Academy of Elder Lawyers
AN INTRODUCTION TO ESTATE PLANNING
It sounds so simple, but many people "just don't get around to making a will" even though they fully intend to do so.
A well-drafted Last Will and Testament can greatly avoid unnecessary costs and complications for your heirs when you die. Most importantly, it can and should direct the final disposition of your property.
Proper estate planning should begin with proper legal advice and counsel, in that what may be a most advantageous plan, idea, or provision for one person could be devastating for another. Consequently, your Last Will and Testament should be tailored to meet your individual needs and special requests.
Do you know what happens when you die without a will? Among other things, it means that the State of North Carolina does your estate planning for you.
DO YOU WANT TO:
1. Maximize your estate assets and minimize estate taxes?
2. Make your own determination as to who are your heirs?
3. Make your assets available immediately for your heirs?
4. Select the guardian for your minor child?
5. Choose an executor to administer and settle your estate?
6. Waive the fiduciary bond which is normally required in order for your executor to settle your estate?
7. Choose a trustee to administer your assets for the benefit of your heirs?
With a will you can make all of the above decisions as well as a host of others which are specifically pertinent to your personal and business affairs. Be warned, however, that poor planning in regard to your estate is as bad, or perhaps worse, than no planning at all.
Careful consideration of the language in your will, in keeping with North Carolina statutory requirements, should give you peace of mind regarding the final disposition of your estate.
YOUR EXECUTOR? WHO'S THAT? WHAT'S THAT?
"Wanted: Professional person with experience in business, accounting, investment management, estate planning, taxes, and personal counseling. Must have a proven track record, be willing to commit for the long term, be available at all times, and be ready to start immediately."
If you were to place the above advertisement in your local newspaper, you probably would not get much of a response. The position requires too much expertise, in too many different areas, with too much of a time commitment. Yet, that is exactly what you need when it comes to choosing an executor or personal representative for your estate.
What is an executor and what does an executor do? Your executor is the person you name to carry out the intent and directions contained in your will.
When you die, your executor will usually be called upon to help make funeral arrangements, locate your will, meet with the estate attorney and arrange probate of the will, meet with family members to ascertain their immediate requirements, make arrangements for support and maintenance payments to be paid to dependents during the period the estate is being settled, and seek court authority to act as your executor.
Once your executor becomes "official" and once Letters Testamentary have been issued, the real work begins. Your executor must:
*take control of your assets and manage, sell, or distribute them as you have indicated in your will
*pay your debts and collect any debts owed to you
*notify Social Security and the appropriate insurance companies of your death
*file for any death benefits owed to your estate
*manage your business or your real estate holdings
*file your final personal income tax returns
*choose a tax year for your estate, which is a decision with important tax ramifications
*file state inheritance and estate tax returns (if any)
*complete and file federal estate tax returns and fiduciary tax returns (if required)
*keep extensive records of all estate transactions and submit a detailed accounting to the probate court and to your beneficiaries
In conclusion, the decision of whom to appoint as your executor is an important one, and one that will have a direct effect on the efficiency and effectiveness of the estate settlement process.
WHAT YOU SHOULD KNOW ABOUT JOINT OWNERSHIP
Joint tenancy is simply co-ownership of real or personal property. The most common form of co-ownership is joint tenancy with absolute right of survivorship.
This form of ownership affords many advantages, but like any form of ownership can have some disadvantages. Any joint tenant has the freedom to manage the jointly owned asset, bank account and/or brokerage account.
Generally, a Last Will and Testament has no power over property held by joint tenants with absolute right of survivorship and the property passes automatically to the survivor no matter what the Will might state. Therefore, spousal joint tenancy property is not probated and avoids the delay, escapes the public record and cost of the probate process. Be aware, however, that the assets held in joint tenancy are subject to estate and inheritance taxes.
Joint tenancy can sometimes benefit married couples in that the Internal Revenue Service includes only one-half of the value of their joint property in the estate of the first to die. The tax basis of that half becomes the value placed on it for estate tax purposes. This is known as a "step-up in basis" and may result in lower income taxes if the property is ever sold.
In conclusion, joint tenancy, like everything, has its advantages and disadvantages. Therefore, if questions arise please do not hesitate to ask them.
LIFE INSURANCE CAN SOLVE MANY ESTATE TAX PROBLEMS
Life insurance can often solve difficult estate planning problems and permit the orderly transfer of assets. With careful planning, estate and gift taxes on life insurance proceeds can be avoided, thereby increasing the value of the insurance as an asset for estate planning.
Many large estates are illiquid. For example, the decedent may have owned a closely-held business or parcel of real estate that comprises a large portion of the estate, while cash assets form a small portion of the estate. Paying estate tax can necessitate the forced sale of these assets, most often under undesirable circumstances. Life insurance can provide the liquidity needed to pay the decedent's final debts and taxes, helping to reduce stress on the family in dealing with the decedent's creditors.
The estate planning use of life insurance has been enhanced in recent years by new life insurance products. "Second to die life insurance" pays at the death of the second spouse to die, which is the time when most death taxes are due and payable.
The advantages of life insurance are greatly increased by the use of the Irrevocable Life Insurance Trust, which removes the proceeds from an individual's taxable estate. If an individual has no incidents of ownership over the life insurance policy, these policy proceeds will be excluded from the taxable estate. An individual can eliminate these incidents of ownership by transferring his life insurance policy to an irrevocable trust.
Many transfers to an Irrevocable Life Insurance Trust can avoid gift taxes by the use of the $14,000.00 annual exclusion. The annual exclusion can be used with respect to the transfer of the original policy given to the trust, as well as to periodic gifts to pay the insurance premiums. Thus, an individual may be able to avoid any transfer taxes on transferring his life insurance to his family.
Careful planning with life insurance can fulfill important estate planning goals and make more funds available to the family with little or no tax cost.
LIFETIME GIFTS AND ESTATE TAX MITIGATION
One of the most basic estate tax mitigation techniques is lifetime gifting. You may give up to $14,000.00 per year to as many individuals as you like. With your spouse you may give up to $28,000.00 per year to each donee, however consultation with your tax advisor should occur, in that under certain circumstances the Internal Revenue Service requires the filing of a written election.
THE FAMILY LIMITED PARTNERSHIP
Do you have a family business, rental real estate, an investment family portfolio, or other assets that you would like to keep in your family from generation to generation? Do you want to maintain control of these assets during your lifetime rather than give too much too soon to younger family members who might not be prepared for the responsibility? Do you know that transferring the assets during your lifetime could protect them from future creditors and remove them from your taxable estate?
Resolving issues such as these can be complex and disconcerting. A "family limited partnership" might be an appropriate solution for all of these challenges. In a typical partnership agreement, you would be the "general partner" and retain ownership of a small portion of the assets. You would give "partnership interests" in the rest of the assets to your "limited partners", which may include your children and/or grandchildren.
A properly structured limited partnership transfers ownership (taxable net worth), but not control, of the assets to the limited partners. As a general partner, you would manage the partnership and have control over its operation, its assets and even the distribution of income the assets may produce. You may reinvest earnings as you see fit or distribute them to the limited partners.
A family limited partnership is considered one of the best tools for protecting assets from future creditors. At best, a creditor may obtain a "charging order" against the partnership interest owned by an individual. But this only allows the creditor to receive cash distributions that the individual partner is entitled to receive, and those distributions are given at the discretion of the general partner. It does not give the creditor access to the partnership assets.
Ordinarily, the transfer of an asset is subject to federal gift or estate tax based on the fair market value of the asset at the time of transfer. In the case of a lifetime gift, appreciation which may accumulate after the time of transfer is free of federal gift and estate tax.
A family limited partnership can offer greater gift and estate tax savings because the value of a family partnership interest, for transfer tax purposes, is usually less than the fair market value of the underlying partnership assets. It is discounted because the terms of the partnership agreement can restrict the recipient's enjoyment of the assets. A typical discount, which is determined by an appraiser and/or accountant, may range from twenty (20%) to forty (40%) percent or more off the fair market value of the assets.
Also, you can use the $14,000.00 annual gift-tax exclusion to transfer partnership interest to any number of recipients each year free of federal gift tax. That is $14,000.00 worth of partnership interest, so the fair market value of the transferred assets may be much greater. If you and your spouse so elect, you may jointly transfer up to $28,000.00 per recipient annually free of federal gift tax. Because of the discounting involved, you should make sure that the partnership interest is valued accurately to make the most of the exclusion and to avoid a challenge by the Internal Revenue Service.
Limited partners are responsible for paying income taxes on their share of the annual partnership income produced, even if it is not distributed. Keep in mind, of course, that a partnership may help reduce your overall family tax bill if any of your limited partners, such as your children or grandchildren, are in lower tax brackets than you.
THE DURABLE POWER OF ATTORNEY
A Durable Power of Attorney is a legal document whereby you appoint, prior to any mental or physical incapacity, a person or institution to handle your personal and business affairs should you become mentally or physically unable. The document is durable in that its legal validity continues notwithstanding your mental or physical incapacity.
Although it is difficult to make any statement regarding estate planning which applies to all persons, it is probably safe to state that everyone should have a Durable Power of Attorney. If a sudden accident or illness were to happen, who would have the legal authority to continue to handle your personal and business affairs?
In the alternative, and in the absence of a power of attorney, a special court proceeding must be instituted to have a guardian appointed and to have you declared legally incompetent. This court proceeding can be time consuming and expensive. It is cumbersome, at best, in that at least two attorneys are usually necessary, one to represent the petitioner for guardianship, and one to represent the alleged incompetent person.
In addition to the Durable Power of Attorney, there exists the Health Care Power of Attorney whereby one designates an agent for the limited purpose of making health care decisions.
Like all estate planning documents, the power of attorney should be tailored to your special needs and requests. It is not the only consideration or single cure to planning for the possibility of mental or physical incapacity, but certainly it is an important first step.
THE LIVING WILL
A living will is a declaration of your desire for a natural death, in that you do not want extraordinary medical treatment used to keep you alive if there is no reasonable hope of recovery. You must follow certain requirements to make your living will effective. You must (i) be of sound mind when you sign your living will, (ii) make certain required statements and elections in the documents, and (iii) sign the document in the presence of two (2) witnesses and a Notary Public.
If your doctor determines that your condition is terminal and incurable, and a second doctor confirms this opinion, your doctor may then, according to the terms of your living will, withhold extraordinary medical treatment, including but not limited to artificial hydration/nutrition.
ESTATE PLANNING CHECKLIST
1. Consider Estate Planning Tools
a. Simple "all to survivor" Will
b. Credit Shelter Trust
c. Disclaimer Trust
d. Irrevocable Life Insurance Trust
e. Family Limited Partnership
f. Trust for Minor Children
2. Inventory your assets, both real property (land) and personal property (cash, stocks, bonds, etc.) and designate type of ownership (individual or joint)
3. Inventory Life Insurance Policies, Annuities, and IRA's and check and update all beneficiary designation forms!
4. Identify your debts and liabilities
5. Select your heirs, such as your spouse, children, parents, other relatives, friends, charitable organizations
6. Consider who might serve as Executor, Trustee, and Guardian of minor children
7. Obtain a Durable Power of Attorney, Living Will, and Health Care Power of Attorney, and now a general HIPAA Release
8. Consider other business continuation plans such as Stock Redemption Agreement, Buy Sell Agreements, Cross Purchase Agreements, Life Insurance Plans
This writing is intended to generally familiarize you with various legal issues. The scope of this document is necessarily limited, and consultation with your attorney or tax advisor should always precede taking any action. You may contact us at Harvell and Collins, P.A. if you have any questions (252) 726-9050.