LAFP1Estate Planning

ESTATE PLANNING

This discussion of estate planning is intended to provide information only. It should not be construed as offering either tax or legal advice.

Estate planning combines the financial and personal sides of retirement planning. Whether you have given little thought to it before now or already devoted considerable time to it, this discussion should prove helpful.

As we cover some estate planning basics and identify a few things for you to pursue, remember that your estate planning objectives are quite personal. There is no substitute for professional legal advice that addresses the specifics of your situation.

We'll look at some common estate planning goals, tell you how and why to take stock of your estate, discuss wills and probate, and give you an overview of federal and state estate taxes. We'll also explore some other estate planning tools and techniques.

Let's begin by asking: "Just what is your estate?" It is all your assets – everything you own at the time of your death. It includes real estate, securities, bank accounts, and personal property such as jewelry, art, clothing and furniture. Determining what is included in your estate can be complicated, however, when it comes to wills, probate, and estate taxes. As we will see when we examine these subjects in detail, some assets that are included in your estate for estate tax purposes are not part of your estate for probate purposes because you do not need a will to pass them on to someone else.

The value of your estate may surprise you. You may discover you're worth much more than you ever imagined. Most of us are aware of what we own, but we've never sat down and calculated the value of all those assets. Once you realize how much you're worth, you may see more clearly the need to develop an efficient plan for passing it along. What you've taken years to accumulate certainly deserves the relatively small amount of time it takes to plan its distribution.

COMMON GOALS

What do people try to accomplish through estate planning? Here are some typical objectives:

  • Make sure that certain people benefit from the estate when it is distributed.
  • Make special provision for beneficiaries with special needs, such as minor children whose property requires a guardian.
  • Make sure that particular personal items go to people who will appreciate them most.
  • Minimize delay in the distribution of the estate.
  • Make sure that a trustworthy and capable person is responsible for distributing the estate.
  • Minimize estate and income taxes, probate fees, and other expenses on the estates of both husband and wife.
  • Make sure that what minors are to receive is protected and managed by someone you trust.
  • Be able to pay estate taxes without forcing the sale of assets that should be transferred to others.
  • Reduce the size of the estate by spending or gifting assets now, so that there will be little left over at death.

Each person approaches estate planning with highly personal objectives. A carefully crafted estate plan can help you achieve yours.

AN ESTATE INVENTORY

Estate planning starts with taking stock of your assets and liabilities and organizing all of your vital records and documents. The forms beginning on page 47 can help you consolidate this financial and personal information. Complete them carefully and keep them up to date. They will save you hours when you put your formal estate plan together. In addition, your family and your executor will find it much easier to locate the information they will need in the event of your death.

Once you've taken stock of your estate, move on to think about how your assets will be transferred. Two key things for consideration are wills and probate.

WILLS

A will is a legal document that spells out how you want your estate distributed. It is one way to transfer ownership of property after your death. It is not, however, the only way available. It is very likely, in fact, that a good deal of what belongs to you will pass by other means. Property you own jointly with a right of survivorship is one example. Property you placed in trust is another. Life insurance policies, pensions and annuities with survivor options, individual retirement accounts and employee benefit plans with designated beneficiaries -- all of these can pass property to others, whether or not you have a will. For these assets, your will enters the picture only if you arranged for your estate to receive them at your death.

Although assets that pass outside your will are not part of your estate for probate purposes, most of them are included in your estate when estate tax is calculated. For this discussion, then, you may wish to think of yourself as having two estates: a probate estate that includes only what passes under your will, and a tax estate that includes your probate estate plus everything else you leave behind.

For now, let's limit ourselves to considering wills and probate. We'll explore other devices for transferring property later.

Every state has its own requirements for making a valid will. In general, a will that meets the requirements of the state that is your legal residence when you make it will be recognized by another state should you move. But to be absolutely safe, have an attorney review your will if you move to another state.

Your will should be typewritten so that it can be read clearly. Because legal language is designed for precision, a "do-it-yourself" will can be risky. Vague language can be hazardous to your estate plan. If your words are open to question, you are inviting disputes later on, and you are making it necessary for someone else to step in after you're gone to interpret what you say. The assistance of an attorney in writing your will can ensure that your will says clearly and exactly just what you mean.

To be valid, a will must be witnessed. Most states require that at least two people witness (1) your saying that the document is your last will and testament, (2) your signing it or saying, "This is my signature," and (3) your being of sound mind. The witnesses must then sign the will. Afterwards they can sign notarized self-proving affidavits. These may be either contained in the will itself or attached to it. They permit an uncontested will to be probated without the appearance of the witnesses. Most states recognize such self-proved wills. If your will is contested, however, witnesses may be still required to appear in probate court. So in choosing witnesses, consider their age and whether they are likely to be available at the time your estate is distributed.

No witness should be a beneficiary under the will. Although having a will witnessed by a beneficiary does not make the entire will invalid, it could invalidate any bequest to that witness/beneficiary.

A written will that is properly witnessed is then called an executed will.

What should you do with your will after it is executed?

  • Keep the signed original in a safe place, so that it can be reached easily when you die. Some people keep the original with their lawyer, others in a safe deposit box at their bank. This could cause delay because some states require that the box be sealed at your death; a court order may be needed to open it. Make sure you ask your bank what the rules are in your state. To avoid delay, some people keep their will in their spouse's or executor's safe deposit box. Many states permit you to place the original on file with the county clerk. Wherever you decide to keep the original, always tell one or two people where it is. If your will cannot be found, your estate will be settled without it.
  • Keep a copy of your will at home so you can read it over periodically to see if it needs changing. If it does, the changes must be made with the same legal formalities as the original will. You can't simply write in something new or cross out parts of it.

An amendment to a will that makes minor changes or adds to it is called a codicil.

You can also revoke your will completely and start over. You can do this by destroying the original and all copies, or by executing a later will that specifically revokes the earlier one, or by doing both, which is the safest option.

Why change your will? Your family or financial situation may be different now. Your beneficiaries' needs may no longer be the same. Tax laws may have changed, or you may have moved to a new state.

A will normally includes a residual clause saying who receives anything not specifically mentioned. This lets you control the disposition of assets you haven't listed individually.

Should you and your spouse have a joint will? This is a single document executed by two or more individuals as the will of each. Most experts in estate planning advise against joint wills, as well as mutual wills, in which each person makes his or her own separate will but pursuant to an agreement to dispose of their property in a certain way.

Joint wills and mutual wills may tie the hands of the parties and make it extremely difficult to respond to changes in circumstances after one party dies. While both persons are alive, it is usually possible for either one to revoke the will unilaterally. After the first death, however, courts may not recognize changes in the will by the survivor. This could severely restrict the flexibility often needed in effective estate planning.

Executor/Executrix

In your will, you name the person or institution to be responsible for managing the distribution of your estate as described in the will. This is the executor (executrix, if female). If you die without a will, the state will appoint an administrator to oversee the distribution. In many states, the administrator or executor is also called the personal representative.

Two qualities are important in an executor:

  • First, the person should be trustworthy, someone who knows you and will carry out your wishes.
  • Second, the person should be capable of carrying out the many financial and other duties of the office. Finding both qualities in one person may be difficult, so you may wish to consider naming co-executors – your spouse and your attorney; a close friend and your bank's trust department or estate settlement service; a business associate and a professional investment counselor.

You also want to make sure that, as with witnesses, you name someone who will be available when you die. Your will should also name a substitute executor in case your first choice is unwilling or unable to serve.

Some states permit a non-resident to serve as executor, while others do not -- another reason to have your will reviewed if you relocate.

Executors are usually paid for their services according to what the probate court considers just compensation. This usually amounts to 3% to 3½% of the value of the probate estate. These expenses are subtracted from your estate's gross value for federal and state estate tax purposes.

Duties

The executor guides your will through the probate process, pays any estate or inheritance tax, and distributes your estate. The duties of the position are many. Here are some of them:

  • Obtain original copy of will and all other relevant documents
  • Select and hire an attorney for probate, if necessary
  • Submit the will and file any other necessary papers with clerk of probate court
  • Provide court with names and addresses of all family members, witnesses, other interested persons, and known creditors to be notified of probate proceedings
  • Produce witnesses, if necessary, to prove validity of will in a probate hearing
  • Conduct inventory of all items mentioned in will and of all estate assets; contact employers, banks, brokers, or others, to determine whether there is other estate property and how to collect it
  • Protect all estate property against loss or harm
  • Determine estate property passing without probate
  • Arrange for publication of notices of probate in local newspapers
  • Determine any claims of creditors against estate and by estate against others
  • Establish separate estate bank accounts to receive any income and pay any expenses, if necessary
  • Petition probate court for family allowances, if necessary, and any other transactions
  • Pay funeral and burial expenses
  • Apply to IRS for estate tax identification number
  • Petition probate court for attorney, executor, and any other fees
  • File and pay federal and state estate taxes
  • Make distributions to all beneficiaries; obtain receipts and releases
  • Provide periodic and final accounting to probate court of all distributions
  • Change legal ownership of certain property to beneficiaries
  • Obtain final decree of distribution from probate court.

To make your executor's job easier and to help speed up the distribution of your estate, you should draw up a list telling your executor where to obtain all the necessary information about every element of your estate. This document is sometimes referred to as a letter of instructions. It will be extremely helpful, especially if your executor is someone close to you.

The letter of instructions typically includes such information as:

  • The location of your will
  • Funeral instructions
  • The names, addresses, and phone numbers of all people who should be notified and their relationship to you
  • The location of all important legal documents, such as Social Security and Medicare cards, title papers to autos, deeds to real property, marriage papers, armed forces discharge papers, and birth certificate
  • The name, address, phone number, and contact person for any society or lodge which provides any benefit or insurance for members on their passing and any information about the procedure for collecting
  • All employee benefit plan papers and the location of any descriptive materials
  • The location of all insurance policies, including the name of the company, policy number, beneficiary, and amount of coverage. This should be provided for life, casualty, homeowner, and any other insurance policies you own or on which you have been paying premiums
  • The name of the bank and the account number of all savings and checking accounts in your name; also the location of all checkbooks, passbooks, and certificates of deposit
  • All U.S. savings bonds, in whose name registered, their serial numbers, and denominations
  • All stocks and bonds, their locations, and the names, addresses, and phone numbers of brokers who handled them
  • The location of any safe deposit boxes, in whose name registered, and location of keys
  • The location of recent federal and state income tax returns
  • The location of particular personal possessions
  • Anything else that it would help your executor to know about quickly and which might not be clear in the will.

Most of this information can be recorded in the Assets and Personal Information Records beginning on page 47.

PROBATE

Probate is the legal process of "proving" in court that your will is in fact your will, interpreting it, and overseeing the distribution of your estate in accordance with state law and your will's instructions.

How does probate work?

At the time of the distribution of an estate, the executor usually hires an attorney to present the original will along with all necessary forms required by state law (e.g., death certificate, original will, sample of the deceased’s signature, list of assets, addresses). The attorney then files a petition with the clerk of the probate court in the county of the deceased’s residence. A date is assigned to the petition for the beginning of probate proceedings. A notice announcing the date, time, and location of the first probate hearing then is sent by the probate court to all known parties with an interest in the estate as identified by the executor.

At the initial probate hearing, which varies in formality from state to state, a probate or surrogate judge presides. At this hearing, the original of the will is presented to the court. This is the time for anyone who questions the validity of the will (e.g., who claims you signed under fraud or duress) to make objections. The hearing notice may contain a waiver of objections, which individuals can fill out and return by mail to the court clerk if they have no objections. If there is any doubt about the validity of the will, your witnesses may be summoned to court. At the hearing, family members and others can ask questions of the judge. Once the judge is satisfied that the will is valid and does represent your last wishes, the judge will issue a certificate of appointment ("letters testamentary") to the named executor, authorizing the executor to begin undertaking the many different duties described earlier. One of the executor's very first duties is to arrange for a legal notice to be published in local newspapers. This is to notify all potential creditors about the processing of your estate and of the deadline for any claims against the estate to be submitted to probate court. Creditors who fail to submit claims are barred from later trying to obtain repayment from the estate. This freezing of creditors' claims is one of the most important functions of probate.