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The Important Topics to Discuss with Your Estate Planner

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Jonathan J. David
go60.us Legal Ease Column
April 2012

Dear Jonathan:

I am 75 years old and a widower. I recently received some troubling news regarding my health, which got me thinking about estate planning and death taxes which are topics I have been avoiding for years now. Now that I am facing the harsh reality that I may not be here a year from now, has forced me to take stock. I will be making an appointment with an estate planning attorney in the near future, but before I meet with that person, I want to be somewhat educated so that I can not only converse on this topic but have a decent idea as to whether the recommendations that are made are sensible given my circumstances. I particularly want to make sure that my estate transfers smoothly to my four children and minimize the costs and taxes to the greatest degree possible. If I had to guess, I would peg the value of my estate at just around $5,000,000. Based on this information, what types of planning do you think I should engage in?

Jonathan Says:

The first thing I would recommend is that you make sure you have both financial and health care power of attorneys in place. These power of attorneys have nothing to do with passing your estate on to your children, but nonetheless play an important role in your overall planning, and you should not be without them, especially given your health concerns. The financial power of attorney allows your named agent to act in your place regarding your financial matters, i.e., investments, paying bills, filing tax returns, etc. Your health care power of attorney allows your named agent or patient advocate to act on your behalf regarding health care matters if you aren't able to act for yourself. Also, if you have any thoughts about whether you want to kept alive on life support or be resuscitated if it comes down to that, you should consider preparing a living will or medical directive and possibly a DNR (Do Not Resuscitate directive) so that your family and physicians have a road map as to your desires in the event either of those situations arise.

You should have a last will and testament and, if you are interested in avoiding probate, a living trust. The will makes sure that any probatable assets, i.e., assets that are just in your name alone at death, pass to the beneficiaries named in the will. Without a will, those assets would pass according to state law, which may or may not be consistent with your objectives.

Further, if your assets are in your name alone, those assets must be probated first before going to your beneficiaries. If you want to avoid the time and costs associated with having to probate your estate, you can prepare a living trust, and then fund it with certain of your assets while you are alive. Any assets you transfer to the trust during lifetime will avoid probate at your death and pass directly to the beneficiaries. The trust can also state whether your children are to get the assets outright, or whether they are to be held in trust for a period of time, and who should receive a particular child's share in the event that child predeceases you.

You indicated you have an estate worth approximately $5,000,000, but you did not indicate what types of assets comprise your estate. This is important to know because the nature of your assets will many times dictate whether a trust is recommended or not. For instance, if the bulk of your $5,000,000 estate is tied up in retirement type investments, i.e., IRA's, 401k's, tax-deferred annuities, etc., those types of assets typically would not end up in trust; instead, you would name your children as the beneficiaries of those proceeds at your death.

On the other hand, if the bulk of your assets consist of real estate and cash, then having those assets owned by your trust makes good sense. Further, if you own any real estate outside of the state in which you live, at your death that real estate will need to be probated in the state where it is located; you can avoid having your estate be subject to an out of state probate by having that real estate owned by your trust.

Under the current federal estate tax law, anyone who has an estate of $5,000,000 or less through the end of 2012, will not owe any federal estate taxes at his or her death. For 2013 and beyond, we do not know yet what that exemption from estate taxes will be. Consequently, you may want to consider entering into a gift-giving program now (depending upon the nature of your assets) for the purpose of reducing the size of your estate, which has the corresponding effect of minimizing any potential estate taxes that might be due and owing if you are still living in 2013 and the exemption falls below $5,000,000.

Currently you can make tax free gifts of up to $13,000 per year per person without any gift tax consequences and without having to file a gift tax return. You can also gift more than that, and although any amount over $13,000 gifted to one person in one year would be deemed to be a taxable gift for which a gift tax return would have to be filed, there would be no real impact to you because through the end of 2012, the lifetime gift tax exemption is $5,000,000.