Questions & Answers About Estate Planning


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Qusetions & Answers about the Estate Planning Process

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Gary A. Loftsgard, CFP We have compiled a list, by no means an exhaustive list, of questions – and corresponding answers – most commonly asked by people concerned about setting up their estate plan the proper way. If you have questions not found on this list, feel free to contact our office at 480-451-7882, ex 4.   2  


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WHAT IS AN ESTATE PLAN? Estate planning is simply an activity whereby the property/asset owner decides upon one or more methods of transferring all of his assets, real and personal, to chosen recipients at his death. A proper estate plan takes into account personal, administrative, and transfer tax matters in order to create the most efficient, cost-effective means of transferring a particular estate upon the owner's death. WHAT HAPPENS IF I DON'T PLAN MY ESTATE? Actually, everyone who owns any asset(s) whatsoever already has an estate plan. If the asset owner does not establish his own plan during his lifetime, and he therefore dies "intestate", then the state's probate code will prescribe a statutory Last Will & Testament for him at his death. WHAT IS A LAST WILL & TESTAMENT? A Last Will & Testament is simply a statement or "testimonial" of one's intent regarding the disposition of his assets after death. It is not a contract, and it therefore cannot be binding on anyone – only those parties “interested” in the estate of the decedent. A will can also create a "trust," and it can appoint a trustee to hold (probated) assets for the benefit of another. This type of trust is called a "testamentary trust" and it is always funded only with probate assets.   3  


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HOW ARE THE TERMS OF A WILL ENFORCED? The probate court generally enforces the intent of the decedent unless evidence is submitted (through due diligence, law suits, or other litigation, obvious impropriety etc.) that causes a determination that the decedent's intent cannot be carried out as stated in his will. Because a will is not a contract (and is therefore not binding), a court of law has jurisdiction over its administration. WHY IS IT NECESSARY TO PROBATE A WILL? First of all, the court has to procedurally determine that the decedent's will is valid and that it is, in fact, his/her will. This is called proving the will. Moreover, when an asset-owner dies, he becomes a deceased asset-owner. A deceased person is unable to transfer ownership of his assets to anyone. The result is that only a court of law has the legal authority and ability to appoint (and transfer) ownership of the decedent’s assets, even if it is only to the decedent’s own family members. The role of the decedent's personal representative (as executor, administrator, trustee, or other fiduciary) is to first have title to all of the decedent's assets vested to him/her by the probate court. Then, after gathering all of the decedent's assets and accounting to the court the personal representative eventually transfers title of the decedent's property to   4  


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the decedent's intended heirs (or those heirs that the state's legislature, through the state's probate code, have decided should be the natural recipients of the decedent's bounty). All of this can happen only through either "formal" or "informal" statutory probate court procedures. SO, WHAT'S SO BAD ABOUT PROBATE? Probate tends to: • Be relatively costly to the estate • Take several months or even years to complete • Effect a disclosure of all pertinent family and financial matters – by a public file – for even unscrupulous people to discover • Be more prone to disputes (and even court litigation) among family members, including attracting the unwanted services of corporate entities who do not have altruistic motives.   5  


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IS THERE A POSITIVE SIDE TO PROBATE? Before the major tax law changes of 2001, there were a few obscure, minor tax benefits to certain estates with certain conditions. Now, those separate advantages are all but gone. However, some probate attorneys take the position that the formal supervision provided by a court in settling an estate is worth the expense, time-lapse, undesirable publicity, vulnerability, and frustration that can be experienced by the heirs while waiting to get their inheritance. HOW CAN PROBATE BE AVOIDED? There are several ways: • Outright gifting during life is one such method that, if used correctly, can be very effective. • The most common method of probate avoidance, however, is to hold real property as joint-tenantswith-rights-of-survivorship (JTWROS). • Another method is by deeding realty property to someone with a life estate retention clause in the deed. • A third well known strategy of avoiding probate of bank accounts, life insurance, IRA's and other assets normally held in accounts is to make those accounts payable-on-death (POD) directly to a named beneficiary.   6  


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All of these methods, however, can create potentially undesirable outcomes ranging from loss of control and unnecessary lawsuit exposure during lifetime to the forfeiture of a thoughtfully structured disposition of one's estate at death. IS THERE A SINGULAR WAY TO ADDRESS PROBLEMS INHERENT IN ESTATE TRANSFERS? Yes. A properly drafted, properly funded, properly implemented Revocable Living Trust is a proven foundational plan for almost any estate, and has the structure to remedy almost all of the problems that can be associated with transferring an estate, regardless of the size. Wealthy estates may require more sophisticated planning in order to minimize the estate tax consequences of transferring great wealth. There are, thankfully, a whole range of options available for this purpose, including, but not limited to, irrevocable trusts, limited family partnerships, charitable trusts etc. Even for large estates, however, a living trust will still comprise the centerpiece of the estate plan because of its flexibility, portability, and ease of administration. HOW DOES A LIVING TRUST AVOID PROBATE? When the creator of a living trust transfers assets to the trust, actually to himself as the trustee, he has   7  


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already conveyed legal title to his assets to a "party" that does not cease to exist when he dies. That party is the office of the trustee – which he may occupy during his lifetime. He is also the beneficiary of his own trust during his lifetime. Probate is no longer necessary because the (successor) trustee already holds legal title to the decedent's assets by operation of law. A trust is a contractual agreement between the creator and trustee of the trust. WHAT DOES IT MEAN TO "FUND" A TRUST? Funding a trust simply means to transfer one's assets to the trust – actually to the trustee of the trust. This is generally accomplished by such means as: • Assignment deeds for realty interests, • Specific assignment/conveyance documents for contractual interests or other non-account assets, • Request-for-retitlement letters (and beneficiarychange letters), • Assignment of stock & bond powers • An entry in a corporate ledger • Using asset ledger / schedules   8  


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WHY MUST A LIVING TRUST GET FUNDED DURING THE CREATOR'S LIFETIME? A living trust must be funded during the lifetime of the creator in order to take advantage of the full benefit of the trust. That is why it is referred to as a "living" trust: it is designed to be funded and functional during the creator's life, in addition to facilitating the transfer of his assets to his beneficiaries upon death. Any (non-funded) assets still owned by the decedent outside of the trust at his death will have to be probated in order to be transferred to the trust through a "pour-over will" – a will that "pours" the assets into the trust – after they have been probated. HOW DOES A MARITAL A/B TRUST WORK? A Marital A/B Trust is a trust format designed for legally married spouses (husband & wife) who establish a trust together as co-creators (note: spouses can also establish a "Marital Simple Trust" which has no A/B format). When the first spouse dies, Trust "B,” called a Credit Shelter Trust because it takes advantage of the amount allowed to be sheltered from estate tax, is to be funded with that part of the entire trust estate which is deemed to belong to him (assuming husband dies first). This means that his sole and separate property (if any) and his interest in any property owned jointly by the spouses   9  


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(community property and/or tenants-in-common or tenants-by-the-entirety property) is transferred to Trust "B,” which then utilizes his unified credit by not having the decedent spouse's estate go directly to the surviving spouse under her full control. The assets of Trust "B" are maintained IN TRUST for the benefit of the surviving spouse for the remainder of her lifetime (unless a prior arrangement is agreed upon). Although she has no ownership interest in Trust “B”, it can be set up so that she can receive all distributable net income from it as well as distributions from the principal for her health, education, maintenance and support. Trust "B" provides legitimate protection of the decedent spouse's estate from the surviving spouse’s potential creditors, or a new predatory spouse, or even possible spendthrift tendencies of the surviving spouse because it becomes irrevocable upon the death of the first spouse to die. Upon the surviving spouse’s death, the assets of Trust “B”, along with the assets of Trust "A" (the surviving spouse’s estate) are then distributed according to the decrees of the trust.   10  


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IF A LIVING TRUST WORKS SO WELL, WHY HASN’T MY ATTORNEY MENTIONED IT? Conventional wisdom says that the family lawyer, because of familiarity and the fact that he or she is a lawyer, is best qualified to help a family set up an estate plan (usually a will). Unfortunately, this is a misconception. Law schools require only one course in the mechanics of wills, trusts, and estates, and only a fraction of practicing lawyers have the knowledge and skill to claim to be legitimate estate planners. This is because the law is vast; probate and trust law can be a complicated subject. In addition to the legal aspects of estate planning, a lawyer must be able to implement the plan once it is set up. This often requires the skills of a financial management professional, so the lawyer must either acquire those skills him/herself or find financial experts to do the work for him/her – all for just one small area of his/her law practice a function that he/she performs only occasionally for a valued client or friend. Unless a lawyer is actively involved with proper estate planning as a fulltime practice or devotes a large percentage of his time to it (as do our network attorneys), it becomes a comparative loss for him or her to get involved in any form of estate planning beyond will preparation.   11  


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Without question, on a client-per-client basis, it is much more profitable for a lawyer to probate the estate of a deceased client after death than it is to spend the time and effort it takes to help an occasional estate-planning client meet their real planning goals and objectives while they are still alive. So, in defense of the family attorney (like everything else), it all boils down to the undisputable laws of “Economics – 101.” WHAT IS A CONSERVATORSHIP? A conservatorship is a legal guardianship established by a probate court for a person who has become mentally and/or physically debilitated to the extent that he is no longer able to perform financial decisions or responsibilities on his own behalf. It allows the conservator to use the incapacitated person’s assets on his behalf under the supervision of the court. Therefore, someone must petition the court for an adjudication of his incompetency – a public matter. HOW CAN A POTENTIAL CONSERVATORSHIP BE AVOIDED? A Financial Durable Power of Attorney (DPA) can be used in some cases to help avoid issues with conservatorship. But a transfer agent (one who acts as a custodian over private accounts held in an institution such as a bank, etc.) is not under any legal requirement to transact with the agent appointed under the DPA.   12  


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The reason is that a DPA is not a contract, only a valid statement of an agency relationship. Because it is not in contract form, the transfer agent is taking a "risk" in agreeing to honor the DPA, especially if there is later any question about the honesty of the DPA agent’s handling of the principal’s finances. WHAT IS THE BEST WAY TO AVOID A CONSERVATORSHIP? A funded revocable living trust is the most effective way to prepare for a potential conservatorship. A living trust is a contract. Therefore, when a transfer agent who is representing the institution where the account is held honors the trust creator’s request to have the account retitled into his trust, the transfer agent assents to the terms of the trust/contract and agrees to transact with the trustee who is now serving as a trustee over the trust assets of the incapacitated creator. WHAT ARE ESTATE TAXES? The estate tax is a transfer tax imposed upon the estate (not the heirs) belonging to the decedent at the time of (and because of) his death. It is imposed on the decedent’s entire estate. However, the unified credit can shelter the estate from estate taxes up to the exemption equivalent amount – then in effect at the year of the decedent’s death. Estate taxes are   13  


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generally not deemed as an "inheritance tax". Inheritance taxes are imposed only in a small number of certain states upon the beneficiaries of the estate (the heirs) and usually at lower rates than the federal (and state) estate tax. WHAT IS THE UNIFIED CREDIT? Let’s use an illustration to define a tax credit. A taxpayer owes a tax of say $500 as a result of selling an appreciated stock portfolio less than one year (short term gain) after acquisition; at first glance, he seems liable for the full $500 tax bill. But let’s assume he is allowed a tax credit of $200 that he can take against any tax liability(s) incurred as a result of selling the short-term appreciated property. This means that he will only have to pay a $300 tax instead of $500. The tax credit is a dollar-for-dollar credit against (i.e., a per dollar reduction from) that taxpayer’s tax liability. The Unified Credit works the same way. A credit (the Unified Credit) is allowed against (e.g., used to reduce from) the federal transfer tax imputed on all transfers of assets (other than assets "excluded" from the transfer tax base, such as gifts that are excluded with the annual exclusion). Transfer taxes are imposed on each and every dollar of value that may be transferred by either a lifetime gift or by bequest at death (such as with a will or a trust). Congress allows a credit against those taxes which shelters a certain amount of   14  


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the taxpayer’s estate from taxation when it is transferred to another. The term unified, when referring to the Unified Credit, means that the transfer tax credit is allowed to be taken against transfer taxes incurred as a result of either (a) lifetime gifts, or (b) transfers at death, or (c) a combination of both; thus, it is unified – or combined. If the taxpayer uses part of the Unified Credit against a gift tax liability incurred as a result of a large gift made in a given year, then he has effectively reduced the Unified Credit that is available to his estate in the exact dollar-for-dollar amount of the credit that has already been used, whether his death occurred in the same year that the gift(s) was made or in a subsequent year. WHAT IS THE FEDERAL EXEMPTION EQUIVALENT AMOUNT? Let’s start with an illustration. If we wanted to make a loaf of bread that was to become exactly 1 foot in length, 7 inches wide, and 6 inches high – assuming it was to be baked for a specific amount of time and with a specific temperature – we would need to use a certain amount of flour, water, and yeast to make that loaf of bread, every time. So, let’s say that it required 7 cups of flour, 3 cups of water, and 1 package of yeast to make the loaf we have described. That means that every time we had those exact ingredients in our   15  



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