Estate planning means planning for the disposition or distribution of your assets upon your death. The term also includes planning for life-time distributions by way of gifts, trust and the use of joint accounts. A good estate plan has three goals:
- To make sure your wealth reaches the individuals or organizations you select as efficiently as possible.
- To minimize the effect of federal and state taxes on your estate.
- To allow you to select the individuals who will handle various administrative functions on your behalf, including guardians for any minor children.
If you are like most people, you will work an entire lifetime to accumulate assets: a home, cars, savings, retirement accounts, stocks and other property. The modest amount of time and money required to create an estate plan will ensure that your assets are passed on to the people you want in the way that you want, and with a minimum of cost, time and amount of aggravation.
If You Die Without a Will
If you die intestate (without a will) a probate court will take control of your estate and distribute your assets according to your state’s statute of descent and distribution. The pattern of inheritance set forth in that statute may not provide for distribution of your assets in a way that matches your wishes.
First, your assets may not go to the individuals you would have selected or in the amounts you would have wanted.
Second, if you have minor children, you will not be able to select their guardian. In addition, the absence of a will places a great burden on the guardian. Because the intestate law typically gives part of the estate to the children, the guardian must petition the court periodically for an allowance to support the children, and must report all expenditures. Furthermore, your children will receive their shares of your estate at an early age (age 18) – usually before they are equipped to handle property responsibly. A survivorship clause also prevents an unintended distribution of property. Suppose George and Gladys are a married couple with no children, and have no will or trust. Under the law of intestacy, the distribution of property is determined according to the order of death. If an accident occurs and only one spouse survives, the surviving spouse inherits all property. If the surviving spouse lives for only a week due to injuries incurred in the same accident, all assets are inherited by the relatives of the second spouse to die, since the predeceased spouse’s relatives are not considered heirs of the spouse who survived one week. Since the spouse who survived legally owned all assets, only that spouse’s heirs receive an inheritance.
Clearly written wills and trusts can minimize the cost of administering an estate. If a will is used and probate is required, the court can more quickly and inexpensively approve procedure to carry out those wishes. A trust can be used to totally avoid the probate process, allowing for transfer of assets to beneficiaries with no court intervention.
Common Distribution Schemes if you Die without a Will
If you are married and do not have children your property will be distributed as
- Spouse takes the first $150,000 plus three quarters of the balance
- Remaining property will go to the parents
If you are married and have children from that marriage:
- $150,000, plus one half of the remainder will go to the surviving spouse
- The remaining property will go to the children
What You Should Know About Wills
Traditionally, preparing a will has been a fundamental step in estate planning.
In this section, we offer some basic facts about wills and suggest how writing a will may impact your estate.
What is a will?
A will is a legally executed document that states how all property in your name is to be distributed at your death and which names an executor for your estate. Among other things, a will can:
- Designate property to be placed in trust for family members or other beneficiaries;
- Designate a guardian for any minor children;
- Direct how debts, taxes, probate fees and other costs are to be paid;
- Provide living expenses for family members during the probate period; and
- Designate a fiduciary to manage the affairs of an incapacitated beneficiary.
How a will is prepared.
The requirements for executing a legal will vary from state to state, but the basic requirements are that:
- You are of sound mind and of legal age;
- You declare the document to be your “last will and testament”;
- You will sign the will, or if you are physically unable to sign, have an authorized person sign for you; and
- Your will is witnessed and signed by two or more individuals.
What Happens at Your Death – Probate
Probate is the process by which property is transferred from a deceased person’s estate to his or her beneficiaries. Probate occurs in the county where the deceased person had his or her permanent, legal home. The probate court oversees the probate process, which has several steps:
- Presenting the will to the probate court and proving it is valid, or establishing that no will exists. If there is a will, but it is not valid, the estate is administered as if there were no will.
- The court appoints the personal representative named in the will (Executor). The court also appoints a personal representative if there is no will, or if the person named in the will cannot serve.
- Your personal representative notifies beneficiaries of your death and provides each beneficiary with a copy of your will.
- A death notice is published in a local newspaper and mailed to any ascertainable creditors. This gives creditors the chance to present unpaid bills and allows any interested party the chance to contest your will.
- The personal representative files an inventory and appraisal of the deceased person’s assets.
- The probate attorney files the appropriate papers with the court and attends any required hearings.
- The personal representative pays the deceased person’s funeral expenses, debts and the taxes and fees related to probate.
- The personal representative distributes the remaining assets to the beneficiaries and heirs.
- The personal representative prepares a final accounting, showing the estate’s income, expenses and the distribution of assets.
- The estate is closed.
The probate process takes a minimum of five months, or could go on for several years for complex estates. The average time needed to complete probate is approximately one year.
Does all property go through probate?
Only probate property must go through probate. Non-probate property passes outside of the probate process and outside the terms of your will. Property you own in a joint tenancy with a right of survivorship is non-probate property. It passes by law automatically to the surviving co-owner. Married couples frequently own their homes jointly with a right of survivorship. Non-probate property includes life insurance and retirement plan benefits paid directly to others and property held in trust.
It is important to be aware of assets as such as life insurance proceeds and retirement accounts. Many couples with minor children have wills that put aside their assets in Trust for their children until they reach a specified age – 22, 25, 30, 35, etc. It is important to make sure that the beneficiary designation on the insurance policies and retirement accounts is your estate and not the children directly, otherwise these proceeds will not go into the Trust but rather a Conservatorship will be set up through the Probate court and the assets distributed at age 18.
How much does it cost to go through probate?
Various studies have indicated that the average cost of probate is from 2-3% of the estate’s value. A separate probate proceeding is required for every state in which you own real property. If you won out-of-state property, it must be probated in the state where it is located. This involves additional costs and delays because separate petitions must be filed and a separate probate procedure conducted.
There are certain reasons you may wish to avoid probate:
- To minimize the expense of transferring your assets to your beneficiaries;
- To protect your privacy, all documents filed in probate court are a public record;
- To provide for uninterrupted management of your assets;
- To provide you with a sense of relief, knowing that everything has been taken care of prior to your death;
- To assure that your assets will be handled in an orderly fashion even if you become incompetent.
The practical way to avoid probate is by employing a revocable living trust (sometimes called an “inter vivos trust”), which provides for the management of your assets during your lifetime and for their disposition upon your death all without probate court involvement. You are the initial trustee of the trust and can name anyone, including a relative or trusted friend, as successor trustee upon your death or disability.
Estate and Gift Taxes
Federal estate taxes are deducted from the assets in your estate. If you fail to plan for estate taxes, your estate could be reduced by federal taxes as high as 55%.
Whether or not your estate goes through probate, it will be taxed depending upon the size of the estate and whether your spouse survives you. Your estate for federal estate-tax purposes includes:
- Property held in your own name;
- A percentage of the value of the property you hold jointly with others, based on your percentage of ownership;
- The face value of life insurance you own on your life;
- Retirement plans in which you have an interest.
The current federal law allows each individual to leave an estate of up to $5,000,000 (less any lifetime transfers subject to gift tax) free of any federal estate tax.
Avoiding Probate through Joint Ownership
Many people own property jointly with others. Married couples often own their
home and other valuable assets jointly. In a joint tenancy with a right of survivorship, when one joint tenant dies, the property passes automatically and completely to the other joint tenant. Property passes quickly and outside probate. What are the risks in owning property jointly? Adding a joint owner to your property reduces your control over the property. A joint tenant can withdraw money from the joint account at any time. Also creditors of each joint account holder can make claims on jointly held accounts, etc. Further, If the joint account holder becomes involved in a divorce, the spouse can make a claim on the account.
Tax ramifications should also be considered before entering into joint tenancy with a non-spouse. The one-time exemption from income tax on the sale of a personal residence for those over age fifty-five may be lost if the second joint tenant does not live in the home or is not yet fifty-five. Gift taxes should also be considered, since the joint ownership will be considered a gift to the new joint tenant. Additionally, if property which has appreciated in value is gifted, rather than inherited, substantial income tax benefits can be lost.
An “estate planning” technique employed by many elderly people, is to add a
son or daughter to their homes and financial accounts with the understanding that upon their death the son or daughter will split up all of these assets with the siblings. This is almost always very poor planning. Firstly, there is great potential for abuse or for perceived abuse by the siblings. Also, suppose that the joint owner dies shortly after the death of the parent. All of the assets will pass through that joint owner’s estate and go to his or her spouse and/or heirs. Assuming that the joint owner does make the distributions to his or her siblings, that distribution would be considered a gift, taxable to the person making the distribution.
Before you choose a joint tenant, consider whether or not you trust the person and feel comfortable sharing access to your money. If you are not sure joint tenancy is right for you, but you want to avoid probate, you may want to create a living trust.
The Living Trust: Avoid Probate while Maintaining Total Management and Control of Assets
A revocable living trust is a method of totally avoiding the probate process. If assets are owned by a trust, no court is involved in the transfer of assets upon death. Therefore, no newspaper notices or letters to heirs are required, no records become public and no statutory waiting periods apply.
In order for a living trust to avoid probate, ownership of assets is transferred to
the trustees (managers) of the trust. Instead of owning property as Fred and Carol Clark, the name on the deed, account, security or other asset is changed to Fred or Carol Clark as trustee, or successor trustee(s) of the Clark Trust.
Fred and Carol, as trustees of the trust, have total control over all property just as they did before. Fred or Carol could spend money, mortgage, sell or give away assets, or do anything they would do if the trust did not exist. Since the trust owns the property and it is physically impossible for the trust to die, the owners of the property never die and probate is never required. If either Fred or Carol pass away, probate is avoided and the trust remains as it was before. In most cases, the survivor, either Fred or Carol, still has complete control over the property.
Upon the death of the survivor, no probate is required since the trust is still the legal owner of the property. According to the provisions of the trust agreement, when both Fred and Carol are deceased, the party they named as successor trustee will have the power to distribute the property of the trust according to the terms provided in the trust. The successor trustee is generally the same person or institution who would be named as personal representative in a will. This should be someone who is capable of completing paperwork, who is responsible with money, and who can get along with the named beneficiaries. The successor trustee can be one of the named beneficiaries, any other individual, or a bank or trust department.
The trust terminates at the time that neither of the original owners of the property survives. At that time, assets are distributed to beneficiaries named in the trust agreement. No probate, no probate cost and no waiting periods are necessary.
Advantages of a Living Trust
- Avoids probate of the estate, so no court is involved and expense and waiting periods are avoided.
- Eliminates the requirement of public notices in a newspaper.
- Keeps your plan of distribution private.
- Is acceptable in all states, so avoids probate of out-of state property as well as property located in the state of residency.
- Provides for management of assets by a family member or an institution (whichever you select) if you are unable to manage assets due to health problems and avoids proving incompetency in a court proceeding.
- Allows for optimum tax planning using federal and state income, gift and estate tax law, yet requires NO extra tax forms or filings.
As with all estate planning, each person’s individual situation and wishes must be analyzed before a decision is made as to the most effective planning technique.
Answers to Commonly Asked Questions about Living Trusts
What if I change my mind? Can a living trust agreement be changed or revoked?
Living trusts may be set up in a way that is desired by the people putting assets into the trust. The most commonly used trusts are revocable living trusts, which allow you to amend any provision of the trust or to totally revoke the trust.
If I have a living trust, do I still need a will?
If all assets are held in the name of the living trust, a will is not used at the time of death. However, a will should be signed in conjunction with a living trust in case an asset is inadvertently left out of the trust. The will simply states that any property not already in the living trust should be transferred to the trust. This document is called a POUROVER WILL since it POURS assets over into the trust.
Does a living trust have to file income tax returns
As long as the person or people who put the assets into the trust are the managers (Trustees) of the trust, the individuals will continue to file and pay income taxes in exactly the same way they did before the trust was created. Income generated by trust assets is simply treated as income of the individuals, so no extra tax returns are required.
Can a living trust save money on taxes as well as avoid probate?
Use of a living trust may save on income, gift, estate and inheritance taxes, depending upon the value of the estate and the needs of the individual person. Other documents may also be used for tax planning, but the living trust incorporates both tax planning and probate avoidance.
When my spouse passed away, no probate was required. Why should I be concerned with probate of my estate?
Do not be fooled into thinking probate is easy or is not required because probate did not arise on the death of the first spouse. It is very likely that no probate was required on the first death since many couples own all property in joint tenancy. This form of ownership allows the surviving joint tenant to inherit property without going through the probate process. However, when only one joint tenant survives, probate will be required to transfer assets to beneficiaries. Additionally, estate tax planning opportunities may be lost if the trust is not set up while both spouses are living.
How large must an estate be to make a living trust worthwhile?
In some cases, even if substantial amounts of money will not be saved in probate, the desire to keep affairs private and to allow for transfer of assets without waiting periods required in probate may make use of a living trust beneficial. The primary goal of any estate plan must be to achieve the individual’s desired objective.
How expensive is a living trust?
Costs of a living trust will vary substantially from attorney to attorney, and costs will vary depending upon your particular estate planning needs. Many attorneys will provide an initial consultation at no charge, to allow you to meet the attorney and to discuss your individual situation.
Will a living trust protect my assets from potential nursing home costs?
Revocable living trusts, which allow you to continue to manage your own assets and which can be revised or revoked at any time, have been discussed in this booklet. Revocable living trusts will not shield assets from nursing home costs. Assets held in a revocable living trust will be considered to be your assets for purposes of Medicaid eligibility. Medicaid is the government program which covers costs of nursing home care for those eligible, but eligibility is available only to those whose income and assets are under allowable levels. For Medicaid purposes, if you can manage and control the assets, the assets are considered as yours for Medicaid purposes.
Other Estate Planning Documents
(Powers of Attorney, Living Wills, Marital Property Agreements, Instructions for Survivors, Trust)
In addition to wills and trusts, various other documents may be used to carry out your wishes, either in case of death or in case of illness or accident.
Powers of Attorney
Powers of attorney give another person the power to act in place of the principal (the person signing and authorizing the power of attorney). The power of attorney can be drafted so that it would only become effective upon the disability or incapacity of the principal, or so that it is effective immediately.
The power of attorney allows someone else to handle affairs such as payment of bills, cashing checks, and selling assets. A specific power of attorney may be drafted which grants only very specific, limited powers to the person named as attorney-in-fact (the person given power to act for the principal). This could include the power to manage a particular piece of real estate, or a particular account, investment or business.
Living Wills/Durable Powers of Attorney for Health Care
Living Wills are directions regarding prolonging life by artificial means if the condition is terminal. These documents provide family members or others appointed by the document with authority to make medical decisions for you if you are unable to do so.
Instructions and Location of Information
It is a very good idea for everyone to make a list of assets and directions for loved ones to use in case of death or incompetency. This list can include directions for funeral arrangements and memorial services, location of documents including insurance policies, deeds, securities and evidence of other assets, location of bank accounts and names and addresses of professionals who would have information regarding the estate, including the attorney, accountant, insurance agent and other financial advisors. Location of the records, safety deposit box, will, trust, and any other pertinent documents should also be listed.
Life Insurance Trust
This trust is set up to hold your life insurance polices and to remove the proceeds of these policies from you taxable estate. The Trust is also named as the beneficiary.
The life insurance trust is a popular method of saving estate taxes. The Trust is designated as both the owner of the policy and the beneficiary. In this way, the insurance proceeds are not part of your taxable estate.
Any couple in a situation where one partner has a lot more money or property that the other or where one partner is substantially older than the other, should consider entering into a prenuptial agreement as part of their estate planning.
Older people with grown children from another marriage may want their property to go to their own children after they die, rather than go to the new spouse. A prenuptial agreement can accomplish that purpose.
Another device to accomplish these objectives is the Q-TIP (Qualified Terminable Interest Property) Trust. Money goes into this trust at your death. Your surviving spouse is entitled to all of the income for as long as she or he lives. At the death of the spouse the assets can be distributed to your children.
Family Limited Partnerships
A Family Limited Partnerships is probably the ultimate estate planning vehicle. They are used to minimize estate taxes and also protect your assets from any potential creditors. With a family limited partnership, you own shares in the Partnership while the partnership owns the assets. Your assets are shielded from creditors seeking damages as a result of a lawsuit. You can transfer partnership shares to your children and still retain full control of the assets. The value of the transferred assets are subject to valuation discounts for purposes of calculating the taxable estate.
Considerations in Estate Planning
Here are a few considerations to weigh in planning your estate:
- If you leave assets directly to minor children, the guardian (even the child’s surviving parent) must keep records of even routine use of the inheritances and petition the court for any unusual expenditures on the children’s behalf. Instead, you may be wise to bequeath your property to a trust established in the children’s names, and to name their guardian as trustee.
- If you give your executor or personal representative broad powers to settle disputes or sell property as he or she sees fit, it will not be necessary to seek permission from the court for each activity.
- If you are single but plan to be married, you may wish to consider a prenuptial agreement to control your assets in the event of divorce or death. This maybe particularly important in certain circumstances, such as where you own a closely held business or wish to leave your estate to children from a previous marriage.
- It is wise to avoid provisions likely to be ruled invalid or to cause a challenge from neglected heirs. If you seek to disinherit a child, it should be unequivocally indicated in your will that this is your intent.
- There is little that can be done after death to relieve your estate from taxes if you have not properly planned the disposition of your estate.
- Anytime your circumstances change significantly, your estate plan probably should be updated. These are some significant factors that might call for a modification of your plan:
- Change in marital status. If you have a divorce or family law issue click here.
- Change of ownership or value of property
- Birth, marriage or death of a child
- Change in the Probate Code or tax laws (The Michigan Probate code is being changed effective January 1, 2000).
- Change in income or employment status
- Change in your health or the health of a beneficiary
- At a minimum, you should have your estate plan reviewed every three to five years.
- Keep your affairs in order and maintain an inventory of all your property. Take some time to educate your spouse and lawyer about the property and where you keep your inventory.
- Your will is effective until you change or revoke it. You may alter your will by executing a new one or by adding a “codicil.” If you make changes to your will by writing on the document itself, you may invalidate the entire will.
- If you think your estate might shrink or grow significantly, use percentages instead of dollars to divide your assets.
- You generally may not exclude your spouse completely from your will without your spouse’s consent.
- The best assets to give as lifetime gifts are those that are gaining in value because the future appreciation is excluded from your estate for estate-tax purposes.
- In selecting a Trustee or Executor, make sure that they will be available and willing to act for long periods of time. A trustee should have at least basic investment skills and must keep abreast of financial markets and changes in tax laws. It usually makes sense to choose someone close to you. The Trustee or Executor must be able to deal fairly and impartially with your beneficiaries. As the name implies, the Trustee must be a person who can be trusted.