Monday, February 13, 2012

Estate Planning Basics

Estate Planning is not just for the wealthy. Even if your situation is very basic, you still need an estate plan. And if your situation is more complex, improper estate planning can cost your loved ones thousands if not millions. Today, I will cover wills, power of attorney, trusts, and that evil thing called the “death tax”! 

An estate plan has several elements. Includes: a will, assignment of power of attorney, and a living will or health-care proxy/medical power of attorney. For some people, a trust may also make sense. When putting together a plan, you must be mindful of both federal and state laws.

Take inventory
Your assets include your investments, retirement savings, insurance policies, and real estate and business interests. 

3 important questions
Who do you want to inherit your assets? Who do you want handling your financial affairs if you're ever incapacitated? Who do you want making medical decisions for you if you can’t make them for yourself?

Get a Will!
A will tells the world exactly where you want your assets to go when you die. It's also where you should name the guardians for your children. If you die without a will, this is known as dying "intestate". Die without a will, and the state where you live decides who gets what.

NFL quarterback Steve McNair died without a will and he was married at the time of his death. McNair had four sons, two from his current marriage and two from previous relationships. Under Tennessee law, when one spouse dies without a will, the surviving spouse is automatically entitled to at least one third of the estate, and the surviving children split the rest. It is possible that this division may have very well been what McNair intended, but without a will to express his final wishes, nobody will ever know. Making a will is extremely important for people with young children, because a will is the best way to transfer guardianship of your children. 

You can amend your will at any time. And I recommend reviewing it annually and especially when you have major life changes. At the same time, review your beneficiary designations for your 401(k), IRA, pension and life insurance policies. These accounts will be transferred automatically to your named beneficiaries when you die.

Living Will
Making your medical wishes known through living wills and medical power of attorney can save your family a lot of heartache later. A living will (also known as an advance medical directive) is a statement of your wishes for the kind of life-sustaining medical intervention you want, or don't want, in the event that you become terminally ill and unable to communicate.

You increase your chances of enforcing your directive when you have a health-care agent advocating on your behalf. You can name such an agent by by assigning what's called a medical power of attorney. You sign a legal document in which you name someone you trust to make medical decisions on your behalf in the event that you can't do so for yourself. Choose your health-care agent carefully. That person should be able to do three key things: understand important medical information regarding your treatment, handle the stress of making tough decisions, and keep your best interests and wishes in mind when making those decisions.

If you live in TN, here is a great FREE resource

Power of Attorney
When you can't control your financial life, make sure someone you trust can by assigning power of attorney. Granting someone you trust the power of attorney allows that person to manage your financial affairs if you are unable to do so. Your agent is empowered to sign your name and is obligated to be your fiduciary, meaning they must act in your best financial interest at all times.
There are different kinds of powers of attorney, but in estate planning there are two essential types you should know:
  • Springing power of attorney, which only goes into effect under circumstances that you specify, the most typical being when you become incapacitated.
  • Durable power of attorney, it is effective immediately, and your agent does not need to prove your incapacity in order to sign your name.
An attorney can help you decide which form makes the best sense for your circumstance. In any case, take care in choosing your agent. That person should be competent, trustworthy, willing to take on the burden of your affairs and financially secure. If you do become incapacitated without having assigned power of attorney, the court may step in to appoint a guardian. This process might cost your family hundreds if not thousands. Plus, the person the court chooses may not be someone you would have picked.
Do you need a Trust?
Trusts are legal documents that let you put conditions on how and when your assets will be distributed upon your death. They also can allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay and publicity of probate (proving your will). Any assets that are not retitled in the name of the trust usually are considered subject to probate. As a result, if you haven't specified in a will who should get those assets, a court may decide to distribute them. Trusts are flexible, varied and complex. Each type has advantages and disadvantages, which you should discuss thoroughly with your estate-planning attorney before setting one up.

There are many types of Trusts that serve different purposes. If you'd like to learn about different kinds of trusts, I’ll be posting an article on my website later this week.

Living Trust  
"Living Trusts" are very controversial in TN. Some salespeople sell living trusts so they can learn what assets you own. Many of these folks actually sell financial products for a living. They want to sell you an annuity or other financial products. Is it right for you? Work with someone who can provide you with objective financial advice, NOT someone trying to sell you a document or a product.

The Reality:
  1. For most estates in Tennessee and in many other states, probate is no big deal. It goes quickly, is private for the most part, and is not that expensive.
  2. Living trusts can be contested, just like a will. The living trust salesperson who claims that a living trust can’t be contested does not know the law.
  3. Living trusts are much more expensive to set up and maintain than a will.
  4. In many instances, the trustor fails to transfer all of his "probate assets" to his living trust. The estate winds up in probate court anyway. So you pay twice: first, to set up the living trust intending to avoid probate; and second, to go to probate court.
  5. Living trusts are no more effective than wills in saving state and federal estate taxes.
Some important reasons for having a living trust include:
  1. You own property in another state.
  2. Beneficiaries of your estate are disabled.
  3. You live in a state in which probate is time-consuming, burdensome, and costly.
The Estate Tax or Death Tax
For 2012, because the gift and estate tax exemptions are indexed for inflation, the $5 million lifetime gift and estate tax exemption limits rose to $5.12 million or $10.24 million per married couple. In 2012, families can also elect to take advantage of “portability.” “If dad predeceases Mom in 2012, she can use what remains of Dad’s estate tax exclusion.” Dad’s estate must make an election on his estate tax return. In other words, “Mom won’t inherit his unused exclusion unless a federal estate tax return is filed even if one is not otherwise required because Dad’s estate is” under the  $5 million exemption amount. Portability is not available for state estate tax exclusions. In 2013, the gift and estate tax exemptions are both scheduled to revert to $1 million, unless Congress acts. 

TN Estate Taxes: 
$1 million exemption
Anything over the exemptions are taxed at the following rates:
First $40,000
Next $40,000 - $240,000
Next $240,000 - $440,000
$440,000 and over

Giving to reduce the size of your estate
You may give up to $13,000 a year to an individual (or $26,000 if you're married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred.
Give more than 13k? Don't panic! You won't actually owe any federal gift tax unless your cumulative taxable gifts exceed your $5.12 million lifetime gift tax exemption for 2012. Unified Credit: A credit is an amount that reduces or eliminates tax. The unified credit applies to both the gift tax and the estate tax and it equals the tax on the applicable exclusion amount. $1,772,800 for 2012 (exempting $5,120,000 from tax).  This is done by filing IRS form 709.

If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.
Charitable gift funds permit you to make a tax-deductible donation, grow your investment tax-free, and then direct the contribution to the nonprofit of your choosing whenever you like.

Estate planning isn't just about how you want your assets distributed after you die. It's about deciding how much you want to give away while you're still alive. If you plan carefully, giving allows you to reduce your taxable estate and provide advance help to your beneficiaries.

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