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ESTATE PLANNING

Frequently Asked Questions

What information do you need at the Free Initial Consultation?

The primary purpose of the Free Initial Consultation is to gather information from you. The estate planning advice that this law office might provide depends on the nature and size of your assets, how much insurance you have (if any), the nature of your current estate plan (if any), the form of title to property owned, your adjusted basis in certain investments, your age, family dynamics, personal
Retirement Planning
preferences about how and to whom you want your assets distributed, who you want to administer your estate, and many other factors. Accordingly, you should consider these issues and should gather as many of the following documents as you can (if you have them):

This law office is ethically required to keep all of your confidences and secrets strictly confidential, in accordance with AdvoLaw's Privacy Policy. Please remember that the free, initial consultation does not create an attorney-client relationship. ALP welcomes the possibility of serving you and encourages you to take the first step toward sound estate planning by contacting this office today to set up an appointment for a confidential, free consultation. Back to Top

What is Probate?

If you die without a proper estate plan, the state(s) where you live or where you own real estate will distribute your assets through probate.
Estate Plan

Developing an Estate Plan Helps Preserve and Protect Assets from Unnecessary Taxation
Probate is public, court-supervised proceeding in which, in the absence of a will, property will be distributed in accordance with the law. Where there is a legal will, the court will establish the validity of a will and distribute the decedent’s property under its terms.

The probate process is designed to change title to real and personal property from the name of a deceased person to the names of beneficiaries. In the absence of legal direction from the decedent, each state makes these decisions based on its intestacy statute, which sets forth rules about who can be an heir, among other things. The probate process also includes identifying and inventorying the relevant property, appraising the property, paying debts (including court costs, attorney's fees, etc.) and taxes, and distributing the remaining property as the will directs. During this process, the decedent’s creditors may file claims. It also is the forum in which a person may raise a complaint, which often is referred to as a will contest. Probate can be a costly and time-consuming process, even in the absence of a will contest. Generally, the probate process lasts a minimum of a year and will freeze title to property while pending, which could create hardship for beneficiaries because these frozen assets might include savings accounts and safe deposit boxes. With proper planning, one can avoid probate. Back to Top

How do I avoid Probate?

With proper planning, the probate process can be truncated and largely avoided. There are a number of methods that may be used alone or in combination to minimize judicial involvement in the distribution of your assets. The process of selecting the best methods is known as estate planning.

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What is Estate Planning? What should my Estate Plan include?

Estate planning is the process of legally organizing and packaging your assets with the counsel of your attorney and other professional advisors in order to preserve and distribute your assets during your life and after your death. The process involves identifying your personal and financial objectives, determining which combination of tools will provide the optimal results, and executing necessary legal documents to implement the plan. Goals often include such things as minimizing taxes, protecting assets from creditors, maintaining financial and personal privacy, providing financially for loved ones, and providing for guardianship for minors. An estate plan can involve many different legal devices, including:

In addition to achieving the best results, it is essential to carefully select and integrate these and other planning methods in order to avoid potentially costly problems that can result from an uncoordinated or improperly implemented estate plan. Complex laws related to real and personal property ownership, federal and state taxes, inheritance, and fiduciary relationships involved in estate planning.

It is important to understand that estate planning does not involve only planning for your death. While you are alive your assets can be subject to liens, judgments, and taxes that can severely hamper your ability to accumulate and retain wealth. It is equally true, however, that without proper planning significant portions of your assets could be depleted after your death through probate court costs and estate taxes. Second, without appropriate testamentary instructions (for example, a will in combination with a living trust), your assets will be distributed by a Probate Court in a public proceeding, potentially depriving your heirs of assets they could otherwise receive. Planning now can help you avoid or minimize the time-consuming, costly, and public proceedings of Probate Court. Back to Top

What is a Last Will and Testament?

Will ProbateA Last Will and Testament, or simply “will,” is a writing that identifies the beneficiaries who should inherit the testator’s assets and names an executor to administer the estate and to be responsible for distributing the testator’s assets in accordance with the instructions of the will. A will may be used alone or, depending on the situation, in combination with other estate planning devices such as a power of attorney, a revocable living trust, or irrevocable living trust.

Working with an experienced attorney is the only way to be reasonably certain that your estate plan is properly designed and executed. Back to Top

What is a Living Will?

A living will, also known as an Advance Medical Directive, is a document normally incorporated into a “Power of Attorney for Health Care” or “Medical Power of Attorney.” It supplies your directions for life sustaining treatment should you become unable to communicate your wishes. A Medical Power of Attorney may give another person, your agent, power to make a broad array of medical-care decisions on your behalf if you become incapable of making those choices yourself. Back to Top

What is a Power of Attorney?

A power of attorney is a written authorization that one person (the agent) may act on behalf of another person (the principal) with regard to some or all legal and financial matters. A “general” power of attorney is authority that extends to virtually all affairs of the principal; a “special” power is authority that is limited in scope. The scope of authority granted is specified in the document and may be limited by state statute. The power of attorney is an important asset protection device because it provides a trusted person with the power to attend to your affairs if you are unable to do so. In the event you become incapacitated, for example, the power can be used with a revocable living trust to permit your agent to transfer your assets into trust. Establishing a general power of attorney generally eliminates the time consuming, expensive, and public incompetency hearing, where some person must ask a court to declare you mentally or physically incompetent and seek appointment to serve as your court-supervised guardian or conservator. The power becomes effective whenever the document specifies; generally, it either becomes effective immediately or upon the principal’s incapacitated (the latter option is called a Springing Power of Attorney because it “springs” into action upon incapacity). Subject to exceptions, a power of attorney terminates on the death of the person granting the power. A power of attorney may terminate on the person’s disability or, if it is a “durable power of attorney” may persist after disability. Because your appointed agent typically can access your assets without court approval or supervision, it is extremely important that you carefully choose an agent in whom you have exceptional confidence. In any case, however, ALP structures the power of attorney so that it requires the appointed agent to act as a fiduciary representative, which means that the appointed agent has a legal duty to act in your best interest as if standing in your shoes. This is an effective tool against inappropriate self-dealing. Back to Top

What is a Living Trust?

A living trust is a legal arrangement by which an owner of assets, known as a grantor, transfers assets to individual or corporate fiduciary who will own and manage those assets as trustee for the benefit of another, called a beneficiary. Often, the grantor is a beneficiary of the trust. In some cases, the grantor can serve as the trustee (the administrator of the trust). The arrangement is revocable, meaning that during the grantor reserves the right during his lifetime to terminate, modify, or amend the trust. Because the law recognizes the trust as a person separate from the grantor, assets transferred to a trust can be removed from the grantor’s estate, which has some financial planning advantages.

Like a will, a revocable living trust provides for the distribution of your assets, but provides additional benefits, including avoiding probate, holding assets for beneficiaries indefinitely, avoiding or minimizing estate tax, eliminating probate tax, minimizing legal and administrative fees, family supervision rather than court oversight, and avoiding public exposure of private finances. Back to Top

Why Use a Living Trust?

A Revocable Living Trust, similar to a Will, provides for the distribution of your assets, but it also offers other benefits, including: Back to Top

Should I Transfer All of My Assets to My Living Trust?

Clients often ask whether they should fund their living revocable trust or leave it as a “dry” or “standby” trust. Many advisors assert that all persons in all circumstances must fund a living trust with all assets. This probably is an oversimplified approach that could have very negative consequences. For example, these negative consequences could include unnecessarily exposing the assets to creditors’ claims or incurring large capital gains tax liability.

The ALP attorney is careful to consider each client’s particular situation and balances many factors when developing a recommendation of whether to fund a trust with assets. Some of the factors that the ALP attorney considers and balances include the client’s desire for privacy, how property is owned, the clients’ net worth, the nature of specific assets, the identity of beneficiaries, any potential need for protection from creditors, potential sale or refinance of real estate, the health of the client, and the overall structure of the estate plan. ALP’s clients received a tailored plan that fits their needs and NEVER the “one-size-fits-all” approach.

The unfunded or “standby” trust can be very beneficial in certain situations. First, it is not necessary to fund certain assets into the trust (indeed, even funding with a nominal amount like $10 may be sufficient). For some investment assets you can designate you trust as a beneficiary upon your death while retaining the ability to change your beneficiary designations during life (though it is important to integrate your beneficiary designations with your overall plan and to comply with many complex regulations related to IRAs and 401(k) beneficiary designations). Second, the unfunded nature of the trust also provides a surviving spouse with the assurance that a trust is in place if needed while also providing planning flexibility that may prove beneficial. Third, it could help induce a corporation to serve as a trustee. Fourth, the distribution of assets should remain private. In addition, the trust becomes irrevocable upon its creator’s death, so it is possible to establish conditions of distribution that must be adhered to by beneficiaries. Finally, it allows one to arrange in advance for the management of assets in the event of incapacitation. Powers of attorney can authorize your attorney-in-fact to transfer assets to your trust in the event of your declining health or incapacity. Back to Top

Will Creating A Living Trust Cause Me To Lose Control Of My Property?

No, the retention of control is one of the tremendous advantages of a revocable living trust. Because living trusts are revocable, you can amend or terminate the trust at any time during your life. In addition, if the trust is funded and you are like most people, you could name yourself as initial trustee during life. This means that you could have the right as trustee to make decisions regarding your property, including whether to sell it. Back to Top

Can My Lender Accelerate My Mortgage if I Transfer My House to a Trust?

The general answer is ‘no.’ As long as you live in your home, and it has less than five dwelling units, federal law prohibits lenders from accelerating your mortgage simply because you transferred your real property into trust. Nevertheless, it may be a good idea to ask the ALP attorney to notify your mortgage lender that you will be transferring the property into trust to avoid complications. Back to Top

What is an Irrevocable Trust?

This is a trust ALP uses in some estates because it cannot be terminated or otherwise modified or amended by the grantor. One major advantage of this kind of trust is that ALP can use this device to place assets outside of the reach of creditors. Most people shy away from irrevocable trusts because there is significant loss of control. However, this also is somewhat of a misconception. The ALP attorney can, within bounds, to draft some flexibility into the terms of the irrevocable trust so that the grantor will retain some control over investment decisions, the distribution of income and principal, and beneficiary designations. Back to Top

What is a Credit Shelter Trust?

Often referred to an “A/B trust” or a “Bypass Trust,” the ALP Credit Shelter Trust is a legal arrangement that the ALP attorney designs with special language to minimize or eliminate federal estate taxes. The ALP attorney structures the trust to make optimal use of one spouse’s unlimited marital deduction and each spouse’s federal estate tax credit. This is how it works (in very simplified terms): the ALP attorney creates a revocable trust for a spouse that will become irrevocable when that spouse dies. This trust consists of two sub-trusts. The first sub-trust is funded with assets up to the value of the first spouse’s estate tax credit. This is the bypass trust. The ALP attorney drafts language that would cause any assets exceeding the value of the estate tax credit to flow into the second sub-trust, which is called a marital trust. When the first spouse dies, all of the funds in the marital trust flow to the surviving spouse free of estate tax and become part of his or her estate. The assets residing in the bypass trust essentially are held in trust for the ultimate beneficiaries until the second spouse dies (hence, these assets bypass the second spouse’s estate). However, ALP can add special language that would give the surviving spouse a limited right to use the bypass trust assets during his or her lifetime. When the second spouse dies, all assets flow to the beneficiaries as follows: Because the bypass trust never is considered part of the second spouse’s estate (even though he or she cold have a limited right to the funds), assets remaining in the bypass trust flow to the beneficiaries free of the federal estate tax. The second spouse also has an estate tax credit, so any assets in his or her estate up to that amount also escape the federal estate tax. Any portion of the second spouse’s estate exceeding the federal estate tax credit is subject to the estate tax. In this way, the ALP credit shelter trust takes advantage of each spouse’s estate tax credit and defers taxation of amounts exceeding the exclusions until the second spouse dies.Back to Top

Aren’t Credit Shelters Illegal?

Sham credit shelters designed to evade taxes are illegal. The ALP Credit Shelter Trust, however, is designed to maximize the use of legitimate deductions and exclusions provided by the IRS. It employs legal techniques that the IRS has recognized as legitimate. Back to Top

What is the Unlimited Marital Deduction?

This is a very valuable estate-planning tool that ALP often relies upon when planning for married couples. The IRS permits an individual to leave any amount of assets to his or her spouse without taxation, assuming the surviving spouse is a United States citizen (a qualified domestic trust can be used for residents). Upon the surviving spouse’s death, however, all assets in the estate over the Applicable Exclusion Amount will be included in the survivor's taxable estate and may be subject to transfer taxes. Back to Top

What is an Irrevocable Life Insurance Trust (“ILIT”)?

The IRS taxes life insurance proceeds as part of as part of the decedent’s estate. Many people are shocked to learn that life insurance could cause the size of their estates to exceed transfer tax credits. Combined with the decedent’s equity in the family home or individual retirement accounts, life insurance frequently carries folks over the line where estate transfer taxation begins.

One common estate-planning solution that ALP offers is the Irrevocable Life Insurance Trust, or “ILIT.” There are many benefits of an ILIT. First, it creates liquidity upon death. Second, it avoids federal estate tax on the death of the surviving spouse. Third, the ILIT can ensure adequate funding of family plans for support, maintenance, and education. Fourth, because it is an irrevocable trust, the ILIT generally is immune to creditors’ claims against the insured’s estate. Finally, the ALP attorney can construct an ILIT in a number of ways to, for example, benefit a number of beneficiaries or to schedule payouts. The major disadvantage is that the trust must be irrevocable. Most people shy away from irrevocable trusts because there is significant loss of control. However, this is somewhat of a misconception. The ALP attorney, within bounds, can draft some flexibility into the terms of the irrevocable trust so that the grantor will retain some control over investment decisions, the distribution of income and principal, and beneficiary designations. Back to Top

What is a Family Limited Partnership?

The Family Limited Partnership (‘FLIP’) is a legal arrangement that ALP designs for clients who want to want to transfer beneficial ownership of property to family members while maintaining control of the property during life. The property can be money, real property, stocks, or even business interests. In other words, an ALP FLIP is a business form that allows families to conduct their affairs like a commercial interest. To understand how the FLIP works, one must understand the nature and structure if a limited partnership. The FLIP consists of two components: a general partnership and a limited partnership (each of these partnerships may consist of one or more persons). ALP structures the FLIP so that the general partner maintains control and management over the property and the limited partners essentially are passive investors. ALP can assist family elders to transfer assets to the FLIP in exchange for shares of both the general and limited partnerships. Next, ALP assists the FLIP to transfer the limited partnership shares to others, usually children or grandchildren.

The FLIP presents a number of truly remarkable benefits. First, family elders can lower their estate transfer tax profile because the property they transfer to the FLIP no longer is subject to taxation as part of their gross estate. Second, the elders retain total control over the property, including decisions related to its disposition (because incapacity is a risk, it is important to have comprehensive estate plan that includes a power of attorney). Third, the limited partners may qualify under IRS regulations for valuation discounts because their ownership interests are completely passive (because they have no control, they have less than full ownership rights, so those ownership interests are deemed to be less valuable). These valuation discounts offer very favorable tax results for the limited partners. Finally, ALP can organize the FLIP so that it provides protection against creditors’ claims. Back to Top

What is a Qualified Personal Residence Trust (‘QPRT’)?

A Qualified Personal Residence Trust (‘QPRT’) is a trust that ALP creates so a client can lock in a discounted value of a home for the purpose of calculating estate transfer taxes while continuing to reside in the home for a predetermined number of years. After the specified period of occupancy ends, title of the home fully transfers, with any accumulated value and free of taxes, to the client’s beneficiaries (usually children). The client may continue to live in the house after the transfer, but, in that case, the client must pay rent to the new owners. This may seem like a negative outcome, but the rent payments create a powerful estate-planning tool, especially to older clients, by effectively transfer assets outside the estate. Because the rent is no longer part of the estate, the client’s estate transfer tax profile is reduced. Finally, the QPRT also provides legal protection from creditors’ claims. Back to Top

How Can Gift Giving Reduce My Taxes?

If you wish to transfer assets to family members free of estate transfer taxes, lifetime giving is a powerful tool that ALP frequently recommends. There are annual exclusions and lifetime exemptions from federal taxation that permit a person to give an annual gift to each family member or other beneficiary free of federal gift or other transfer taxes and without any IRS reporting requirements. The annual exclusion, which is indexed for inflation, is $13,000 per donee for 2010. The IRS does not treat medical care expenditures and tuition fees paid to the provider directly as gifts for gift tax purposes. Back to Top

Tax Planning

What is the Estate Tax?

Sometimes referred to as the “death tax,” this is a tax imposed on a decedent’s estate when the estate transfers of property to beneficiaries. This is not an inheritance tax, which is a tax that some states impose on the beneficiary’s right to receive property. Many states have no separate estate or inheritance tax while others have a “soak up” tax that matches the exemption equivalent amount under the federal taxation scheme. Back to Top

What is the Gift Tax?

This is the federal transfer tax on lifetime completed gifts from one person to another in excess of a person’s unified credit amount may be used to shelter lifetime gifts exceeding the annual exclusion amount. Some states impose a separate gift tax. Back to Top

What is the Generation Skipping Tax?

This is the tax that the federal government imposes on outright gifts and transfers in trust to or for the benefit of beneficiaries that are two or more generations younger than the donor that exceed the GST exemption. The common scenario is a transfer from a grandparent to a grandchild, but the tax is not limited to this type of familial relationship. Some states impose a separate generation-skipping transfer tax. Back to Top

Did Congress Repeal the Death Tax?

Did Congress repeal the death tax? Did it extend the Bush-era tax cuts for the estate tax? The answer to both questions is: Yes . . . and no. In 2001, Congress enacted a law that changed the estate, gift, and generation-skipping transfer tax systems. The law first reduced and then ultimately repealed the estate and generation-skipping taxes, while leaving the gift tax regime in place. The law phased in the tax reductions over eight years, culminating with a repeal of the estate tax in 2010. Due to congressional budget reconciliation rules, the provisions were set to “sunset” at midnight on December 31, 2010. However, President Obama signed legislation into law on Friday, December 17, 2010, that will extend the “Bush Era Tax Cuts” until 2012. Unless Congress acts to make the repeal permanent, the federal estate, gift, and generation-skipping transfer taxes will revive and return to their 2001 levels at that time. If Congress does not act by the sunset date, the top marginal rate of 55% would apply to estates that are larger than $1 million in size. This probably will be an issue again during the 2012 presidential election, as will the federal budget deficit, so prudent planning would account for the worst-case scenario of the return to a $1 million exemption that a life insurance payout alone easily could exhaust. Until then, the estate tax will have an exemption equivalent amount equal to $5 million and a 35% top marginal tax rate. Back to Top

What is the Marital Deduction?

The IRS permits an individual to leave any amount of assets to his or her spouse without taxation, assuming the surviving spouse is a United States citizen. Upon the surviving spouse’s death, however, all assets in the estate over the Applicable Exclusion Amount will be included in the survivor's taxable estate. In this way, the marital deduction merely defers federal taxation of the first spouse’s estate. Back to Top

How Does Joint Ownership Fit Into An Estate Plan?

Property that is owned by two or more people as “joint tenants with rights of survivorship” automatically will pass, upon the death of one of the owners, to the surviving owner(s). Joint tenancy is a useful tool in estate planning in combination with other methods of planning, but it is not sufficient by itself. There are serious limitations associated with joint tenancies. First, joint ownership does not address the question of what happens after all owners of the property die (for example, after the death of the second spouse). Second, placing a child's name on the title to jointly owned property can raise a number of problems. It also could trigger unanticipated taxable events. Some benefits of utilizing joint tenancy may be to prevent strain on the primary residence exclusion under Section 121 of the Internal Revenue Code or in some cases to shield property from the creditors of another joint tenant. Back to Top

What is Tenancy by the Entirety?

This one form of joint tenancy between a married couple. A tenant by the entirety generally will enjoy immunity from the claims of the other spouse’s creditors against that property. Because there is a right of survivorship, all of a spouse’s interest in the property is transferred immediately to the surviving owner upon the first spouse’s death. Back to Top

What are Designated Beneficiaries?

Certain insurance policies and investments allow one to designate a beneficiary as part of the contract. It is important to coordinate the designation of beneficiaries on insurance policies and investments like IRAs with the overall estate plan. A conflict between contractual beneficiary designations and other estate planning documents can create problems. In addition, it is important to properly coordinate beneficiary designations with other estate planning documents because IRS regulations related to beneficiary designations are fairly complex. Back to Top

What is a Life Estate?

A life estate is any interest in property owned by a person having the legal right under state law to use the property for life, after which title fully vests in another person identified in the deed, trust agreement, or other legal document as being the ultimate owner (often called the “remainderman”). Back to Top

How do I name a guardian for my children?

There are three basic types of guardians: natural guardians (like a surviving parent); testamentary guardians (appointed by a will); or court-appointed guardians. The appointed guardian effectively is a substitute parent for the minor. Guardians are subject to significant court or commission oversight and reporting requirements. It is important to distinguish between guardians of the minor's person and a guardian of a minor's property and assets. These do not need to be the same person. In any event, minors are legally disqualified from handling their own financial affairs. So, making gifts to minors during life or at death requires proper planning. If the only or primary concern is managment of a minor's financial affairs, as often is the case, then a custodian or trustee arrangement may be more attractive. There are many ways to transfer gifts to minors, including outright gifts below the annual gift tax exclusion amounts, gifts made in accordance with the Uniform Transfers to Minors Act, Non-tax trusts, a "Crummey Powers" trust, and certain statutory tax trusts such as the 2503(b) "income only" trust or the 2503(c) trust. There are significant pros and cons to each of these methods, including required distribution at different ages (18, 21, or older), minimum distribution requirements or restrictions on the amount of transfers that can be made, and varying tax treatment (including potential application of the "kiddie tax"). Consult ALP today if you would like to know more. Back to Top