Estate Planning Guide

I.          INTRODUCTION

It’s easy to be lured by advertisements claiming you can save time and money by drafting your own will with do-it-yourself software or fill-in-the-blank estate planning kits. It’s unlikely, however, that these systems will generate a suitable estate plan that accomplishes all your objectives. Only a qualified lawyer can interpret the maze of laws bearing on property rights, taxes, wills, probate, and trusts. Estate planning is the process of providing for the orderly succession and distribution of your assets during your lifetime and after your death. The process involves:

• Inventorying your assets, their value and the manner in which they are titled.
• Identifying your goals and objectives with respect to the distribution of your estate during your lifetime and after your death.
• Preparing documents such as Wills, Durable Powers of Attorney, Advance Medical Directives or Living Wills, and in some cases, Trusts to carry out your goals and objectives.
• Selecting individuals and/or institutions, such as banks or trust companies, to serve as Executor, Trustee, Guardian, or Agent under your estate planning documents.
• Coordinating the titling of assets and beneficiary designations for retirement plans, IRAs, life insurance and annuities.
• Executing your estate planning documents.
• Reviewing and revising your estate plan as your family and financial circumstances evolve.

II.        HOW PROPERTY IS TRANSFERRED

Most people understand that they need a will to transfer their property to someone else after they die. They do — but that's not the whole story. Property can actually be transferred in several ways: by contract, by operation of law, and by will or trust. You should understand into which categories your various assets fall, so you can be sure that your wishes will be carried out.

A.        Contractual Arrangements

Assume that your will provides that your entire estate passes to your spouse. You have a $500,000 life insurance policy. If you die, will your spouse get the $500,000? Maybe. Maybe not. Life insurance proceeds are transferred by contract —  they go to whomever is listed as the beneficiary on the policy —  regardless of what your will says. Therefore, if your will provides that all of your assets pass to your spouse, but your life insurance is payable to your children, your children will receive the life insurance proceeds, not your spouse.

Retirement plans, IRAs and annuities are other examples of assets that are transferred by contract. Therefore, during the estate planning process, it is important to coordinate the beneficiary designations for all contractual arrangements, such as life insurance policies, retirement plans, IRAs, and annuities, to ensure that your goals and objective are carried out. In addition, these types of assets carry special income tax attributes and, therefore, require special attention when planning your estate.

B.        Transfers By Operation of Law

Property can also be transferred by operation of law. The way a property is titled may supersede the terms of a will. If you and your spouse own your house and the title specifies "joint tenancy with right of survivorship" or "tenants by the entirety with the right of survivorship as at common law," title to the house will pass to your spouse regardless of the terms of the will.

Example: Mary, age 73, is a widow. Mary has three children, Anne, Frances, and Dan. Frances and Dan live out of state; Anne lives three miles from Mary. Mary's will provides that her entire estate passes equally to her three children. Mary decides to open a checking account at a bank. Mary has Anne named on the account for "convenience," so that Anne may write checks on the account and assist Mary with the payment of bills, etc. At the bank's urging, the account is established as joint tenants with a right of survivorship. Mary dies five years later. Her estate is comprised of $300,000 of assets that pass under her will and the $50,000 bank account. Since the bank account transfers to Anne, by operation of law, at Mary's death, the money in the bank account passes only to Anne. Frances and Dan are not entitled to any portion of the bank account. Therefore, Dan and Frances receive $100,000 each, while Anne receives $150,000.

C.        Wills

Finally, and most importantly, you must use a will - and perhaps also a trust - to control the transfer of the balance of your property. A will is a written document that specifies to whom, when, and how much of your property is transferred when you die. A will also includes other important provisions, such as the naming of your executor and the guardian of your minor children. Wills are discussed in greater detail below.

III.       ADVANTAGES OF ESTATE PLANNING

If you don't already have an estate plan, you should strongly consider executing one. If you do, review it to be sure that it describes your current situation. These are two of the most basic principles of estate planning.

A.        Intestacy – An Unpleasant Alternative

Why are wills so important? Without a will or trust, your estate passes under California's law of intestacy. First, a local court will have to appoint an administrator to manage your estate. Second, even if your surviving spouse is named the administrator, he or she may have to post a financial bond. Third, the amount of time required to settle your estate may be unnecessarily long at a time when the financial security of your family is particularly important. Fourth, your estate could unwittingly pay more federal and state taxes than necessary. And fifth, your surviving spouse may receive less than half of your separate property, depending upon other surviving family members, such as your children.

Example: Kevin and Susan are married. Kevin has three children from a prior marriage. Kevin and Susan have no children from their current marriage. Kevin dies intestate. Under California's intestacy statute, Susan receives one-third of Kevin's estate, while Kevin's children receive two-thirds of his estate.

B.        Reasons To Have A Will

There are many reasons to have a will:

• A will is primarily responsible for describing how you want to distribute your property after your death.

·         A will also lets you name a guardian to care for your minor children if you die or become incapable of caring for them. A will is the only document that permits you to nominate a guardian for your minor children. In the event you do not name a guardian, a guardian is appointed by the court.

• A will lets you name your Executor, the person who will oversee the settling of your affairs after you die. If any trusts are established under your will, you can name the Trustee of the trusts, also.
• A will permits you to take advantage of various methods of reducing or avoiding estate taxes and administration expenses. Some of these methods will be discussed in greater detail below.
• A will permits you to waive security on the bond that your Executor, Trustee, or Guardian must sign to guarantee his or her performance, thereby eliminating the cost of the premium on the surety bond.

C.        Revocable Living Trusts

A Revocable Living Trust is an agreement entered into by a person (typically called the "Grantor") during his or her lifetime with a trustee. The trustee can be any individual including the Grantor and his or her spouse or a bank qualified to conduct a trust business. This trust can be amended or terminated by the Grantor at any time during his or her lifetime. This trust can be funded, that is assets transferred to the trustee and put in the trustee's name during the Grantor's lifetime, or it can be treated as a standby trust so that a person's estate can be poured into the trust through the will at the person's death. Insurance can also be made payable to the trustee of this trust with no funding required.

D.        What Are The Advantages Of A Revocable Living Trust?

• It avoids probate.
• Revocable Living Trusts are private and are not subject to public inspection or disclosure.
• Estate inventories and accountings may not have to be filed with the Court.
• It provides for more flexibility in administration.
• It provides immediate benefit for beneficiaries upon death of Grantor if funded during life or if insurance is paid to trustee.

E.             Durable General Power Of Attorney

A Durable General Power of Attorney permits your attorney-in-fact to act on your behalf with regard to your legal rights and obligations. Your attorney-in-fact can sign checks, transfer property, and do all other things on your behalf as if you were acting yourself. An important feature of the Power of Attorney is that the law regards it as a "durable" Power of Attorney. This permits your attorney-in-fact to act indefinitely on your behalf in the event of a disability — the time you need such assistance the most.

     F.             Advance Medical Directive

The Advance Medical Directive serves three purposes:

1.         Health Care Power of Attorney

The Advance Medical Directive serves as a Health Care Power of Attorney. The Health Care Power of Attorney permits you to designate an agent who is authorized to make health care decisions on your behalf in the event you are incapable of making such decisions. Hospitals are now required to inquire whether you have an Advance Medical Directive before a patient is admitted.

2.         Living Will

Second, the Advance Medical Directive serves as a Living Will. The Living Will portion of an Advance Medical Directive permits you to declare your wish that your life not be artificially prolonged through heroic measures, if you have no chance of recovery from an illness.

3.         Anatomical Gifts

Finally, the Advance Medical Directive permits you to designate a person who is authorized to make anatomical gifts of your organs.

IV.       ESTATE TAXES

In 2001, new rules were passed that reduced estate taxes over the next few years and completely eliminated them in 2010. Unfortunately, the reform is not yet permanent. In 2011, unless a new estate tax bill is passed by Congress, we revert back to the old rules that were in effect in 2001. The estate tax rate table will remain the same for the entire period, however the maximum tax rate will be gradually reduced from 55% to 45% over the next five years. In addition, the Estate Tax Exemption increases gradually to $3.5 million in 2009. Estate taxes are then officially repealed for 2010, but could come back in 2011, with the rules that were in effect in 2001.

A.        Gross Estate

The starting point in determining what, if any, Estate Tax will be imposed at your death is the calculation of the value of your "Gross Estate." Your "Gross Estate" includes all assets owned by you including real estate, stocks and bonds, cash, CDs, life insurance, jointly-owned property, annuities, retirement plan assets (such as 401(k) plan accounts or IRAs), and tangible personal property (such as automobiles, jewelry, furniture, boats, and collectibles). The Gross Estate also includes the value of all taxable gifts made by you after 1976.

The Gross Estate is reduced by all available deductions and credits, and the resulting amount is known as the "Taxable Estate." As of 2005, no Estate Tax is due if your Taxable Estate is less than $1,500,000. Please note that the current threshold is $1,500,000, but this amount will gradually increase to through 2009.  As mentioned above, it will be eliminated in 2010 and, if no further estate tax bills are passed by Congress, it will revert back to the original amount of 1 million in 2011. The increase will be phased in as follows:

B.        Deductions and Credits

One of the most important deductions used in determining the Taxable Estate is the "Marital Deduction." The Marital Deduction provides an unlimited, dollar for dollar, deduction against the Gross Estate for bequests or devises to the surviving spouse. For example, if Bill Gates died with a $80,000,000,000 Gross Estate, but left his entire estate to his wife, Melinda, no Estate Tax would be due at Bill's death because of an offsetting $80,000,000,000 Marital Deduction.

The Estate Tax Credit is another important component in determining the Taxable Estate. The current Estate Tax Credit is the equivalent of $1,500,000. The Estate Tax Credit permits each person to transfer up to $1,500,000 tax-free during his or her lifetime or at death.

C.        Tax Rates

If your Taxable Estate for 2005, after being reduced by all deductions, including the Marital Deduction, is greater than $1,500,000, Estate Taxes are payable. The marginal tax rates for Taxable Estates greater than $1,500,000 are as follows:

D.        Basic Estate Planning Strategy

The Estate Tax Rates discussed above are extremely high and somewhat oppressive. In some cases, the federal government may receive almost as much of your family's wealth as your children and grandchildren. Therefore, it is important that you plan far in advance to minimize the impact of the Estate Tax. Unfortunately, we find that many clients fail to take full advantage of the tax planning opportunities offered by the Estate Tax Credit and the Marital Deduction.  Waterman & Sichon LLP can work with you to show you ways in which to maximize these benefits.  Simply utilizing estate planning vehicles such as the marital deduction and bypass trusts could result in hundreds of thousands of dollars in tax savings.   

E.        Some Lifetime Planning Tips

If you believe that your estate will be subject to estate tax, here are some other simple planning tips which may help you reduce your estate.

Make gifts not exceeding $11,000.00 per year per donee, which are excluded from your taxable estate for estate tax purposes even if done on your deathbed.

Make gifts of highly appreciating property. This may use up some of your estate tax credit, but it freezes the value of the property at its value at the date of the gift.

Rid your estate of any term, group or other insurance which you would be willing to give up the right to borrow from or control by transferring same to an irrevocable insurance trust (Crummey trust).

Transfer highly appreciated property to a charitable remainder trust, thereby increasing your income without paying a capital gains tax and at the same time receiving a sizeable charitable deduction for income tax purposes.

V.        CONCLUSION

            To be a successful estate planner, you must study your options carefully. Be sure to consult with appropriate experts who are aware of current laws, as well as upcoming changes and make your decisions in consultation with your family members.  Contact Waterman, Sichon & Caravetta, LLP today at (714) 508-7015.  We are here to help.   

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Glossary of Common Estate Planning Terms

Administration:  the process of handling the affairs of a deceased person's estate or a trust.

Beneficiary:  a generic term that usually refers to a person or entity that is entitled to receive something, for example, a beneficiary of an estate or trust, or a beneficiary of life insurance or retirement benefits.

Claim:  technically, this refers to funeral expenses, the debts of a deceased person, and expenses of administration.

Codicil:  a written amendment to a will.      

Conservator:  an adult person or financial institution appointed by a court, who is responsible for a minor child's or legallyincapacitatedperson’s property until that minor child becomes an adult or the legally incapacitatedperson becomes competent to be responsible for his or her own property.  In some states this position is referred to as "guardian of the estate."

Crummey Trust:  A trust set up for minors to take advantage of the $11,000 annual gift exclusion. 

Devise:  when used as a noun, it refers to an inheritance of real or personal property under a will. When used as a verb, it means to dispose of real or personal property by will.

Devisee:  a person or entity designated in a will to receive a devise.

Domicile:  one's home or permanent residence. The laws of the state of a person's domicile determine what happens to that person's property at death.

Donee:  the recipient of a gift.

Donor:  a person who makes a gift. This term is also used to refer to a person who establishes a living trust.

Escheat:  assigning property to the state when a person dies with no known beneficiaries under a will and no known heirs if there is no will.

Estate:  this word has a number of meanings depending on the context in which it is used. For federal estate tax purposes, it refers to all of a deceased person's assets that are included in that person's estate for tax purposes (usually everything). It is also used to refer to those items of property that are subject to administration in the probate court. For example, life insurance owned by the decedent and payable to a named beneficiary such as a surviving spouse is not part of the deceased person’s estate that is subject to administration in the probate court, but it is included in the deceased person’s estate for federal estate tax purposes.

Estate Planning:  the process of arranging one's personal and financial affairs.

Executor:  the person or financial institution that is appointed to administer the estate of a deceased person who died with a will.

Fiduciary:  comes from a Latin word meaning trust and confidence. This is a generic term used to refer to a person (or entity) that serves in a representative capacity. Personal representatives, trustees, guardians, conservators, and agents under powers of attorney are all fiduciaries. A fiduciary stands in a position of confidence and trust with respect to each heir, devisee, and/or beneficiary.

Formal Probate:  a proceeding before a probate judge to determine whether a decedent left a valid will.

Formal Proceeding:  a proceeding usually started by a petition or motion and culminating in a hearing before a probate judge after notice to interested persons.

Grantor:  in a trust context, this refers to a person that established a living trust. It is also used to refer to one who is transferring real estate in a deed.

Guardian:  an adult person appointed by a surviving parent in his or her will or by a court, who is responsible for a minor child or legally incapacitated person's personal care and nurturing.

Heir:  person, who inherits property from the estate of a deceased person who died without a will.

Intangible Personal Property:  property  one cannot physically touch. This type of property may have some paper associated with it. This type of property usually includes such items as stock, bonds, mutual funds, bank accounts, and cash.

Inter Vivos Trust:  see living trust below.

Intestate:  refers to dying without a will.

Irrevocable Trust:  a trust that can no longer be amended or revoked by anyone. Most revocable trusts become irrevocable at some time, for example, when the person who established the trust dies.

Legally Incapacitated Person:  a person who has been determined by a court as not capable of handling his or her personal and financial affairs.

Living Trust:  a trust that one establishes during one's lifetime which is not part of one's will, but is usually established by a separate written trust agreement. The same as "inter vivos trust." This type of document is also sometimes referred to as a revocable living trust.

Marital Deduction: All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass "outright." In some cases, certain life estates also qualify for the marital deduction.

Personal Representative:  the person or financial institution appointed by the probate register or the court to administer a deceased person’s estate.

Probate:  the process of determining if the deceased person left a valid will and admitting that will to probate.

Revocable Living Trust:  a living trust or inter vivostrust that can be amended and revoked, usually by the person who established the trust. This trust may become irrevocable and unamendable when the only person who can amend or revoke the trust dies or becomes incompetent.

Settlor:  a person who established a living trust.

Statutory Will:  a form of will accepted by law in California and contained in a statute. It is intended to be available to someone who doesn't want to use a lawyer.

Supervised Probate:  a proceeding for the administration of a deceased person's estate in which there is considerable court involvement. There are papers that have to be filed with the court and various types of hearings before the probate judge.

Tangible Personal Property:  property that you can touch, such as cars, dishes, jewelry, tools, guns, sporting equipment, etc.

Testamentary Trust:  a trust that is part of a person's will.

Testate:  refers to dying with a will.

Testator:  a person who makes a will.

Trust:  an arrangement, usually established by a written document, to provide for the management and disposition of assets. It normally involves three parties: the person who establishes the trust (sometimes called a donor, grantor, settlor, or trustor), a trustee, and one or more beneficiaries.

Trustee:  an adult individual or financial institution that is designated to be responsible for the administration of a trust. There may be more than one trustee (co-trustees), and an individual and a financial institution may serve as co-trustees.

Trustor:  see settlor above.

Unsupervised Administration:  that portion of the administration of a deceased person’s estate in which the personal representative performs various duties without being supervised by the probate court. For example, the personal representative may pay claims, sell real estate and personal property, and make distributions to the beneficiaries without any court involvement.

Will:  a written document which disposes of one's property at death. The will also is used to nominate personal representatives. It may also be used to express burial and funeral instructions, make anatomical gifts, and designate a guardian and conservator for a minor child or an  legally incapacitated adult.