Estate PlanningESTATE PLANNING INFORMATION CENTER Overview Every day we get older. No one likes to discuss the fact that one day we will no longer be here. Estate planning is very important no matter how big or small your estate may be. Estate planning allows an individual to plan the disposition of his or her assets during and after death through a will, trust or power of attorney. It gives you the satisfaction that your loved ones will not be burdened with unnecessary red tape and financial confusion. By having an estate plan, you can reduce court costs, attorney fees and reduce tax liabilities. A tax is imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. This helps the family to deal with any administrative or financial issues that arise. An estate plan should include a will and a durable power of attorney. The will is a legal document that lists and details the distribution of the individual’s property after death. The will usually names a guardian for your children and the executor of your estate. Make sure the person you name as guardian accepts the responsibility at planning time. Your executor should be advised how much time being executor entails. State law dictates execution in order to be legally valid and enforceable. It is valid until destroyed, revoked or a new one takes its place. Changes to an existing will are by codicil. A codicil is a document that complies with state law. A trust is a legal entity that holds assets for an individual’s benefit. The creator transfers assets into the trust and sets forth terms, identities of beneficiaries and how to manage it. A living trust (or inter vivos trust) becomes effective during the lifetime of its creator. The creator can change the terms during his or her lifetime. The person who will receive this trust is the beneficiary. The person who manages the trust is the trustee. A trust that cannot be terminated once created is an irrevocable trust. Irrevocable Trust An irrevocable trust is created to transfer assets with no power to revise, amend or revoke the terms. Income generated by this trust is taxed to the beneficiary. Any undistributed or accumulated income is taxed to the trusts fiduciary. If you are incapacitated and cannot handle your own financial issues, a conservator should be appointed. A conservator makes decisions on your behalf. The conservatorship is paid by the incapacitated individual’s estate. A court-appointed conservator does not always know the incapacitated individual’s desires. A durable power of attorney authorizes an individual to make decisions about the individual’s property if they become incapacitated or mentally incompetent. You can sign a durable power of attorney to prepare for the possibility of becoming incapacitated or mentally incompetent.
A power of attorney is a legal document authorizing another person (your agent) to act on your behalf. It can grant the agent a range of authority (general power of attorney) or it can limit the authority to certain situations (special power of attorney). A power of attorney can also authorize a person to handle finances, manage property, file tax returns, etc. However, an authorized person is not legally allowed to prepare a will, vote or seek a divorce on his or her behalf. Probate is the procedure where the will’s validity is proven to the court. Probate property includes homes, automobiles, furnishings, stocks, and bank accounts. Not included in a probate estate are life insurance policies and annuities. The estate plan should also include a medical directive (power of attorney). This document gives a specific person the authority to make decisions regarding the individual’s medical care if he or she becomes incapacitated or needs to reside in an extended nursing home care facility. A living will (natural desire for a natural death) states the individual’s desire to use or not use machines to extend his or her life when recovery is doubtful. Power of Attorney – Medical Care A medical care power of attorney is called a medical directive. It allows another person to make healthcare decisions on your behalf if you cannot because of unconsciousness or becoming mentally incompetent. A healthcare proxy can make healthcare decisions regardless of the individual’s incapacity. It is important to discuss your healthcare options with the person or persons you choose as your medical directive or proxy. Financial Goals Planning The estate plan needs to include setting aside money for retirement, a college education if children are involved, and what to do if an illness or disability arises. It can also include life insurance, gifts to individuals and/or charities. It is important to check with an estate-planning attorney regarding federal gift and estate taxes and state inheritance taxes; these are different in each state. Protect your Assets It is important for you to protect your assets, real and personal property, and financial reserves from creditors and tax collection. Even though there are Federal and State laws that exempt some property from creditors and taxes, an estate-planning attorney can tell you how to reduce or eliminate estate taxes. Asset Protection Trust An asset protection trust (self-settled trust) is a contract created by a person who wants to protect his or her assets.
Family Limited Partnership (FLP) A family limited partnership will help you save your assets and still keep control over them. A family limited partnership reduces estate and gift taxes through annual gift tax exclusion, a valuation discount and a unified estate and gift tax credit. This family partnership consists of the general partners or parents and the limited partners or children. The general partners manage the assets, make decisions, share the income and take care of the debts. Limited partners have an interest in the ownership and share in the income. However, they have little control over the activities and they are responsible for debts only to the extent of their ownership interest. Valuation discounts reduce the FLP estate and gift tax value. Any assets transferred through the FLP and not outside the FLP, have greater annual gift tax exclusion and unified credits benefits. Annual Gift Tax Exclusion Gifts to different recipients are exempt from the Federal gift tax up to a certain amount. Valuation Discount An interest in a FLP is not marketable; it cannot readily become cash at a specific market price. Therefore, a discount for lack of marketability is appropriate. This discount reduces the FLP’s value for the purpose of estate taxes. Unified Estate/Gift Tax Credit The unified estate and gift tax credit applies to the amount of the estate exempt from Federal estate taxes. This credit is applied to lifetime gifts and gross estate at time of death. Assets and Creditors A family limited partnership can provide limited protection from creditors. The limitations are different in each state. It used to be where one spouse put his or her assets in the other spouse’s name because that spouse had a lower risk of liability. Assets owned by one spouse are not always available to satisfy a judgment against the other spouse. It is wise to place assets into a trust or foundation because they will not be subject to claims against the beneficiaries. Additionally, assets in a trust or foundation are removed from a person’s estate tax estate. Elder Law The legal, financial and health needs of seniors are dealt with under Elder law. An elder law attorney helps the individual prepare for long-term medical care using government programs. The discuss finances and establish guardianships and/or conservatorships. Elder Health Issues Long-term care in a nursing home is not covered by Medicare. Medicaid is the only government program that pays for long-term care, including medical bills. Estate planning can provide for an elderly person’s care by redistributing his or her assets to reduce the amount required to qualify for Medicaid. By redistributing assets to family members beforehand, they will not be used to pay for healthcare expenses
Conclusion Estate planning protects an individual’s property, assets and interests during his or her lifetime and continues after death. Planning early gives you greater flexibility in maintaining control of your estate as you become older. An estate plan must be created to fix an individual’s specific needs and desires. An estate-planning attorney can make sure your goals are adhered to during your lifetime and after your death. Links to more information In order to calculate how much estate tax you will pay, visit www.banksite.com The Cornell University Law School at www.4.law.cornell.edu details the Federal Estate Tax law and the Federal Gift Tax law of the Internal Revenue Code. To learn about retirement planning, visit the Federal Social Security Administration at www.ssa.gov/retire2/ The Administration on Aging provides a website to connect older people with caregivers and local programs offered to elders and their families. Visit them at www.aoa.gov Estate Planning Legal Center sponsored by
Earl Carter & Associates
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