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Usually estate planning is seen only as drafting a will or a trust to say who you want to be in control should something happen to you. But estate planning is much more than this. Estate planning can certainly include wills and trusts to avoid probate and provide estate tax planning, but may also include the formation of business organizations such as corporations and limited liability companies (LLCs), succession planning (buy sell arrangements), asset protection planning, and estate tax planning. It will almost always include other documents such as a durable power of attorney, advance healthcare directive (a living will and special power of attorney for medical purposes), a personal gifts and effects list, and burial and funeral directions. It may include cremation directives for those who desire it as well, among many others elements.
The following statement, taught at a seminar I once attended, more comprehensively and accurately describes the purposes of estate planning from the viewpoint of the client:
I want to control my property while I am alive and well;
Plan for me and my loved ones if I become disabled;
And after I die, I want to give what I have to:
Whom I want
When I want
The way I want
All at the lowest possible cost to me and those I love.
This is a comprehensive definition of estate planning that I try to live up to for my clients. Estate planning encompasses control, disability, distribution, probate, estate and income tax planning, and asset protection. All of these aspects are of critical importance. These goals are accomplished through the use of the appropriate combination of wills, trusts, powers of attorney, advance healthcare directives, corporations, and limited liability companies, all carefully tailored to the wishes and needs of each particular client.
A Will is simply a written directive to the probate court as to how property is to be distributed at death, who should be the personal representative (previously called an executor) to manage the estate, and who should be the guardian of minor children. Wills do not avoid probate! They plan for probate. Wills have to be probated to be given effect. They also provide no protection against incapacity.
A “Simple Will” is a will that passes the assets to a named individual or individuals and generally contains no tax planning trust provisions or testamentary trusts for minors. The usual simple will is set up to distribute to the survivor of the couple and then, after the death of the survivor, to the children equally.
A “Complex Will” is a will that contains testamentary trust provisions. A complex will will create a trust at the death of the testator (the person making the will) which may help avoid taxes, provide for a delay in distributions, or other goals that cannot be accomplished with a simple will alone. Most people want a complex will when the differences between the types of wills are explained.
A “Pourover Will” is a will that is used in conjunction with a living trust. It acts as a safety net to ensure that the testator’s wishes as set forth in the trust are carried out, even if the assets are not placed in the trust. Ideally a pourover will sits dormant and is never used.
A trust is an entity (like a corporation) established to hold and manage property. It has its own separate existence apart from the grantor or creator of the trust. Trusts can be established during one’s lifetime (a “living” trust) or they can be established at death through a will (a “testamentary” trust). Living trusts can be either revocable or irrevocable. There are three major participants to a trust: a grantor who is the person creating the trust (sometimes called a “settlor” or “trustor”); a trustee who is the person who manages the trust; and a beneficiary who gets the benefits of the trust. Dividing the benefits from the control can be a powerful concept. It allows us to place a responsible individual or institution in charge of the assets for someone else’s benefit. A revocable living trust is the most commonly used vehicle for estate planning today. At the death or incapacity of the grantor, the trust continues on and the backup trustees simply carry out the grantor’s wishes set forth in the trust without probate or court involvement.
A revocable living trust continues on upon the death or incapacity of the grantor, and the backup trustees simply carry out the grantors wishes set forth in the trust. Since the trust does not die or become incapacitated, no probate is necessary to authorize a person to act in the deceased or incapacitated person’s place, without court intervention. The trust is totally revocable and amendable by the grantor during his or her lifetime. Since the grantor usually serves as the trustee and beneficiary during lifetime, the grantor also maintains total control over the assets.
Summary of Revocable Living Trust Benefits:
(1) Avoids probate at death
(2) Avoids multiple probates if you own assets outside of Utah
(3) Avoids Conservator ship during lifetime
(4) Avoids Conservator ship for minors who might have received the assets
(5) Provides privacy
(6) Often allows quicker distribution of assets (especially in smaller estates)
(7) Prevents unintentional disinheriting
(8) More difficult to contest than a Will
(9) Provides complete control to you during your lifetime, including ability to cancel or amend
(10) Through proper planning, estate and gift taxes can be lowered and potentially avoided entirely through use of a trust.
Even though you may not be terminally ill, if you require long term care in a Salt Lake City nursing facility, the costs could deplete your estate. In the past it was common practice for parents to transfer their property to their children relatively early in their lives in an attempt to avoid those assets being available to pay for their long term medical care. This practice, however, causes numerous problems:
- A loss of control in the parent and may require the parent to go to their children in times of need;
- increased capital gains taxes to the children when they sell the property or asset after the death of the parent.
- exposure of the parent’s assets to the creditors of the children.
Under recent legal changes, this practice may also cause a loss of federal benefits under Medicaid unless properly planned.
Medicare is federally sponsored medical insurance for the elderly and pays for medical treatment regardless of your financial situation. Taxes have been withheld from your pay through the years to pay for this coverage. However, Medicare does not cover long term care in nursing care or custodial facilities.
Medicaid is a federally funded WELFARE program administered by participating States. It is designed to pay for medical treatment, including long term nursing care or custodial care, for the very poor. It is funded by our tax dollars. Medicaid benefits are available only to those who qualify financially in both income and assets. Due to the large number of individuals purposefully impoverishing themselves to qualify for these benefits, the federal government has passed new legislation in an attempt exclude such individuals.
(1) Transferring Assets: Medicaid will deny eligibility for a period of time to any person who transferred an asset out of their estate within the “look back period.” The look back period is now 5 years. The ineligibility period now runs from the time of application for medicaid benefits for the number of months equal to the value of the disposition divided by statutory nursing care costs. (e.g. If a person transfers assets worth $120,000 and the statutory nursing care costs are $4,000 per month, then the individual would be disqualified from Medicaid coverage for a period of 30 months [120,000/4000=30].) There is no limit on the disqualification period.
(2) Other Problems with Transferring Assets: Transfers of assets to avoid medical costs from your estate can cause numerous other problems besides ineligibility. These problems include
increased capital gains tax on sale of the property, gift and estate tax consequences for transferring the assets, and exposure of the assets to others’ creditors.
It is my opinion that, in most cases, a person should maintain their assets for their own use and benefit during their lifetime. If all of their assets are used to care for them, then they can die having the peace of mind that they have provided for their own care. If they do wish to protect their assets, then appropriate insurance can be obtained to cover long term care costs. Occasionally Medicaid planning may be appropriate for those trying to protect assets for their spouse’s use.
Medical science can keep a person alive almost indefinitely, even when their quality of life has severely deteriorated through a terminal illness or other accident causing loss of brain function. Most people do not wish to be kept alive unnaturally under these circumstances. They want to die with dignity. Besides the dignity issue, the medical costs associated with a terminal illness may entirely deplete an estate.
Planning can be done to direct what type of care you desire. Most individuals desire that the dying process not be prolonged if there is no hope of recovery or they are in a comatose state and there appears to be no chance of their extrication from this state.
An Advanced Healthcare Directive is a directive to physicians and other care providers which states that life sustaining procedures should not be applied under circumstances you specify. It also directs who you want to make medical decisions for you should you be unable to direct your own care for any reason, even if you are not dying. I highly recommend this document for all of my clients. The power holder should be carefully informed about your wishes so that will know how to respond and follow them should you be unable to direct your own care.
ESTATE AND GIFT TAXES
The federal government and many states have established taxes which apply to the gifting of property during lifetime and at death. Utah currently has no estate tax, therefore the discussion here will focus on the federal estate and gift tax. This tax can be avoided by most people with early planning.
The simplest way to look at the estate tax is through an analogy. It is as if each of us is pushing a grocery cart through a grocery store. As we go we put things in our cart; that is, we accumulate
assets. During our lifetime we are allowed to transfer up to $13,000 per year per person (called the annual exclusion – currently indexed for inflation) to another’s grocery cart. When we go to check out of this life (we die), all of the assets in our cart are subject to estate tax when they pass over the checkout stand. However, each person has been given a coupon currently worth $5,000,000, so the first $5,000,000 passes through the checkout stand without any tax (so long as it was not used during life through gifting). Every dollar after that is subject to a tax of 35%.
These rates are the same for gift taxes, thus a “unified tax” system. The “coupon” is referred to as the applicable exclusion amount. I will just refer to this as the exclusion amount or the coupon amount. This coupon amount may be used during life or at death. If we exceed the annual exclusion amount in any in year we are subject to a gift tax or using up some of our coupon amount. If the coupon is not used at death it is lost entirely.
You may ask, what is included in my estate for tax purposes? The answer is, your entire net worth, including the face value of any life insurance in which you have any incidents of ownership at your death. Put another way, add up the value of all of your assets, subtract your liabilities, and include your life insurance at face value.
As you can see, the estate tax is a significant expense for those effected by it. Congress may change this system in the coming years to avoid the reduction of the estate tax applicable exclusion to $1,000,000 2013. those with estates in excess of this limit may wish to consider the creation of an A-B Trust plan.