate is as high as 40 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. 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 a different 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 may find that you need to 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 by dint of experience an experienced estate planning lawyer will be able to do a better job in a fraction of the time? 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:
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.
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.
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 2 of this book. Trusts are covered in Part 3.
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.
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).
Do you have life insurance? Take a look at who owns the policy, and who you have named as beneficiaries. Ownership will affect whether or not your insurance proceeds are included in your taxable estate. Your beneficiaries will receive the proceeds outside of probate, meaning that your beneficiary designation controls who receives the money even if your will says something else. When you review and update your will, you should also review and update your life insurance beneficiaries (see Chapter 16).
Do you have retirement accounts? As with your life insurance policies, they’ll typically pass to a named beneficiary instead of going through your estate. Have you considered what rollover rights your beneficiary may enjoy? Inheritance of tax-deferred retirement savings can be more valuable to an heir who can roll those savings into his own retirement accounts instead of having to immediately pay taxes (see Chapter 15).
How will your estate pay its bills? Do you have enough cash assets, or investments that can be liquidated to pay the costs of your estate? Do you need to have life insurance to help cover those costs? If so, will the insurance proceeds be subject to estate taxes, and can those taxes be avoided? (See Chapter 6 on the costs of estate administration and estate taxes.)
Will your estate have to pay estate taxes? Are you unsure? If your estate will owe estate taxes, you will almost always benefit from professional estate planning services. Estate taxes are so high that in the long run those services will typically pay for themselves several times over. (See Chapter 6 on estate taxes.)
How do you keep your estate planning documents safe? How can you be sure that your personal representative can find your will, or that it won’t be lost or destroyed? (See the suggestions on safeguarding your estate plan in Chapter 2.)
