What is a Will?

1. What is Estate Planning? Estate Planning encompasses the issues that surround people at their death and/or incapacity. Although death is not a pleasant subject for most people to address, it nevertheless remains a fundamental part of life. By planning in advance, you can determine who will be in control of your estate, who will get your estate and how they will get it, as well as who may be making decisions about your health care. Actually a good estate plan will address these issues, while anticipating many others that you might not otherwise think about. Thus, how you prepare for the inevitable will have an enormous impact upon you and your loved ones. That is why it is so important for you to confront these issues now, before it is too late.

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2. Do I need Estate Planning? Yes, everyone needs estate planning. At the very least, you should have a Will and Durable Powers of Attorney. Should you need it, your Powers of Attorney will enable your loved ones to help you with your finances and health care during life. At your death, your Will dictates who is to receive your estate as well as who you want to be in control of your stated dispositions.

Still, for some people, these documents are not enough. In California for example, people who own their own home generally prefer to set up a Revocable Living Trust in order to avoid probate. That is because in California, if you own any real estate OR own over $100,000 in separate property investments and other personal property, your estate will probably have to go through probate. On the other hand, if you do not own any real estate AND you do not own over $100,000 in separate property investments and other personal property, you will avoid probate anyhow because you are within California’s exempt property exclusion.

Sound complicated? To an experienced estate planning attorney, it’s actually pretty easy but if you don’t deal with living trusts every day, this stuff is far from simple. Another basic, yet commonly misunderstood concept is the estate tax exemption amount. In fact, the exempt property exclusion discussed in the paragraph above oftentimes is confused with the estate tax exemption. The estate tax exemption is best explained with an example. For instance, in 2004, there is no estate tax on estates that are less than $1,500,000. Probates, on the other hand, are triggered by a much smaller estate (the $100,000, in California, for example). Therefore, even if you have a will, and no estate tax is due, your estate may still need a probate. Confused? Don’t be, simply click here to end the confusion, and you will be able to get a consultation FREE and FAST.

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3. What is Probate? Probate is a process where a decedent’s assets are inventoried, debts paid off, and the remainder assets are distributed to the decedent’s beneficiaries, through a probate court. Even if you have a Will, there is a high probability that your estate must face probate. In general, probate is expensive and time consuming. Associated costs may be from a lawyer, executor fees, and court costs. Since probates are held in open court, they are open to the public. In California, they usually take at least 6-12 months to complete.

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4. What are the different ways my estate could pass to my loved ones? In general, there are six different ways in which your estate will transfer at death. They are as follows: by Will, Intestacy, Beneficiary Designation, Joint Tenancy, Revocable Living Trust, and Irrevocable Trust. The first two methods are likely to trigger probate. Intestacy, Beneficiary Designation, and Joint Tenancy are the easiest to implement but oftentimes result in unintended dispositions and/or tax consequences. Revocable Living Trusts, on the other hand, are extremely efficient and fairly simple when you create such with an experienced estate planning attorney. We will examine each of these methods in the next few sections. Or if you prefer, simply click here to have us call you and explain all this and more.

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5. What is a Will? A Will is a set of instructions regarding who gets what of your assets, at what time, and under what circumstances. Wills generally require probate if you own any real property, such as a home, or own a substantial amount of personal property assets, such as investments. Plus, your Will only covers assets that pass through probate. That is, certain types of property pass outside of probate. Given such, your wishes may be frustrated if you do not have a comprehensive estate plan. Still, having a Will is better than doing nothing. With a Will, you can insure that your loved ones receive your estate, be able to appoint a guardian for minor children that are left without parents, and appoint someone you trust to administer your estate.

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6. What is Intestacy? Intestacy is the form of succession that occurs when you do nothing. It is otherwise known as the state decides. California simply guesses what you would have wanted and imposes those wishes. Obviously, this oftentimes results in unintended dispositions. Moreover, a probate will generally be required if you own any real property, such as your home, or own a substantial amount of personal property assets, such as investments.

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7. What is Beneficiary Designation? Transfers that pass by Beneficiary Designation do so outside the probate process. Examples of such transfers include life insurance and IRAs. These transfers are efficient but when utilized may result in unintended dispositions as well as estate tax consequences. Plus poor use of these Beneficiary Designations could actually result in an unintended probate. Therefore, you need to be extremely careful when using this form of transfer.

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8. What is Joint Tenancy? A Joint Tenancy is a form of ownership where more than one person owns a single asset. When one owner passes away, the remaining
owner(s) continue to own the property. For example, the most common form of Joint Tenancy occurs when a husband and wife take ownership of their house in Joint Tenancy. When one spouse passes away, the other spouse owns the property outright. A Joint Tenancy is similar to beneficiary designation in that it may avoid probate. On the other hand, this manner of transfer oftentimes results in unintended dispositions as well as negative estate and income tax consequences. A common problem that arises with Joint Tenancy occurs when a married couple dies together or holds property in Joint Tenancy through the death of the second spouse. At either point, a probate will be required. In addition, many problems are caused by owning property in Joint Tenancy with a child. For instance, your children’s creditors might try to seize your Joint Tenancy property. Furthermore, if a younger joint tenant (let’s say your child) dies before you, your property will go to the other joint tenants and skip that child’s children altogether. In other words, you might end up leaving your intended beneficiaries out. If that’s not enough to shy you away from this form of ownership, there might even be additional negative income tax consequences to holding property this way.

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9. What is a Revocable Living Trust? A Revocable Living Trust is a legal document that replaces what most people think of as their will. That is, the living trust makes sure your assets go to the people you choose. It’s main selling point is that it will avoid probate when properly funded. It also avoids a second probate if you or your spouse own property in other states. Besides avoidance of probate however, living trusts allow couples to do some tax planning and in the process eliminate or reduce taxes. Finally, living trusts are the most comprehensive vehicle available in estate planning since it compels you to get your “financial house in order” to transfer your assets into the trust.

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10. What is an Irrevocable Trust? An Irrevocable Trust is similar to a living trust, except it cannot be amended or terminated. Therefore, prior to choosing this estate planning vehicle, you should realize that you can never entirely get the property that you place in an Irrevocable Trust back. Still, the advantage of these types of trusts is that they provide estate tax savings by reducing the size of your estate while providing some creditor protection.

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11. Who should I chose to be in charge? Now that we’ve discussed some of the tools used by estate planners, it seems appropriate to talk about who you want to leave in control. Of course, while you are alive and well, you do not need help. But at some point, you will need to designate another person to be in charge. Those who are in control of your affairs are known as your fiduciaries. They are the trustee(s) of your Trust, executor(s) of your Will, and agent(s) of your Powers of Attorney. Although experience and knowledge is useful for your fiduciaries to have, the most important characteristic of a fiduciary is that they are trustworthy. So long as you trust them to carry out your wishes, professionals can help them achieve those goals.

Another important and oftentimes overlooked issue is the potential for conflict amongst your beneficiaries and fiduciaries. If, in your situation, your beneficiaries and fiduciaries do not get along well now, after you are gone, it is probably going to get worse. That is why it is of the utmost importance that you reduce the potential for fighting, by carefully analyzing your estate plan prior to signing your final documents. This is especially important in the situation where there are children of a prior marriage involved. Much of this type of planning comes down to common sense but generally speaking, an experienced estate planning attorney who has engaged in trust and probate litigation is the best person to anticipate problems in your estate. That is another reason why it is so important to have an attorney draft your documents, not a paralegal and certainly not a trust mill.

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12. Is my estate taxable? These days, this question seems to be on everyone’s mind. About the only generalization one may make with a reasonable amount of certainty is that if your estate is less than $1,000,000, your estate will not be taxed. Beyond that, there is much confusion. The uncertainty was born out of the May 2001 tax reform package that Congress passed in part to phase-out estate taxes. From 2002 to 2010, the credit exemption amounts and highest estate tax rates are as follows:

Year	2002	2003	2004	2005	2006	2007	2008	2009	2010
Maximum estate tax rate	50%	49%	48%	47%	46%	45%	45%	45%	0%
Estate Tax Expemption	$1m	$1m	$1.5m	$1.5m	$2 m	$2 m	$2 m	$3.5m	Repeal

This chart illustrates that each person may pass $1,000,000 to their loved ones in the years 2002 and 2003 estate tax free. For every dollar transferred above $1,000,000 there is a tax. That tax in 2003, begins at a rate of 41% and has a maximum rate of 49%. Every year after 2003, the situation gets better, as the chart demonstrates. In 2010, there is no estate tax at all! But before you start believing in the tooth fairy again, there are several issues to keep in mind. First, estate tax implications remain for all those who pass away over the next few years. Second, after the one year repeal of estate taxes in 2010, Congress elected to bring it back in 2011. That’s right folks, in 2011, all estates will revert back to 2002 since each person will only be allowed a one million dollar exemption. For those of you scratching your head over this one, take comfort in the fact that you are not alone. This law effectively forces Congress to revisit the issue again at some point over the next decade. To make a long story short however, uncertainties over estate taxes will continue for now. The most important thing to remember at this point is not to ignore estate taxes, hoping that things will work themselves out in the end. As always, the prudent course of action for those individuals who are potentially taxable is to devise a plan that makes sense for you no matter how the law changes.

Please note that the explanation above was extremely simplified for illustration purposes here. In actuality, there are gift taxes, generation skipping taxes, and capital gains taxes that changed in the 2001 reform package but are beyond the scope of the discussion here. If you are concerned about these issues, simply click here for a FREE analysis.

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13. I’ve done everything I can think of to reduce taxes in my estate…Is there anything I’m missing? There are numerous estate planning devices available to reduce the tax implications on your estate. They range from the simple, such as giving $11,000 per year to anybody you want, to the complex, such as an Irrevocable Life Insurance Trust or Charitable Remainder Unitrust. (Please see the “Tricks of the Trade” section below for some other ideas.)

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Law Offices of Mary P. Kulvinskas
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