ESTATE PLANS AND WILLS
I believe everyone should have an estate plan and update it whenever there are significant changes in one’s personal situation. An estate plan includes a will and other important legal documents that I discuss here. For most of us, our estate plan should be prepared with the help of an attorney who specializes in this field.
General Principles
Key point:
We all need an estate plan even if we are sure our estate won’t have to pay estate tax.
A few facts to consider:
The exemption from federal estate tax was doubled by the tax reforms that commence in 2018, to $11,200,000 per individual (effectively twice that amount for married couples.) This exempt amount will be indexed for inflation every year until 2025. In 2026 the exemption reverts to 2017 levels unless new legislation is enacted. So very few estates will be subject to federal estate tax in the next several years.
It is important to note, however, that a number of states also impose an estate tax and some of them currently have exemptions that are lower than the new federal exemption, considerably lower in some cases. One therefore needs to know the estate tax regime in the state where one lives when doing one’s estate planning. This is where an attorney can help.
We should all have an estate plan, even if there is no chance our estate will be liable for estate tax at the federal or state level. As I see it there are two main reasons: (1) to ensure our wishes are followed as to how property is distributed after our passing, and (2) to make the administration of our estate as straightforward as possible for those who will have to handle our affairs. We have all heard of heirs waiting years to receive inheritances because of contested wills and other complexities in winding up estates, which could have been avoided with good planning.
Gifts and Gift Taxes
Key point:
Everyone can give away up to $15,000 a year to an unlimited number of people without any tax consequences.
So, if you are rich why not just give away most of your money during your lifetime to avoid estate tax? The simple answer is it doesn’t work. You would have to pay gift tax, which is like an estate tax for the living. (There is also something called Generation Skipping Transfer tax, but I won’t get into that.) These taxes have gift exemptions that mirror the estate tax exemption so, starting in 2018, an individual can give away up to $11,200,000 before starting to pay gift tax. Again, this problem will only affect a small number of Americans. The IRS requires the filing of gift tax returns annually, so they can keep track of how much people have given away. States that have an estate tax generally have a gift tax as well.
There is one other aspect of the revenue code concerning gifts that I have found useful and it is this. Anyone can make gifts of up to $15,000 (increased in 2018 from $14,000) and not have them count towards the gift tax exemption, nor have to file a gift tax return. These are called “annual exclusion gifts.” Anyone can make gifts of $15,000 to as many people as one wishes every year; children and grandchildren are, not surprisingly, the most common recipients of such gifts. A married couple can together make gifts of up to $30,000 a year to as many people as they want. So, if you can afford it, why not give away some of your assets to those you love while you are alive and enjoy the pleasure, knowing the gifts won’t be taxed.
By the way, one can also pay medical and education expenses on behalf of others without limitation, but one needs to be careful how to do this to avoid having the payments classified as gifts. I would suggest consulting a financial advisor first.
Components of an Estate Plan
Key point:
For most of us an estate plan should consist of a will, a living will, a durable power of attorney and a revocable trust.
Some years ago, when I went to see an attorney specializing in estate planning to draw up a new will, he informed me that a will is only one component of an estate plan. He said there are other important legal documents that form an estate plan, all of which have to be signed and witnessed and, in some cases, notarized. I listened carefully and, once I understood, asked him to go ahead and prepare everything. Preparing these documents naturally costs money, though some attorneys will charge less if the entire plan is done at the same time as a “package.”
There are articles that suggest additional documents but, for most of us, the following four documents are what lawyers will generally suggest one needs:
Last Will and Testament
This technical term refers to our most recent will, superseding any wills one may have signed previously. A will does three principal things:
It is important to note that any assets that are owned jointly with another person(s), (known as “JTWROS” ownership) pass to that person(s) and any provisions in a will that contradict that passage are of no effect. Assets owned jointly, usually with a spouse or partner, but it can be someone else, could include real estate, automobiles, brokerage or other investment accounts, and bank accounts. Furthermore, for retirement accounts like IRA’s and 401k accounts, it is normal to name a beneficiary and provide that name to the account administrator. The assets in the retirement account will then pass to the named beneficiary. The same is the case with life insurance policies that name a beneficiary. Again, if there is a contradiction in the will, the provision in the will is of no effect.
For people who are married or have a partner, sometimes the only assets for which the heir will be determined by the terms of the will are personal affects like furniture, art work, jewelry and clothing but, for many of us, who inherits such items is very personal. If one does not have a will, one’s property will be distributed according to the intestacy laws of the state in which one lived. So, having a will is always important.
How often should one update one’s will? In my opinion one should ask oneself questions like the following, which might suggest a need to update a will, at least once a year:
Advance Health Care Directive (“Living Will”)
A Living Will is a set of instructions that sets out actions that should, or should not, be taken with regard to one’s health care if one is no longer able to communicate one’s wishes as a result of one’s state of health. It normally specifies the types of life-support one wants or does not want, especially towards the end of life, or if one falls into an irreversible coma. Living wills can express one’s wishes in relation to pain management and artificial nutrition and hydration, as well as organ donation. A Living Will makes it easier for medical staff and other caregivers to know how to care for us in a situation in which we cannot communicate our wishes.
A Living Will should appoint a health care agent (called by different terms in some states) who will liaise with medical staff about decisions that need to be taken to carry out our wishes as stated in the Living Will. One would normally appoint a family member or someone else who knows us well.
Many advisers recommend complementing a Living Will with a Durable Power of Attorney that gives someone else the power to make health care decisions on our behalf if it becomes necessary - for the simple reason that a Living Will cannot contemplate every possible situation that might arise. Durable Powers of Attorney are discussed below.
Durable Power of Attorney
A Power of Attorney gives someone the legal power to act on behalf of another person, to take decisions, sign documents and the like. A durablepower of attorney continues if the person granting the power of attorney becomes mentally incapacitated. If it is not durable, the power of attorney ceases if the grantor becomes mentally incapacitated. In this context this would defeat the purpose of giving someone else the legal power in the first place, so it essential that the power of attorney is durable.
In my view it is advisable, as part of one’s estate planning, to grant someone else a durable power of attorney so that person can take certain decisions on our behalf, in particular essential medical, legal and financial decisions, should one become mentally incapacitated. Normally one would grant a family member or close friend a durable power of attorney, but it could be a professional advisor. One can easily change the person nominated at any time by preparing a new durable power of attorney.
As the granting of powers of attorney is governed by state law, and laws differ across states, it is advisable to have a lawyer specializing in estate planning draw up a durable power of attorney.
Revocable (Living) Trust Agreement
A Revocable or Living Trust (also called an “inter vivos trust”) is a legal document that transfers assets that the holder designates into a trust for the holder’s benefit during his or her lifetime, and then transfers them to beneficiaries named in the trust document, upon death. The trust is revocablebecause one can alter it if one’s circumstances change, or indeed if one changes one’s mind – just as with a will.
Should you decide to set up a revocable trust, the trust document will name you as “Grantor,” as you are transferring the assets to the trust, and you as “Trustee” during your lifetime. The Trustee (you) administers the trust. The document should also name one or more “Successor Trustees” who will take over administering the trust if you cease acting as trustee. This would arise if you become mentally incapacitated and cannot make decisions, or upon death. A successor trustee will typically be the person(s) named as Executor in one’s will but this does not have to be the case.
The trust will not be a separate taxpayer; any income from the assets that one transfers will still be taxed in our hands, so revocable trusts are not an income tax planning tool. What they are is an estate planning tool. Most of us should work with an estate planning attorney to set up a revocable trust; we will likely need advice in deciding which of our assets to transfer to the trust, and then guidance on how to make the transfers. The main reason people use revocable trusts is because wills have to go through a time-consuming and expensive process called probate, which is a court-supervised process of authenticating the will as genuine, as well as overseeing the payment of liabilities and distribution of property in accordance with the will. This can take months, or occasionally years, before the heirs receive anything.
If one transfers assets to a revocable trust, the assets placed in the trust can be transferred immediately upon one’s passing, without cost, to the named beneficiaries, bypassing the lengthy probate process. While setting up a revocable trust and transferring assets to it takes time and costs money, there are obvious advantages to doing so.
I should note that a trust that is set up after one’s death under the terms of a will (called a “testamentary trust”) does notavoid probate. These are sometimes used, for example, if the beneficiaries of the estate are minor children. Testamentary trusts are beyond the scope of the discussion in this section.
So what assets should one consider transferring to a revocable trust? The most commonly recommended are real estate, brokerage accounts, other investments, and bank accounts. I strongly recommend talking to an estate planning attorney or financial advisor before making a decision. Transferring real estate, such as one’s personal residence, is somewhat more complicated if there is a mortgage over the property.
Assets that should not be transferred include retirement accounts such as IRA’s and 401k’s. For these accounts, as discussed earlier, one should name a beneficiary and notify the account administrator. The asset will then pass to the named beneficiary upon death and bypass probate.
As mentioned above, assets that are jointly owned with another person such as a spouse or partner (JTWROS ownership), pass to the other owner(s) upon one’s death. They also bypass the probate process, by the way. Homes, brokerage accounts and bank accounts are some of the more common assets to be owned jointly by couples so, if one does own them jointly with someone else, what would be the point of transferring one’s share of the ownership to a revocable trust?
This is something to discuss with an advisor, but I will leave one thought. Let’s say you own a home, brokerage account and bank accounts jointly with a spouse and both of you die together. Your respective shares of these assets will now fall into your estates, go through probate and will not be distributed to the heirs until the costly probate process is complete and all bills and fees have been paid.
If there are others who are dependent upon you and / or the other joint owner for their day-to-day financial needs, remember the liquid assets in a deceased estate, such as brokerage and bank accounts, will generally not be accessible for some time to provide for their needs. Dependents could include minor children, adult children at college, aging parents or others. Is it not better to transfer these assets, or at least some of them, to a revocable trust to avoid any possibility of this situation arising? Assets in a revocable trust pass to named beneficiaries and bypass probate. I would suggest it is worth thinking about and discussing with an estate planning attorney. Revocable trusts are not just for high net worth individuals, many of us should have one.
General Principles
Key point:
We all need an estate plan even if we are sure our estate won’t have to pay estate tax.
A few facts to consider:
The exemption from federal estate tax was doubled by the tax reforms that commence in 2018, to $11,200,000 per individual (effectively twice that amount for married couples.) This exempt amount will be indexed for inflation every year until 2025. In 2026 the exemption reverts to 2017 levels unless new legislation is enacted. So very few estates will be subject to federal estate tax in the next several years.
It is important to note, however, that a number of states also impose an estate tax and some of them currently have exemptions that are lower than the new federal exemption, considerably lower in some cases. One therefore needs to know the estate tax regime in the state where one lives when doing one’s estate planning. This is where an attorney can help.
We should all have an estate plan, even if there is no chance our estate will be liable for estate tax at the federal or state level. As I see it there are two main reasons: (1) to ensure our wishes are followed as to how property is distributed after our passing, and (2) to make the administration of our estate as straightforward as possible for those who will have to handle our affairs. We have all heard of heirs waiting years to receive inheritances because of contested wills and other complexities in winding up estates, which could have been avoided with good planning.
Gifts and Gift Taxes
Key point:
Everyone can give away up to $15,000 a year to an unlimited number of people without any tax consequences.
So, if you are rich why not just give away most of your money during your lifetime to avoid estate tax? The simple answer is it doesn’t work. You would have to pay gift tax, which is like an estate tax for the living. (There is also something called Generation Skipping Transfer tax, but I won’t get into that.) These taxes have gift exemptions that mirror the estate tax exemption so, starting in 2018, an individual can give away up to $11,200,000 before starting to pay gift tax. Again, this problem will only affect a small number of Americans. The IRS requires the filing of gift tax returns annually, so they can keep track of how much people have given away. States that have an estate tax generally have a gift tax as well.
There is one other aspect of the revenue code concerning gifts that I have found useful and it is this. Anyone can make gifts of up to $15,000 (increased in 2018 from $14,000) and not have them count towards the gift tax exemption, nor have to file a gift tax return. These are called “annual exclusion gifts.” Anyone can make gifts of $15,000 to as many people as one wishes every year; children and grandchildren are, not surprisingly, the most common recipients of such gifts. A married couple can together make gifts of up to $30,000 a year to as many people as they want. So, if you can afford it, why not give away some of your assets to those you love while you are alive and enjoy the pleasure, knowing the gifts won’t be taxed.
By the way, one can also pay medical and education expenses on behalf of others without limitation, but one needs to be careful how to do this to avoid having the payments classified as gifts. I would suggest consulting a financial advisor first.
Components of an Estate Plan
Key point:
For most of us an estate plan should consist of a will, a living will, a durable power of attorney and a revocable trust.
Some years ago, when I went to see an attorney specializing in estate planning to draw up a new will, he informed me that a will is only one component of an estate plan. He said there are other important legal documents that form an estate plan, all of which have to be signed and witnessed and, in some cases, notarized. I listened carefully and, once I understood, asked him to go ahead and prepare everything. Preparing these documents naturally costs money, though some attorneys will charge less if the entire plan is done at the same time as a “package.”
There are articles that suggest additional documents but, for most of us, the following four documents are what lawyers will generally suggest one needs:
Last Will and Testament
This technical term refers to our most recent will, superseding any wills one may have signed previously. A will does three principal things:
- It sets out how one wants one’s assets to be distributed upon death – who will inherit what, subject to the exceptions referred to in the next paragraph.
- It names a guardian for any minor children who might be orphaned.
- It names an Executor, who will administer the affairs of the estate, until all liabilities and fees have been paid and the assets distributed.
It is important to note that any assets that are owned jointly with another person(s), (known as “JTWROS” ownership) pass to that person(s) and any provisions in a will that contradict that passage are of no effect. Assets owned jointly, usually with a spouse or partner, but it can be someone else, could include real estate, automobiles, brokerage or other investment accounts, and bank accounts. Furthermore, for retirement accounts like IRA’s and 401k accounts, it is normal to name a beneficiary and provide that name to the account administrator. The assets in the retirement account will then pass to the named beneficiary. The same is the case with life insurance policies that name a beneficiary. Again, if there is a contradiction in the will, the provision in the will is of no effect.
For people who are married or have a partner, sometimes the only assets for which the heir will be determined by the terms of the will are personal affects like furniture, art work, jewelry and clothing but, for many of us, who inherits such items is very personal. If one does not have a will, one’s property will be distributed according to the intestacy laws of the state in which one lived. So, having a will is always important.
How often should one update one’s will? In my opinion one should ask oneself questions like the following, which might suggest a need to update a will, at least once a year:
- Have I moved to a different state or country?
- Has my marital status changed?
- Have any children (or grandchildren) been born?
- Have I acquired assets not mentioned in the will that I wish to bequeath to someone?
- Do I still want my assets distributed as indicated in my will?
- Is the person named as Executor of my estate still willing to act?
Advance Health Care Directive (“Living Will”)
A Living Will is a set of instructions that sets out actions that should, or should not, be taken with regard to one’s health care if one is no longer able to communicate one’s wishes as a result of one’s state of health. It normally specifies the types of life-support one wants or does not want, especially towards the end of life, or if one falls into an irreversible coma. Living wills can express one’s wishes in relation to pain management and artificial nutrition and hydration, as well as organ donation. A Living Will makes it easier for medical staff and other caregivers to know how to care for us in a situation in which we cannot communicate our wishes.
A Living Will should appoint a health care agent (called by different terms in some states) who will liaise with medical staff about decisions that need to be taken to carry out our wishes as stated in the Living Will. One would normally appoint a family member or someone else who knows us well.
Many advisers recommend complementing a Living Will with a Durable Power of Attorney that gives someone else the power to make health care decisions on our behalf if it becomes necessary - for the simple reason that a Living Will cannot contemplate every possible situation that might arise. Durable Powers of Attorney are discussed below.
Durable Power of Attorney
A Power of Attorney gives someone the legal power to act on behalf of another person, to take decisions, sign documents and the like. A durablepower of attorney continues if the person granting the power of attorney becomes mentally incapacitated. If it is not durable, the power of attorney ceases if the grantor becomes mentally incapacitated. In this context this would defeat the purpose of giving someone else the legal power in the first place, so it essential that the power of attorney is durable.
In my view it is advisable, as part of one’s estate planning, to grant someone else a durable power of attorney so that person can take certain decisions on our behalf, in particular essential medical, legal and financial decisions, should one become mentally incapacitated. Normally one would grant a family member or close friend a durable power of attorney, but it could be a professional advisor. One can easily change the person nominated at any time by preparing a new durable power of attorney.
As the granting of powers of attorney is governed by state law, and laws differ across states, it is advisable to have a lawyer specializing in estate planning draw up a durable power of attorney.
Revocable (Living) Trust Agreement
A Revocable or Living Trust (also called an “inter vivos trust”) is a legal document that transfers assets that the holder designates into a trust for the holder’s benefit during his or her lifetime, and then transfers them to beneficiaries named in the trust document, upon death. The trust is revocablebecause one can alter it if one’s circumstances change, or indeed if one changes one’s mind – just as with a will.
Should you decide to set up a revocable trust, the trust document will name you as “Grantor,” as you are transferring the assets to the trust, and you as “Trustee” during your lifetime. The Trustee (you) administers the trust. The document should also name one or more “Successor Trustees” who will take over administering the trust if you cease acting as trustee. This would arise if you become mentally incapacitated and cannot make decisions, or upon death. A successor trustee will typically be the person(s) named as Executor in one’s will but this does not have to be the case.
The trust will not be a separate taxpayer; any income from the assets that one transfers will still be taxed in our hands, so revocable trusts are not an income tax planning tool. What they are is an estate planning tool. Most of us should work with an estate planning attorney to set up a revocable trust; we will likely need advice in deciding which of our assets to transfer to the trust, and then guidance on how to make the transfers. The main reason people use revocable trusts is because wills have to go through a time-consuming and expensive process called probate, which is a court-supervised process of authenticating the will as genuine, as well as overseeing the payment of liabilities and distribution of property in accordance with the will. This can take months, or occasionally years, before the heirs receive anything.
If one transfers assets to a revocable trust, the assets placed in the trust can be transferred immediately upon one’s passing, without cost, to the named beneficiaries, bypassing the lengthy probate process. While setting up a revocable trust and transferring assets to it takes time and costs money, there are obvious advantages to doing so.
I should note that a trust that is set up after one’s death under the terms of a will (called a “testamentary trust”) does notavoid probate. These are sometimes used, for example, if the beneficiaries of the estate are minor children. Testamentary trusts are beyond the scope of the discussion in this section.
So what assets should one consider transferring to a revocable trust? The most commonly recommended are real estate, brokerage accounts, other investments, and bank accounts. I strongly recommend talking to an estate planning attorney or financial advisor before making a decision. Transferring real estate, such as one’s personal residence, is somewhat more complicated if there is a mortgage over the property.
Assets that should not be transferred include retirement accounts such as IRA’s and 401k’s. For these accounts, as discussed earlier, one should name a beneficiary and notify the account administrator. The asset will then pass to the named beneficiary upon death and bypass probate.
As mentioned above, assets that are jointly owned with another person such as a spouse or partner (JTWROS ownership), pass to the other owner(s) upon one’s death. They also bypass the probate process, by the way. Homes, brokerage accounts and bank accounts are some of the more common assets to be owned jointly by couples so, if one does own them jointly with someone else, what would be the point of transferring one’s share of the ownership to a revocable trust?
This is something to discuss with an advisor, but I will leave one thought. Let’s say you own a home, brokerage account and bank accounts jointly with a spouse and both of you die together. Your respective shares of these assets will now fall into your estates, go through probate and will not be distributed to the heirs until the costly probate process is complete and all bills and fees have been paid.
If there are others who are dependent upon you and / or the other joint owner for their day-to-day financial needs, remember the liquid assets in a deceased estate, such as brokerage and bank accounts, will generally not be accessible for some time to provide for their needs. Dependents could include minor children, adult children at college, aging parents or others. Is it not better to transfer these assets, or at least some of them, to a revocable trust to avoid any possibility of this situation arising? Assets in a revocable trust pass to named beneficiaries and bypass probate. I would suggest it is worth thinking about and discussing with an estate planning attorney. Revocable trusts are not just for high net worth individuals, many of us should have one.
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