Legal Tidbits

What’s the best way to avoid estate taxes?

If you think you have paid taxes and then paid some more taxes throughout your life, you will find that even after you have passed away, Uncle Sam will still want to do business with you. At the very least, Uncle Sam will want to review your estate to ensure that you don’t owe him one last time.

Since each state has their unique set of laws to govern estate and inheritance taxes, you will need to discuss your concerns with an attorney practicing in your state of declared residency. With proper estate planning, you can implement many well-established strategies that will reduce or even eliminate death taxes. However, you must start your estate planning as early as possible in order to take advantage of the many tax-avoidance strategies.

What type of property is not subject to probate?

For the most part, probate is a process through which title is passed from the decedent’s name to the name(s) of the beneficiary(ies). There are indeed certain types of assets that are considered non-probate assets. Included in that list but not limited are the following:

Retirement accounts such as IRAs and 401(k) accounts where the beneficiaries have already been designated;
Any properties held as joint tenants with right of survivorship. This type of ownership allows the asset to pass to the co-owner who has survived without having to go through the probate process;
Life insurance policies;
Bank accounts that have been established as POD (paid on death) accounts;
Properties owned by a living or revocable trust. Title to those properties passes to the successor Trustees without having to go through the probate process.

What is Estate Administration?

With the passing of a loved one, his or her estate will enter a court-managed process called “probate” or “estate administration” whereupon the assets of the deceased will be managed and distributed. If the decedent owned his or her assets through a well-written and properly funded living trust, it is likely that the heirs will be able to avoid the court-managed administration of the estate. The successor Trustee as appointed through the trust will be able to administer the distribution of the decedent’s assets as directed by the living trust. The length of time to complete the estate administration is largely dependent on the size of the estate, the complexity of the estate and the local rules of the court.

While each estate administration is somewhat unique, most estate administrations would involve the following steps:

Filing of a petition with the probate court.
Notice to heirs under the Will and/or Trust or to statutory heirs (if no Will or Trust exists).
Petition to appoint Personal Representative.
Inventory and appraisal of estate assets by Personal Representative.
Payment of estate debt to rightful creditors. Sale of estate assets.
Payment of estate taxes, if applicable.
Final distribution of assets to heirs.

What is the cost of probate and what is the length of the process?

Both cost and duration of probate can vary substantially as a result of several factors. Basically, the value of the estate and the complexity of the estate will determine cost and time frame. If estate planning documents have been well drafter, well funded and are properly in place, the length of time to close the estate and distribute the assets will be shortened considerably. If there are contests or disputes regarding the will amongst beneficiaries or creditors, the length of time to finalize the administration will be affected as well as the costs involved.

Common costs to settle an estate include Personal Representative or Trustee fees, attorney’s fees, court fees, accounting fees and appraisal costs. It is difficult to estimate the total of these expenses, but a normal range would be somewhere between two percent and seven percent of the total value of the estate. The length of time to settle an estate may also vary significantly, but generally speaking most estates can be settled within a nine to eighteen month time frame assuming there is no litigation involved.

What happens upon mental incapacity or serious medical issues?

When you are mentally incapacitated, you are no longer able to manage your own financial affairs. Many people presume that, if they are married and/or have children, that their spouse and/or children will automatically be able to handle such financial matters on their behalf. That is not the case! Without proper documents in place, one’s spouse or children would have to petition a court to have you declared legally incompetent . . . a process that is long, costly and stressful for all concerned. Once declared incompetent, the court will appoint a person to handle your affairs. Hopefully, that person will be someone whom you would have chosen. The court may even require that the appointed financial manager may have to return to court yearly and account to the court for every penny that is being spent, invested, etc. More costs and frustration on the part of your loved ones!

Proper estate planning can eliminate such problems and confusion. If it is your desire that a certain member or members of your family shall be able to immediately assume the responsibility of managing your finances if you are incapacitated, incompetent or deceased, you may designate who this person(s) shall be via various estate planning documents. Your fiduciaries should be people whom you trust implicitly as they will have the authority to withdraw money from your accounts, pay bills, take distributions from your IRAs, sell stocks, property, etc. Since a Will does not take effect until you die and a general power of attorney may not be sufficient, it is important that you discuss with an attorney what other documents you may need to accomplish your goals in this area.

In addition to establishing a plan for your financial well-being, it is equally important that you establish a plan for your medical well-being. The law also allows you to appoint a trusted person to make decisions on your behalf regarding medical treatment options in the event you lose the ability to decide for yourself. Imagine if you are unconscious as the result of an accident or in a coma . . . who would make decisions for you until such time as you are back on your feet? With the proper document in place early on, you will be able to select this person or persons yourself and prepare them for that responsibility well in advance of the dilemma. Additionally, it is important to have a living will in place which informs others of your preferred medical treatment should you become permanently unconscious or terminally ill. The presence of a living will at such a time is a comfort to your medical representative as they may rely on your stated wishes as to how you should cared for as the end of your life draws near. With a living will in place, you spare those who love you the need for guesswork and controversy as to what is best for you. You have already made the decision for them and it is so stated in your living will.

Does the Personal Representative or Trustee get paid for services rendered?

Normally, Personal Representatives or Trustees of an estate administration are entitled to be reimbursed for any out-of-pocket expenses they may incur during the process of managing and distributing the decedent’s estate. Additionally, they may be entitled to statutory fees which may vary according to locale and size of the estate.

The Personal Representative or Trustee is expected to fulfill his or her fiduciary duties with the utmost integrity. Failure to do so may result in his or her liability for mismanagement of estate assets. It is, therefore, advisable that the Personal Representative or Trustee retain an attorney and an accountant to guide them through the somewhat daunting process of administering an estate. Fees for attorneys and accountants would be paid from the assets of the estate and not personally

Can minor children be protected?

If, at the time of your estate planning, you have minor children, it is extremely important that you address issues regarding their upbringing in the event of your incapacity or death. If your children are young and your financial situation provides for advanced planning, you may want to implement a plan that will allow your surviving spouse to devote more attention to your young children without the burden of work obligations. You may want to provide for financial counseling and resources to be available to your spouse in the event he or she lacks experience or ability to handle financial and legal matters.

In the event that you and your spouse die simultaneously or within a short duration of time, you should have a contingency plan that would validate choices you have both made regarding persons to manage your assets as well as a nomination of a guardian for the upbringing of your children. It is not necessary that your financial manager and the guardian of your children be the same. Be assured, however, if you do not make thee decisions yourself via estate planning documents, a court will decide how your finances are managed and who will raise your children . . . often with the undue burdens of reporting to the court and other court-designated restrictions.

Proper estate planning will afford you the opportunity to determine how your children receive your assets . . . whether directly or whether such assets are to be placed in trust and distributed based on a number of factors which you designate: age, need or even incentive-based as fueled by education, behavior and achievement. You will want to avoid the situation where your children receive substantial assets prior to achieving the level of maturity that will enable them to handle inherited wealth, and your legacy, properly.

As to choosing a guardian to raise your minor children, you will want to designate a person or persons who share your values so that they will be instilled in your children accordingly. Consideration should be given to the age of your selected guardian, their personal financial condition and any known child-rearing skills or lack thereof. Be careful to review your estate plan so that you do not create an additional financial burden for the proposed guardian(s).

A word to the wise about estate planning . . .

Thinking about one’s own death or possible disability are topics most people avoid as long as possible. However, these topics are actually two of the most important reasons for creating an estate plan that will ultimately protect yourself and your loved ones. With proper estate planning, you will not only be in charge of your finances during your lifetime, but you will be able to direct how your finances are to be handled upon your passing away or becoming disabled. Such planning spares your loved ones much anguish over your affairs and spares them substantial expense, delay and frustration in settling financial matters on your behalf.