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Estate Planning FAQ

If you're like most people, you have promised yourself a number of times to get that will prepared or otherwise have an attorney review your estate, but for one reason or another you just never got around to it, maybe you think that the amount of money you have does not warrant as Estate Plan.

Having a Will in place along with other Estate Planning documents is an essential step in ensuring control over your presonal & financial matters and protecting the needs of your loved ones.

I have set forth some common questions designed to help you understand the broad concept of estate planning and how it will benefit you:

What is an Estate Plan and what is the role of an Estate Planning Attorney?

Many people have the wrong impression that estate planning is only for the very wealthy. Nothing can be further from the truth. Simply put, an estate plan is merely a means to ensure that upon your death, the maximum amount of your assets are distributed in accordance with your desires free of complications, and, that in the event of a serious illness or incapacity, you have preselected an individual to make medical and/or financial decisions on your behalf if necessary.

An estate planning attorney helps people preserve their assets and plan for retirement while taking into consideration their short & long term needs and the needs of their family. He or she will review a client's financial picture and personal goals and then, implement services ranging from simple wills to the more complex planning needed for larger estates.

Most of us ask the same questions at various stages in our lives, upon marriage, upon having children, when starting a new job or business and certainly as retirement approaches.

  • What happens if I die or become disabled, are my spouse and family protected?
  • Younger people want to know if they're saving enough for retirement & for their children's education?
  • Older individuals question whether they have in fact saved enough to maintain their standard of living in retirement?
  • Homeowners want to protect their home from creditors and medicaid liens so it can pass to their heirs.

Is it important for everyone to have a Last Will and Testament?

In most instances, yes. The purpose of a Will is to allow you to decide who will receive your assets, and in what proportions. It also allows you to select the person who will be in charge of your estate upon your death. This is called your executor. The executor is the captain of the estate. He or she is responsible for taking control of the assets, paying funeral, hospital and other debts. Filing your final income tax returns, death tax returns and starting a probate, if necessary.(Probate is discussed in question 4)

A will also allows you to make special provisions for minor beneficiaries, such as children, grandchildren, nieces or nephews. The minor's share could be held until a certain age is reached or paid out over time at the discretion of the Personal Representative (e.g., educational or medical needs).

Is a Will really necessary if everything is owned jointly with a spouse or some other person?

Many people think that a Will is not necessary if everything is owned jointly. When property is owned jointly with another person, upon the death of one owner, it passes automatically to the survivor outside of the probate process and regardless of whether or not you have a Will. The problem is that once one joint owner dies, the assets, in most cases are owned by a single individual and should be disposed of in that person's Will. Otherwise, the property may pass to unintended beneficiaries.

What does the term "Probating the Will" mean?

Probate is the court process by which the distribution of your assets to your heirs and the payment of expenses, is approved by the court. Distribution is made to persons named in your Will if you have one, otherwise, to those persons established under the laws of the Commonwealth. Only certain assets which are individually owned must go through this process, e.g., stock, bonds, bank accounts, real estate etc. Assets which pass automatically by operation of law or by contract do not have to be probated. Examples are jointly owned property which, as we discussed, passes automatically to the survivor, proceeds of life insurance, retirement benefits or IRAs for which a preselected beneficiary has been designated. These types of assets do not pass in accordance with your Will.

What happens if you do not have a Will?

Without a Will, your property passes in accordance with rules established with the new Massachusetts Uniform Probate Code adopted by the Commonwealth. If a person is survived by a spouse and children (all born by marriage of spouse & decdent), it passes all to the the spouse. If the surviving spouse has no children but the decdent had children from another relationship, then, the first $100,000 plus half of the remaining estate goes to the spouse with the remaining half to be divided among the decdent's children. If there is no surviving spouse, it passes equally to the children. If the surviving spouse has no children but the decdent has parents living, then, the first $200,000 plus three quarters of the remaining estate goes to the spouse with the remaining one quarter to the parent. Its not most people's intent for their spouse to have to split their estate with relatives. If you to die without any surviving heirs then your property passes to the Commonwealth.

Are there any other documents which are used in estate planning besides a Will?

There are three other documents which go hand and hand with a Will and should always be part of any estate plan in most cases.

The first is a health care proxy. The health care proxy allows you to appoint someone to make medical decisions on your behalf in the event you are incapacitated and unable to make them on your own. Usually a spouse, child or other family member is chosen. It is important to advise who ever is appointed what your desires are concerning life sustaining and other medical techniques. Proxy forms are available for free in many places such as; hospitals, the office of elder affairs and at many senior centers.

The second document is a durable power of attorney which allows you to appoint someone to act on your behalf. It is a very effective and powerful document because it allows someone you select to do everything you would be able to do on your own, e.g., open/close bank accounts, make gifts, pay bills, sell real estate, sign checks, sue on your behalf, transfer assets.

WARNING: YOU MUST BE VERY CAREFUL OF WHO YOU APPOINT AS YOUR POWER OF ATTORNEY.  IT CAN BE MISUSED TO STEAL YOUR MONEY OR PROPERTY.  For more information on Financial Abuse of the Elderly follow the link to my newsletter on the topic.

With a power of attorney in place you can also eliminate the need for a guardianship should you become mentally or physically unable to make financial decisions on your own. A guardianship is a court process which is both expensive and time consuming for the purpose of having someone appointed by the court to represent your interest. Usually it is a spouse, child, sibling or other relative. A power of attorney can avoid this necessity and save a good sum of money which would otherwise be spent for attorney fees and court costs.

The third document is for homeowners and is called a Homestead Election. By electing a homestead, MA residents can protect $500,000 of the equity in their home from creditors and this protection continues after death for the benefit of the surviving spouse and minor children. A homestead will not protect you if you don't pay your real estate taxes or mortgage, OR from medicaid liens, and it will not protect you from creditors who existed prior to making the election. There is also a homestead election for persons who are disabled or 62 or older. The protection for this type of homestead is $500,000 for each elderly owner.

Do you have to be sick for the power of attorney to take effect?

No. There are two types of Powers. One is effective immediately. This is usually used when a spouse is to be appointed or when for whatever reason you need someone to start doing things for you immediately because it is inconvenient or you are unable to do these things yourself, e.g., paying bills, making deposits and withdrawals.

The other type of power of attorney is one that does not become effective until you are incapacitated and unable to make decisions for yourself. This is called a springing power of attorney because it springs into effect upon the happening of your incapacitation.

Is it difficult to make a homestead election?

No, not at all. Its quite easy. Homestead election forms are available at many senior centers and at the Registry of Deeds. The form must be signed and filed in the same registry where the deed to your residence is recorded. The filling fee to record the homestead is only $35. This is a very inexpensive way to protect your home. Everyone who owns a home or has a legal interest in real estate should have a homestead. There is no reason not to.

Is it true that upon death, a person's estate can be taxed at rate of as much as 50%?

In some cases, yes. The federal estate tax rates start at 37% and can go as high as 45% depending on the size of the estate. However, its not as bad as it sounds because the vast majority of people will neither have to pay any death taxes nor file a death tax return because of the way the estate tax laws are structured. Taxes are only paid on a person's assets in excess of $11,000,000 for federal estates and $1,000,000 for MA estates. This amount is referred to as the Estate Tax Exemption and allows each one of us to gift and/or distribute at death, rest assured that this will be revisited by future Presidents and Congresses.

What is an example of basic estate planning?

The best example is to show you what happens if planning is not done. Many people think they have a proper estate plan if they have a Will which gives everything to their spouse or if everything is owned jointly. In this situation the couple is not taking advantage of their Estate Tax Exemption amounts. Let's say a Husband and Wife have total assets of $7,000,000. Its important to remember that your assets consists of everything you own. Not only your home, bank accounts and investments, but also the proceeds of life insurance, IRAs, the value of retirement plans and the value of your business. Husband passes away first in 2009 and leaves a Will which gives everything to his Wife, or the property is owned jointly and passes to her automatically. There will be no estate tax at Husband's death because amounts passing to a spouse are not taxed. This is referred to as the "Unlimited Marital Deduction". By leaving everything to his spouse outright in the Will, or by the fact that the property passes automatically to the Wife if it is owned jointly, the Husband has wasted his Estate Tax Exemption because he will be unable to shelter the full amount of their assets. What happens in this situation is that because everything passes to Wife, Wife now has an estate equal to $7,000,000 plus any related appreciation. Therefore, if Wife dies in 2010 she will have to pay death taxes on the amount of her estate in excess of the federal Estate Tax Exemption of $3,500,000. Using the year 2009 rates and credits, the estate tax on $3,500,000 is equal to almost $1,500,000. There is also an estate tax due in MA on the amount over $1,000,000.

How do you prevent this from happening?

First Husband and Wife have to divide their assets so that each of them can take advantage of the Estate Tax Exemption amount. The way to utilize the Estate Tax Exemption is by not leaving the Estate Tax Exemption directly to your spouse. Instead you leave it to a trust for your spouse's benefit. These trusts are commonly referred to as "Credit Shelter Trusts", "Living Trusts" or "By-Pass Trusts". The surviving spouse is given certain rights to the income and the principal of the trust for his or her financial security and well being. Upon the surviving spouse's death the trust assets are distributed to their heirs in accordance with the provisions of the trust. Typically its to the children. The Estate Tax Exemption amount plus appreciation is not taxed upon the death of the surviving spouse. The surviving spouse gets a substantial benefit from the trust, and gets the benefit of not being taxed on the Estate Tax Exemption amounts at the death of the first spouse and at the surviving spouse's death as well.

There are some additional advantages of using these types of trusts. One is that the probate process can be avoided if assets are transferred to the trusts while you are alive(saves court costs and attorney fees). Assets in the trust are not probate assets. There are no current income or gift tax consequences as a result of placing your assets in the trust. Also, your heirs will have quicker access to the trust assets if that is what you desire. By not having to probate the assets in the trust, you can keep your affairs private since probate records are public information. You can also place restrictions on the assets to ensure that they won't be distributed to young beneficiaries, or restricted for limited purposes such as education and medical needs. I am often told by clients that they want to benefit their children or grandchildren but are worried that such beneficiary's spouse may have a windfall in the event of a divorce or premature death. Provisions can be written in the trust to prevent that situation from happening. The trust can also be a means to provide for a handicapped or disabled family member, or a family member who is financially irresponsible.

What happens if I change my mind can I change the trust?

Yes. The beauty of these types of trusts is that they can be amended or revoked at any time prior to death if you change your mind.

Are there other types of trusts or beneficial planning methods?

There are numerous types of things that can be done depending on a variety of personal factors and which are to detailed and complicated for purposes of this Report. However, there are certain types of trusts which I can discuss briefly. They include a Qualified Personal Residence Trust which is used to transfer the value of your residence out of your estate. There are life insurance trusts which are used to prevent the value of life insurance proceeds from becoming part of your taxable estate upon your death.

There are trusts which can be established to provide an income for a term of years to yourself or some other designated beneficiary and at the end of such period, the remaining assets are distributed to a charity or other beneficiary.

There are advantages and disadvantages to all of the trusts and planning concepts I discussed. The type of estate plan which is appropriate, depends on each person's unique situation, their personal desires, the size of their estate and many other factors. Suffice it to say that the best way to determine what plan is right for you is to consult with an experienced estate planning attorney.