What is Estate Planning?

What is estate planning?

Estate planning is the creation of a definite plan for managing your wealth while you are alive, and distributing your assets after your death. An "estate" means all assets of any value that you own, including real property, business interests, investments, insurance proceeds, personal property, and personal effects.

These assets may be owned separately or jointly with others. Below are some examples of how married couples often hold title to property:

• Separate Property: The entire interest is owned by only one of the spouses. The property was generally acquired prior to marriage, or was a gift or inheritance to one spouse alone during the marriage.
• Joint Tenancy: The interest in the property is owned by both spouses. The surviving spouse acquires the entire interest upon the death of the other joint tenant spouse.

What am I attempting to avoid with estate planning?

There are three principal obstacles in planning our estates:

• Living Probate - the court proceeding to manage a person's estate if he or she is disabled.
• Death Probate - the court proceeding to manage and distribute a person's estate at death.
• Death Taxes - the taxes the government demands upon a person's death. The federal estate tax starts at 37% and rises to 55% of everything a person owns at the time of death.

What are my estate planning options?

There are four basic methods you can use to plan your estate:

• Do nothing.
• Hold title to your assets in Joint Tenancy.
• Create a Will.
• Establish a Revocable Living Trust.

What happens if I do nothing?

Unfortunately, a majority of Americans choose to do nothing. Experts report that 70% of all Americans have no written estate plan. Of those who have planned, most have created a simple will or rely on joint tenancy ownership of their assets to distribute their estate. For the majority of people who do not have an estate plan in place, state law will dictate how their estates are to be distributed at the time of their deaths. As you might imagine, the government's plan of distribution has no particular concern for the best interests of the family.

Doing nothing can result in probate costs, attorney's fees, and higher death taxes. Most people do not realize that there can be major problems as a result of creating a simple will or holding title to their assets in joint tenancy.

This estate planning seminar will discuss each of the estate planning complications and explain what happens if you plan your estate with a joint tenancy, a simple will, or a living trust.

What is joint tenancy and why do so many people use it?

Joint tenancy ownership is where two or more people hold title to an asset together. Unlike other forms of joint ownership, upon the death of one of the owners, the entire interest in the property passes automatically to the surviving joint tenant(s). The legal term for holding property in a joint tenancy is "joint tenancy with a right of survivorship." Right of survivorship means that whoever dies last owns the whole property.

A joint tenant's interest passes to the surviving joint tenant immediately at death. Therefore, the distribution of such property is not controlled by the joint owner's will. For example, two good friends, Joe and John, own a piece of real property as joint tenants. Joe dies leaving a will that says upon his death, all of Joe's estate shall go to his wife, Mary. What happens to Joe's interest in the real property he owns with John? Because title passes automatically at death to the surviving joint tenant, John will own the entire property and Mary will get nothing. This is only one example of the unforeseen problems that joint tenancy ownership can create.

Is creating a will a good idea?

Many people plan their estates by creating a document called a "last will and testament." A will is basically a legal document that states out how you want your assets distributed at death. As previously discussed, a will does not control the distribution of all of your assets. Joint tenancy property and life insurance proceeds both pass outside of your will. Wills do not take effect until a person dies, so they are of no help with lifetime planning.

Upon a person's death, his or her will becomes a public document when it is filed with the probate court. It is then available to anyone who wants to read it. Once a will enters the probate process, the deceased person's estate is no longer controlled by his or her family. Rather, the estate is in the hands of the court and the probate attorneys. Simply stated, a will guarantees that your estate will go through probate. Therefore, it is a poor estate planning document for most families.

Why do so many estate planning professionals recommend a revocable living trust?

A revocable living trust is a complete will substitute. It can control all of your assets both during your lifetime and after your death. Here's how it works: when you set up your living trust, you transfer the title to all of your major assets (stocks, bonds, real estate, etc.) from your name to the name of the trust. You then name yourself as the trustee and beneficiary. This gives you total and complete control of your assets. You can buy, sell, trade, do whatever you wish with your property, just like you do now.

Here is the difference, and the real benefit of a revocable living trust. When you die, there will be no assets left in your name (all of your assets will be in the name of the trust) and, therefore, no probate for your family to endure. Whomever you name as your successor trustee will immediately gain control of your assets to distribute them according to your exact instructions.

LIVING PROBATE

What is a living probate?

Most people, when they hear the word "probate" think it is only something that happens when a person dies. Unfortunately, probate can also happen while a person is alive. It is often referred to as a "living probate." The legal term is a "conservatorship" or "guardianship proceeding." If you become mentally disabled before you die, the probate court will appoint someone to take control of all of your assets and personal affairs. These court-appointed agents must file strict annual accountings with the court. The entire procedure is expensive, time-consuming, and often humiliating.

Does joint tenancy avoid a living probate?

No. Each joint tenant is required to sign documents on all major transactions involving joint property. If one owner is mentally disabled and incapable of handling financial matters, everything will have to wait until the probate court takes control. The court, in effect, becomes a joint owner and will continue to have a voice in managing the jointly-owned property until the disabled owner either recovers or passes away.

Does a will avoid a living probate?

No. A will only takes effect at the time of the person's death. It has no control over the events during a person's lifetime.

Does a living trust avoid a living probate?

Yes. One of the most important benefits of a living trust is that it is designed to protect you while you are alive. Every well-drafted living trust contains a section setting forth your instructions in the event you should become legally incapacitated. You can plan in advance to look after illness, disability, and even old age. The trustees you choose are bound by law to follow your instructions during these difficult times. With a living trust, there will be no need for expensive "help" from the probate court, probate lawyers or conservators.

DEATH PROBATE

What is death probate?

When you think about it, probate is not difficult to understand. At your death, your assets need to be distributed to your heirs, your debts need to be paid, and any loose ends need to be looked after. Obviously, you can't sign the deeds, write the checks, or handle your business affairs after you are gone. The probate court takes over those duties.

The probate process is a long, complicated, officious nightmare for most families. The following are the five basic steps to settling an estate through death probate:

Step One: Recording the Will and Gathering Material

The original will must be submitted to the court, along with a filing fee, to begin the probate process. One of the probate court's first jobs is to approve or appoint someone to handle the affairs of the estate. This person is called the executor, administrator or personal representative, depending upon the rules of the state and whether the decedent dies with or without a will. In Pennsylvania, this individual is referred to as a personal representative if the decedent dies without a will and an executor if the decedent has a will when he or she dies. For our purposes, we will refer to this person as the personal representative. Generally, the first thing the personal representative does is hire an experienced probate attorney. Although having an attorney is not always a legal requirement, it has become a practical necessity because probate paperwork and filing procedures can be very complex.

Step Two: Publishing Notice to Creditors

The second major job of the probate court is to ensure that the decedent's creditors are notified so that they can present their claims to the court for payment. This requires the time-consuming task of cataloging all of the decedent's liabilities. The creditors are notified either by notices in the local newspaper or directly by mail. The law sets a time that the probate proceeding must be left open in order to allow creditors the chance to present their claims. In Pennsylvania, the creditor period is several months long.

Step Three: Inventory and Appraise Assets

During probate, all of the assets in the estate are usually frozen so that an accurate inventory and appraisal can be made. During this period, none of the assets can be distributed or sold without permission from the court. The court will often require formal written appraisals for many items, such as real estate, antiques, collectibles, automobiles, furniture, and other valuable assets. Appraisal fees can be expensive and, like all expenses, are paid for out of the estate.

Step Four: Payment of Debts, Claims and Taxes

Once all of the debts and claims have been submitted and approved, they are presented to the court for approval to pay them from the assets of the estate. Some estates may also have death tax liability and they must stay open until those taxes are paid.

During the entire probate process, disgruntled heirs or those who disagree with the provisions in the will can bring a lawsuit in the probate court. These suits are referred to as will contests. Will contests can prolong the distribution of the estate, and are often used to intimidate heirs into settling cases that have no merit.

Step Five: Final Distribution and Closing of Estate

Finally, after the court is satisfied that all legal requirements have been met, it will allow all debts, claims, taxes, attorney's fees, the personal representative's compensation, and any other miscellaneous expenses to be paid. If there is not enough cash in the estate to pay these substantial claims, the judge can order that assets be sold at public auctions or estate sales in order to defray these costs. These transactions are often conducted in a depressed market or under the banner of "distressed sales."

After all of the liabilities and fees are finally paid, the probate court will allow final distribution of whatever is left of the estate to the beneficiaries named in the will; or, if there is no will, to the designated heirs at law. The court then closes the file.

How much does probate cost?

Despite what probate lawyers say, probate is expensive. The average cost of probate may rise to over seven percent of the gross value of the estate. The probate lawyers usually take sixty percent of the cost, and forty percent goes to personal representatives and others. One legal scholar who urges a reform in the probate system remarked that "the cost of probate expands to consume the money available." There just isn't that much to go around. Remember, every dollar that goes to pay probate costs is a dollar that could benefit your family.

What happens when my real estate is located in another state?

Probate proceedings must be instituted not only in the state where you lived, but in every state where you owned real estate. This is called an "ancillary probate." Each state has probate jurisdiction over the real property located within its borders. This means that your family will have to file a new probate in each state and hire local attorneys to represent the estate. This will add to the expenses that must be paid before your family members receive their share.

Are there any other problems with a death probate?

Yes. Perhaps the most significant disadvantage of death probate is that your family loses control of the estate. During probate, your family may not be able to sell assets without court approval even if they need the money. Opportunities can be lost because the cumbersome probate system moves slowly.

Your family may pay an emotional price in probate as well. Because the process takes so long, it can be a constant reminder of the loss of a loved one. It can also foster arguments among family members who would normally seek support from one another. It is common to see family members taking out their frustration about the system on one another, especially if one of the family members has been named the personal representative of the estate.

Does joint tenancy avoid a death probate?

Yes and no. In the case of a husband and wife who own their assets in Joint Tenancy, there is no death probate when the first spouse dies because title passes automatically to the surviving joint tenant spouse. However, when the surviving spouse dies, there will be a complete probate on the entire estate.

The fact that joint tenancy ownership avoids a death probate at the first spouse's death is a small reward for the many other disadvantages of joint tenancy ownership. It can lead to huge unexpected liability when parents and children own assets together. It can create unintended beneficiaries and often causes gift and death tax problems. For these reasons, estate planning experts agree that joint tenancy is a poor planning tool.

Does a will avoid a death probate?

No. Rather, a will guarantees probate. The word "probate" actually comes from Latin and means "to prove the will." All property that is controlled by a will must go through the probate court. Once an estate enters the probate process, it is trapped in the system until the court releases it.

Does a revocable living trust avoid a death probate?

Yes. All assets transferred to a living trust completely avoid the probate process, both during your lifetime and at the time of your death. Living trusts are not new. They have been successfully used in one form or another since the Middle Ages. Both then and now, a living trust requires that the owner of assets transfer title from his or her name to the name of the trust. Practically speaking, this means changing the title to your property. For real property, it means you will sign and record a new deed. For other assets, you will sign special transfer documents changing ownership to the name of your trust. Once the process is complete, all of your assets will be owned by the trust.

Almost nothing will be owned by you personally. Your living trust has title to the assets, but don't worry! You (or you and your spouse if you are married) have complete control of the trust while you are alive. You may amend the trust, or even revoke it, whenever you desire. When you die, there are no assets in your name, so there is no need to go through the tedious probate process. The trust contains your written instructions directing your agent, the successor trustee, about how you want your estate distributed.

With a living trust, there is no need for "help" from the probate court or probate lawyers. Your trust will completely eliminate these unnecessary costs. Moreover, your estate can be distributed instantly at the time of your death. There are no courts to consult. Your trustee merely follows your instructions in distributing your estate according to your wishes.

DEATH TAXES

What are death taxes?

In addition to the expense and delay of probate, your family may also be liable for death taxes at the time of your death. There are two types of death taxes: the federal estate tax, and the state inheritance tax. Many states have abolished the inheritance tax, but the federal estate tax remains one of the largest taxes a family will ever be required to pay. It is a tax on your right to transfer property to others at the time of your death. Currently, the federal estate tax rates begin at 37% and quickly rise to 55% of every dollar in your estate over the amount of the exemption.

*55% on the excess over $3,000,000

Do all estates pay federal estate taxes?

No. The federal government has given every person in the United States an exemption for estate tax purposes. Presently, the exemption is $700,000, with a planned gradual increase to $1,000,000 in the year 2006. This means that if your estate is less than the exemption amount at the time of your death, there will be no federal estate taxes due. In deciding whether your estate is greater than or less than the exemption, the government includes everything you own, including the face value of your life insurance policies.

Is there an estate tax deduction for married people?

Yes. In addition to the phased-in personal exemption that everyone receives, the federal government has exempted all transfers of wealth between a husband and wife. This is called the Unlimited Marital Deduction. Under the Unlimited Marital Deduction, there will be no federal estate taxes levied when the first spouse dies and leaves the estate to the surviving spouse, regardless of the size of the estate.

Keep in mind, however, that this is merely a postponement of taxes. There will be a tax on the estate of the surviving spouse when it passes to the children or other beneficiaries. Since the estate will continue to appreciate in value, when taxes are eventually paid they may be paid at a higher rate.

Please note that recent changes in the tax law have eliminated the Unlimited Marital Deduction for surviving spouses who are not U.S. citizens. Without special planning, all non-citizen spouses are restricted to the tax-free transfer of the personal exemption amount from their deceased spouses.

Should I have an estate plan if my estate is small?

Yes. While an estate valued under the exempt amount is free from federal estate taxes, a person will probably not avoid a living probate if he or she becomes disabled or a death probate when he or she dies. Please keep in mind that federal estate taxes and probate are two entirely separate legal concepts. Federal estate taxes are paid to the federal government for the right of a person to transfer property at the time of death. Probate fees and costs are paid to the probate court, attorneys, and the personal representatives of an estate as compensation for supervising the administration of the estate and distributing assets to the beneficiaries.

How can I create a living trust?

The first step is to make an appointment for a free, no obligation meeting with an estate planning professional. At the meeting, you should be prepared to discuss the following issues:

• How do I want my assets to be distributed after I am gone?

• Who do I want to manage my assets if I become mentally disabled, and at the time of my death?

BENEFITS OF A LIVING TRUST

OVERVIEW

A living trust eliminates a living probate.

If you become disabled or are unable to manage your estate, your living trust avoids the need for a court- mandated conservatorship. The successor trustee you have named in the trust will manage your affairs without government interference and expense.

A living trust avoids death probate.

With a living trust, your assets will go directly to your beneficiaries after your death. There will be no probate attorneys' fees or court costs. There will be no delay in distributing your assets, and all of your estate planning goals will remain private.

A living trust can reduce or eliminate federal estate taxes.

With a living trust, a married couple can pass twice the exempt amount estate-tax-free to their heirs. That means, in 2001, with proper tax planning, a married couple can make a tax-free transfer of $1,350,000. That same couple can transfer $2,000,000 estate tax-free in 2006. A single person can pass $675,000 estate-tax-free in 2001, gradually climbing up to $1,000,000 in 2006.

A living trust allows you to restrict how your estate is managed and spent even after your death.

A living trust can provide for the care, support and education of your children by turning over assets to them at an age chosen by you. Even insurance proceeds can be paid to the trust so your successor trustee can manage them for the benefit of your family.

A living trust can protect children from earlier marriages.

Both the surviving spouse and the children from a previous marriage can receive fair treatment protection under the terms of your living trust.

A living trust can insure that a person's wishes are carried out and are not subject to attack.

Most living trusts contain a no-contest clause which prevents greedy beneficiaries and their lawyers from successfully attacking your estate plan.

A living trust provides peace of mind.

When your living trust is completed, you and your family will relax knowing that your estate will be managed and distributed by someone you have selected and trust.

© 2005 Law Offices of Maribeth Blessing, LLC

Contact the Law Offices of Maribeth Blessing, LLC for a consultation on your estate plan, including a living trust.

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