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Probate Serves Useful Purpose

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When you are planning your estate you will hear about the possibility of implementing strategies that enable probate avoidance, but this may leave you with a somewhat mistaken impression. The reasons why avoiding probate can be attractive is because there are significant costs associated with probate, and the process can be lengthy. Clearly most people want to preserve the value of their estates, and if possible they would like to see their heirs receive their inheritances in a timely manner.

However, when you go out for a good meal you expect to pay a fair price and you don’t mind waiting for the food to be prepared properly. In a similar manner, the money that the estate must spend during probate is not wasted, and the time that it takes is justified.

The executor of the estate is going to be entitled to a fee, and he or she will bring in a probate attorney who will also charge a fee. And then depending on the specifics of the estate the executor may have to engage the services of an accountant, an appraiser or appraisers, and an estate liquidation company. All of these professional entities charge for their services, but at the same time, what they are doing is totally necessary.

As for the time involved, there are things that must be handled that don’t happen instantly. Creditors must be notified and paid, and the assets must be prepared for distribution. If the will is contested the interested parties will be afforded the opportunity to make their cases before the court. This can indeed take time, but that time is well spent if the rightful wishes of the deceased are ultimately carried out.

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Estate planning is just one aspect of the larger field of elder law, and as elder law specialists we help our clients address all of the eventualities of aging. At this exact point in time elder law is going through an interesting phase due to the demographic realities of our country. The baby boomers are entering their golden years, so the elder population is growing by leaps and bounds. And when you place the matter under a microscope you find that the fastest growing group of seniors is the oldest one, those who are 85 years old and older.

When you consider these demographic realities as they affect your family, you can see why incapacity planning is so relevant these days. Today many people are living into their eighties and beyond, and may well experience a period of incapacity at some point in time. Individuals suffering from such an incapacity are unable to make medical decisions for themselves, and are leaving their family in a difficult situation unless they prepare for the possibility beforehand through the execution of a living will and a health care proxy.

With a living will an individual can spell out their health care choices so that there are no misunderstandings among their family members and between their loved ones and their doctors. They can address any medical issues that they want to, but the matter of whether or not they would want to be kept alive by artificial means if they were in an irreversible terminal condition is central to most living wills.

In addition to the living will a health care proxy is often recommended. This instrument is used to name a person to make medical decisions in on behalf of the individual should they become incapacitated and faced with a health care choice that is not addressed in the living will.

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When you are in the business of estate planning you have an uphill battle when it comes to the matter of procrastination. People have a tendency to postpone the things that don’t seem to be immediately relevant to them, and nothing could fit this description more aptly than preparing for death.

Though it is easy to relate to this line of thinking it can be quite problematic, because however we may think about it, we all do pass away. And in a significant percentage of cases the ideal amount of forewarning is not forthcoming. Death is often preceded by a period of decreased mental and physical capabilities, so if you put off planning your estate too long it may not be possible for you to do it properly.

This having been said, sooner or later most people do finally get around to planning their estates, but this is just the first step. When you put an initial estate plan in place you will be working with personal and societal realities as they exist at that particular point in time. Things are constantly in flux, and on the one hand you go through changes that are specific to your own life. Your marital status may change, you might buy or sell a business, and the value of your investments may fluctuate significantly. All of these things could warrant adjustments in your estate plan.

There are also things that take place that impact the society as a whole that are relevant to your estate plan. A prime example is the new tax legislation that was passed in the middle of December. The Federal estate tax exclusion was scheduled to be just $1 million in 2011, but it has been raised all the way up to $5 million. In addition, the top rate has been reduced to 35%. These alterations are limited in time, and are due to expire at the end of 2012, when the estate tax exemption will be reduced back to $1 million with the top rate of 55%. Also, New York State’s estate tax exemption remains at $1 million. These changes are very relevant to many taxpayers, making a 2011 estate plan review a must. Do the right thing and make an appointment with your estate planning attorney sooner rather than later to discuss how these changes affect your present plan and what adjustments might be necessary going forward.

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Efficiency is the name of the game when you are engaged in estate planning, and when you choose to execute a will as your instrument of transfer you may be choosing an inefficient route. A will has to pass through the legal process of probate, and this is when the probate or surrogate court supervises the administration of your estate. Probate is not a bad thing in many cases because some estates are complex, and all interested parties may not be on the same page. Having the court there to provide transparency as the details are being hashed out can be a welcome protection in spite of the pitfalls of probate.

What are these pitfalls? For one thing, the process of probate can be very time consuming, taking anywhere from nine months or so to several years, depending on the details of the case. Probate can also be expensive. There are court costs to pay, attorney fees, executor fees, and possible accountant fees, liquidation expenses, and appraisal fees. Plus, probate opens the door for people to contest your will, and this is something that does not sit well with a lot of our clients.

All of the above can be avoided through the creation of a revocable living trust. You place your assets into the trust and though you relinquish ownership, you retain control because you can name yourself as the trustee and the beneficiary. Of course you also name a successor beneficiary, appoint a successor trustee, and spell out the terms of future distributions. Those who want a financial professional to administer the funds will want to engage the services of a trust company or bank to act as the trustee. When you pass away, rather than going through probate, the assets in the trust will be directly distributed to your beneficiary or beneficiaries in a direct, efficient, and cost effective manner

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When you are planning for the more active segment of your retirement years through to the end of your life you have little choice but to proceed with a good bit of speculation. It is easy to be cavalier and talk about planning for all of the eventualities of aging as though it is a simple matter of moving numbers around. But depending on where you are in your life now, how your latter years unfold, and the extent to which medical and long term costs grow, the size of your numbers may not match the size of the costs you may face.

Though you don’t have control of future health care costs, and you have finite resources and earning capabilities, there is another factor that many people overlook. If you don’t get seriously ill or need long-term care, at least not until very late in your life, your expenses will be minimal. A person who is in and out of the hospital by the age of 65 is going to be in a much different financial situation than another who stays pretty healthy through her seventies and perhaps beyond. So if you are evaluating your financial ability to meet future medical costs, it is only logical to consider your relative health. Statistics on the subject of how much you can expect your costs to be by a certain age are averages and don’t really tell the true tale.

There are those who would go to almost any lengths to earn enough money to feel financially secure, but in the process they may be internalizing stress and living a lifestyle that is inviting illness and the costs that go with it. It is a good idea to recognize the fact that you can’t control health care costs and that you have no power over the insurance companies or government mandates. But you and you alone choose your lifestyle, and the right choices may provide you more dividends than you originally thought possible.

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Planning your estate is not something that you complete with one single action. It is an ongoing process, and every time something significant happens in your life, it will probably affect your estate plan in some way. For this reason it is important to schedule a visit with your estate planning attorney every time one of these life altering events takes place. One such occasion is a change of marital status. When you get divorced you are probably going to want to disinherit your former spouse and change some beneficiaries. And if you should decide to remarry, you are going to have some added things to consider.

There is a certain stigma attached to the prenuptial or premarital agreement in some circles, but when you are mature, established, and remarrying, entering into such an agreement is just an exercise of good common sense. This is especially true if you have a child or children from a previous marriage, and the person that you are marrying should understand this completely. There is a notion that the person being asked to sign the agreement would be offended and question your commitment, but it is almost humorous when you turn the tables and look at it from the other perspective. Why would anyone resist signing the agreement if the marriage has nothing to do with money?

This having been established, you may then want to consider the creation of a Qualified Terminable Interest Trust or what is commonly called a QTIP, in addition to having the prenuptial or premarital agreement. With these vehicles you fund the trust and your new spouse is the beneficiary. If you predecease your spouse, he or she receives all of the income that is derived from the assets in the trust for life. But with the QTIP you name your spouse’s successor when you create the trust. Therefore, after your surviving spouse passes on, your children (or whoever you chose) receive the assets that you placed in the trust.

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When you give gifts to the people who you would be leaving an inheritance to after you pass away you remove the value of these gifts from the overall value of your estate, and that is going to provide you with estate tax efficiency. Of course there is the gift tax that stands in the way of simply giving away all of your estate before you die to avoid the estate tax. However, there are gift tax exemptions that can be taken advantage of and you can use them quite creatively and gain some genuine enjoyment as you put a portion of your inheritance plan into action.

There is a $1 million lifetime gift tax exclusion so you can give gifts of up to one million dollars over the course of your lifetime without incurring any gift tax liability. But there is also an annual $13,000 per person exemption. So for example, you could give an heir $13,000 each year for 20 years if you planned on leaving them $260,000. You could also use this annual gift to purchase life insurance and make your heir the beneficiary. In this manner you are transferring these assets to your heirs tax-free and reducing the overall value of your estate in the process.

The way to actively participate in this plan beyond just handing a loved one a check is to do some creative giving. You can use your annual exemption to give any type if gift; it could be a motorcycle, a musical instrument, a piece of jewelry, a vintage Billy Martin jersey, or a work of fine art. This is a really fun way to take advantage of your gift tax exemption and gain estate tax efficiency while you give your family members thoughtful gifts that will have special meaning to them for the rest of their lives.

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Estate planning is challenging in many ways, but it is also a very nice feeling to be able to make a difference in the lives of your loved ones and perhaps even your favorite charities and/or non-profit organizations. You may be sitting in your favorite chair watching a Syracuse basketball game thinking back on all of the great times you had there as an undergraduate at the Carrier Dome and decide to include a nice behest to the athletic department in your estate plan. You may also think that you would love to give your vacation cabin to the Boy Scouts, and make sure that your cousin’s daughter can afford that beauty shop she talked about last time you saw her.

These may be great ideas, but how will your wife feel about them? Does she have a right to weigh in on decisions such as these? When you think about married couples who have never been divorced engaging in estate planning it’s easy to envision a single entity that agrees on everything, but most real living, breathing human beings don’t melt into one being. It may be relatively easy to agree on some things, like taking care of the children and grandchildren, but when it gets down to some of the optional discretionary decisions there can be profound divergences of perspective.

There is nothing at all wrong with this and it need not present a problem. In fact, being able to make your own personal decisions when you are married and planning your estate may be something that most people want but never get due to a reluctance to defy convention. If you simply execute a post-marital agreement that spells out the personal property of each person, that freedom to give what is yours in the manner of your choosing is there for you.

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One of the big changes that the new year is going to bring along that has an impact on estate planning is the return of the estate tax. One of the provisions of the sweeping tax cuts of 2001 was a repeal of the estate tax in 2010, but it will be returning again in 2011. This in and of itself is highly relevant, but in addition to its mere reappearance, the estate tax exclusion amount in 2011 will be just $1 million; it was $3.5 million when we last saw the tax in 2009.

For this reason a lot more people are going to have to do what is necessary to reduce the taxable value of their estates. One way of achieving this is to give tax-free gifts. Of course the IRS is well aware of the fact that people might try to avoid paying the estate tax by giving away their assets before they die, so there is a gift tax in place as a roadblock. However, there are gift tax exemptions that can be used to create some space and potentially keep your estate under the exclusion amount.

First off, there is a $1 million lifetime gift tax exclusion (as of this writing). So you can give gifts of up to a million dollars throughout your life without incurring any gift tax liability. But in addition to this, there is also a $13,000 per person annual exemption. What this means is that each individual can give gifts of up to $13,000 to as many recipients as they want to each year free of the gift tax. It is useful to emphasize the fact that this $13,000 exemption is for each taxpayer; so a married couple could pool their respective individual exemptions and give as much as $26,000 to an unlimited number of people in any given year.

Giving gifts is a great way to gain tax efficiency, and it is something that can be an invaluable estate planning tool under certain circumstances. In addition, you get to enjoy that special feeling that will come along with giving these gifts in the flesh, and that may be the biggest benefit of all.