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Introduction to Estate Planning.
National surveys indicate that most individuals do not have an
adequate estate plan. In Washington State, the legislature has
drafted an estate plan for you and if you do not adopt your own
estate plan the State plan will control who will receive your
assets and who will be guardian of your minor children.
Many individuals have an estate plan that is outdated. Additional
children have been born; people have died; a party's net worth
has changed substantially; or someone in the family requires
special needs. It's always worthwhile to review your estate plan
to make certain that it is up to date and provides exactly what
you wish to accomplish.
It has been our experience that many people are "sold"
certain estate planning devices or documents. There is no standard
set of estate planning documents that works best for everyone.
Your particular estate situation and your particular needs must
be evaluated carefully and then the proper estate planning tools
used to best implement your plan.
We will discuss briefly some of the estate planning tools that
we use. You need to remember that for some people a particular
tool is very helpful and for other people it may do more harm
than good.
Please see our disclaimer.
Basic Will and Trust Information.
Our Will Questionnaire asks that you set forth certain
basic information necessary to prepare the documents to implement
the estate plan we develop for you.
We need to have your full names, dates of birth and date of marriage.
We need to have the full names of each of your children and their
dates of birth. Normally, no other family members need to be
identified, but you may do so if you desire. Addresses of the
children are not normally included in the Will, but may be useful
to have in our file.
You need to supply a list of individuals or companies to act
as your Personal Representative. We used to refer to this person
as an Executor or an Executrix, but now we prefer to use the term
Personal Representative. It is the duty of your named Personal
Representative to have your Will admitted to Probate and to prepare
an inventory of all of your assets and determine the value of
those assets. The Personal Representative is also responsible
for determining all of the debts that you owe and arranging for
the payment of those bills. When the estate administration process
is completed, your Personal Representative is required to distribute
the remaining assets as directed in your Will. Frequently our
clients will name their spouse as the First Nominee and other
family members or friends as Alternates to serve upon the death
or incapacity of both spouses. We suggest that you nominate Personal
Representatives who have good business and financial management
skills.
If you are preparing a Living Trust or including a Trust
in your Will, you will need to name people or organizations to
act as the Trustee. The Trustees may be the same people you list
as Personal Representative, or they may be different. It is the
duty of the Trustee to receive the assets placed into the Trust
and to manage those assets on behalf of the Trust Beneficiaries.
Depending on how the Trust is structured, the Trustee may be
able to make discretionary distributions during the life of the
Trust, to and for the Trust Beneficiaries. The Trustee is also
directed upon the termination of the Trust to distribute the remaining
assets to the Beneficiaries that you designate. We suggest that
you list as Trustees people or organizations that you will trust
with all of your money and who can keep good records of the Trust
administration. Frequently, our clients will name their spouse
as the first choice as Trustee with family or friends as alternates.
If the Trust is going to continue for any extended period of
time, you may also want to list one of the bank Trust Departments
or the Trust Department of a Brokerage House to act as the long
term Trustee. If you plan to use one of these Corporate Trustees,
we suggest that you contact them and discuss with them the type
of services that they may provide and the fees that they will
charge.
If you have minor children, you will need to name one or more
Guardians to be responsible for raising your children while they
are minors. You may have a Guardian of both the person of your
minor children and a Guardian of their property. These may be
the same individuals or they may be different individuals. For
many of our clients, the naming of the Guardian of their children
is one of the most important reasons to have a valid and updated
Will.
As part of your estate planning process we need to have a general
outline of your assets, liabilities and net worth. As to your
major assets, it is important to know whether those are separate
property or community property and how they are owned. Property
owned as Joint Tenants with Rights of Survivorship may
actually cause the property to be distributed differently than
contemplated by your estate plan.
If you have real property located outside the State of Washington,
it is important that you bring with you a copy of your Deed or
other document showing the legal description of the property and
how it is owned. The ownership or real property outside of the
State of Washington is frequently a good reason to justify forming
a Living Trust for that property, if for no other reason.
In the past, many of our clients wanted to include in their Will
a list of personal property that was to be distributed to specific
individuals. That made your Will drafting more complicated and
more expensive and frequently required revisions. Now we may
include a clause in your Will that refers to specific lists of
personal property to be distributed to your intended Beneficiaries.
You may prepare that list before or after the Will is signed
and may amend it as often as you desire. As part of your Estate
Planning Portfolio, we will provide you with sample forms
for your use.
Your Will may include a clause that provides that your estate
may be administered without Court intervention. In years past,
the Probate process required that the Personal Representative
obtain the Judge's approval for every action taken by the Personal
Representative. For example, the Judge's approval was required
before any asset was sold, before bills were paid and before any
distribution was made. Including the non-intervention clause
in your Will reduces the amount of Court involvement but does
not eliminate it. The Will still needs to be presented to the
Court to be approved by the Judge as a valid Will and determining
which Personal Representative is ready, willing and able to serve
in that capacity. If the estate is solvent (the assets exceed
the liabilities), the Court will enter an Order appointing the
designated Personal Representative and granting the Personal Representative
the authority to complete the estate administration without coming
back to Court for approvals. The Personal Representative may
then work with their attorney in collecting the assets, selling
assets as desired, making arrangements to pay the bills and finally
distributing the estate. Upon completion of the estate administration
a Notice is filed with the Court and mailed to interested Beneficiaries
indicating that the estate administration has been completed and
that the Personal Representative is ready to distribute the estate
and close the file.
Please see our disclaimer.
A Living Trust is a document that you sign that creates a new legal entity known as the Trust. Since you will be creating the Trust you will be called either the Trustor or Settlor. You and your spouse, or the survivor, may also be the initial Trustee to manage the trust assets. You will also list the people to serve as Trustee when all of the initial Trustees are unable to continue to serve as Trustee. You will need to specify who the Trust beneficiaries will be during your lifetime and after the death of one or both parents.
Living Trusts have become a very popular estate planning tool
in recent years. Assets distributed pursuant to your Living Trust
are confidential since the Living Trust is not a matter of public
record. Transferring assets to your family may be easier with
the use of a Living Trust than it is in some probate proceedings.
The use of a properly drafted Living Trust may reduce the expenses
associated with probate and may even eliminate the need for Probate.
However, you should be aware that if your records are not properly
maintained and your assets are not properly transferred into the
Living Trust, those assets may still require a probate.
There are some disadvantages to a Living Trust. Living Trust
are somewhat more expensive to establish than other techniques
that may be available. You must keep separate records for the
Living Trust since it is a separate legal entity. You will occasionally
need to have additional legal assistance when you buy or sell
property to confirm that the Living Trust is in good standing.
There may be some additional transaction costs as you buy or
sell properties. However, the added costs of creating and maintaining
a Living Trust may be very reasonable when compared to the potential
savings. In addition to your Living Trust, we frequently recommend a Pourover Will so that assets you have not transferred into the Living Trust may go into the Living Trust at the time of your death if necessary.
Please see our disclaimer.
A Life Insurance Trust is a fairly sophisticated estate planning
technique that allows you to transfer more of your assets to your
family free of estate and inheritance taxes.
The creation and funding of a Life Insurance Trust requires attention
to detail. If mistakes are made, many of the benefits of the
Life Insurance Trust may be eliminated.
A Life Insurance Trust is an irrevocable trust. That means that
once the Life Insurance Trust is created, you cannot change the
terms.
When you transfer money to your trustee the trustee must follow
the precise notice requirements that are furnished with your trust.
The trustee buys a life insurance policy on the party(s) to be
insured. Typically this is a policy payable upon the death of
the survivor of the parents.
If the Life Insurance Trust has been established properly and
it has been maintained properly the insurance proceeds are not
part of the parents taxable estate. The life insurance proceeds
may be made available to pay the estate and inheritance taxes
on the estate of the parents thereby allowing a greater portion
of the parents' estate to go to the family.
Without a Life Insurance Trust, the proceeds of any life insurance
policies owned by the parents are included in the parents' estate
for estate and inheritance tax calculations, even if the proceeds
are payable to the family.
Please see our disclaimer.
A Family Will frequently provides that upon the death of one
spouse, everything is left to the surviving spouse. Upon the
death of both spouses, everything goes to the children equally.
For parents with an estate of less than $500,000.00 and with
adult children, a Family Will frequently works quite well.
Please see our disclaimer.
If you have minor children and have either assets or life insurance
of any significant sum, you may want to consider a Contingent
Trust. This frequently works as follows:
Upon the death of one spouse, everything is left outright to
the surviving spouse.
Upon the death of both parents, if the children are still under
a specified age, say 21, the assets are placed into a Contingent
Trust for the benefit of the children until they reach a desired
age. The trustee may be authorized to distribute money to the
children or their Guardian for the support, health and education
of your children and for any other purposes that you specify in
your Will or Living Trust.
You may specify when the principal remaining in the Contingent
Trust may be distributed to your children. That could be done
all at one time or it may be staggered over a series of years.
This depends somewhat on how much you expect to be in the Contingent
Trust and you may also want to consider the potential stability
of your children and how they will react if they receive a substantial
inheritance all at one time.
Please see our disclaimer.
The purpose of the Credit Trust is to prevent the combining of
assets in a surviving spouse. For example, under current law
a person has a credit against their federal estate taxes for an
amount equal to the tax on an estate of $600,000. In other words,
you may leave $600,000 to your children tax free.
If a husband and wife have a combined net worth of $1,200,000
and it is all community property, upon the death of the first
spouse his estate would be worth $600,000. He may leave that
entire amount to the children free of taxes. Many parents do
not want to leave to their children all of the assets of the first
spouse to die at the time the first spouse dies.
If the first spouse to die leaves his entire estate to the surviving
spouse, the surviving spouse is now worth $1,200,000. Upon the
death of the surviving spouse, the first $600,000 may be left
to the children tax free but the remaining $600,000 would result
in taxes of roughly 40% to 50%. That would cost the family up
to $300,000 in estate taxes.
The purpose of the Credit Trust is to allow the parents to leave
up to $1,200,000 to their children tax free. It also provides
the surviving spouse with the security of knowing that the assets
in the Credit Trust are available to pay for the needs of the
surviving spouse.
The Credit Trust normally provides that upon the death of the
first spouse, up to $600,000 of their property is placed in the
Credit Trust. The income and assets in the Credit Trust are normally
available to the surviving spouse for the rest of their life for
their support, maintenance and health needs. Upon the death of
the surviving spouse, the assets left in the Credit Trust are
distributed to the children. The Credit Trust assents may be
distributed to the children outright or they may continue in trust
and be distributed to your family over a period of time, whichever
you desire.
Please see our disclaimer.
Q-Tip is an acronym for Qualified Terminable Interest Property.
If the first spouse to die has a net worth of say $1,000,000
we are frequently asked to minimize or eliminate the estate taxes
payable upon the death of the first spouse and defer those taxes
until the death of the second spouse.
First we maximize the ability to transfer $600,000 to your family
tax free by including a Credit Trust in your Will or Living
Trust.
Tax law currently provides that a spouse may leave essentially
an unlimited amount of money or property tax free to a spouse
who is a U.S. citizen. Many of our clients do not wish to leave
all of their share of the property they own at the time of their
death outright to the surviving spouse. The use of an additional
Trust eliminates or reduces the frequent problem faced by Widows
and Widowers when they remarry and have a second family. Trying
to determine how to treat both families properly and fairly can
be a difficult task. Therefore, we may create a second trust in your Will or Living Trust called a Q-Tip Trust. The remaining estate (after funding the Credit Trust) is put into this Q-Tip Trust. The surviving spouse is required to make the Q-Tip election which means that the assets placed into the Q-Tip Trust are not taxable on the death of the first spouse but are included in the estate of the surviving spouse when the surviving spouse dies. This defers all estate taxes until the death of the surviving spouse. The Q-Tip Trust will also direct who will receive the remaining assets when the surviving spouse dies.
For example, a husband and wife have a combined net worth of
$2,000,000. Upon the death of the first spouse, the size of the
estate of the deceased spouse is $1,000,000. Assets worth $600,000
are placed into the Credit Trust tax free. Assets worth the remaining
$400,000 are placed into the Q-Tip Trust and that is also tax
free at the time of death of the first spouse to die.
Assuming the values remain the same, upon the death of the surviving
spouse, that spouse's estate is valued at $1,400,000, consisting
of assets worth $1,000,000 they own and the Q-Tip Trust assets
worth $400,000. Of the total estate of $1,400,000, assets worth
$600,000 may go to the family tax free and the remaining assets
worth $800,000 would be subject to Estate and Inheritance Taxes.
These parties could elect to include a Life Insurance Trust as an additional estate planning vehicle to provide funds with which to pay these taxes. Or, these parties could consider an aggressive Gifting program to help reduce the tax burden to their family.
Please see our disclaimer.
One of the few good remaining estate planning tools for married
couples who have a net worth in excess of $1,200,000 is gifting
to their intended beneficiaries.
Under current law individuals may gift $10,000 per year per
recipient tax free. No gift tax return is necessary and the amount
received is not subject to income tax by the party receiving it.
For example, a husband and wife together may gift $20,000 per
year to each child, to each grandchild and to the spouse of a
child or grandchild. There are some special rules that apply
that need to be followed in an aggressive gifting program to be
certain the gifts are effective and tax free.
Many families are able to transfer substantial sums to their
family members through an aggressive gifting program and it's
all tax free. There is at least one other good reason to have
a good gifting program. The people who receive your gifts are
able to tell you personally how pleased they are to receive your
gifts. They don't have to stop by your grave and say thank
you to a tombstone.
If assets other than cash are gifted, the "basis" for
income tax purposes for the person making the gift is transferred
to the recipient. On the other hand, if your children or grandchildren
inherit property from you they receive what is called a "stepped-up
basis" in the property equal to the value reported for estate
tax purposes, or the fair market value on the date of death if
no estate tax return is filed. Therefore, we suggest that considerable
thought should be given to the gifting process to maximize the
amount you may distribute to your family and minimize the tax
consequences. We are available to assist you in that decision
making process and in the process of proper gifting.
Please see our disclaimer.
A Community Property Agreement is an estate planning tool that
may be useful for married couples with smaller estates. There
are a number of risks associated with Community Property Agreements.
A Community Property Agreement may normally only be revoked by
both parties while they are both alive, competent and willing
to revoke the Agreement.
We have encountered situations where parties have started a divorce
action and prior to the termination of the marriage one party
died. The Community Property Agreement was still in effect and
the surviving spouse, even though that spouse had started the
divorce action, still received all of the community property.
We have encountered situations where a spouse has suffered from
Alzheimer's disease and was totally incapable of managing their
own affairs. The other spouse died and the spouse with Alzheimer's
disease inherited everything they owned but was unable to manage
it.
We have had clients who had inherited specific "family property"
and then died. With a Community Property Agreement that "family
property" went to the surviving spouse who then changed their
Will and left the "family property" to non-family members.
Traditionally Community Property Agreements were referred to as a "three-pronged community property agreement." Essentially the three prongs were as follows:
We are able to draft Community Property
Agreements with more sophistication and identify whether or not
the Community Property Agreement applies to all property now owned
or hereafter acquired or only to specific property. We may include
provisions for an automatic termination if an event such as filing
for divorce occurs.
One of the advantages to a Community
Property Agreement, particularly for smaller estates and older
clients, is the ease with which assets may be transferred into
the name of the surviving spouse without the necessity of probate.
Please see our disclaimer.
Directive to Physician and Living Will
This is a written notice to your
family and doctor that you want to be allowed to die in peace
and comfort and that you do not want your life artificially prolonged.
If you are able to communicate your
desires to your physician, your stated preference will be more
important than your written directive.
If you are pregnant, and your doctor
knows that you are pregnant, your directive becomes invalid.
We have attached a sample directive for your review. You may feel free to copy it yourself and complete it if you desire. If not, we will prepare one for you. The entire Living Will may be accessed by clicking on the term Living Will.
Please see our disclaimer.
Durable General Power of Attorney
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A properly prepared Durable Power
of Attorney may be one of the most important Estate Planning documents
that you have.
Your Power of Attorney should be
in writing, signed by you and notarized. If your Attorney in
Fact is going to use the power granted by the Power of Attorney
to convey or encumber real estate, the Power of Attorney needs
to be recorded with the Auditor of each County where the real
estate is located. After it is recorded, you may obtain additional
certified copies from the County Auditor to furnish to other individuals,
banks or institutions that need to have a certified copy of the
Power of Attorney.
The person you name as your Attorney
in Fact has a great deal of authority to deal with your property.
They have the right to sell property, to encumber the property,
to collect debts and generally to conduct your business and financial
matters for you. Therefore, it is extremely important that you
nominate as your Attorney in Fact only those individuals that
you trust to manage your affairs properly.
Frequently, our clients will have
one spouse appoint the other spouse and then appoint as alternates
one or more adult children or other close relatives in whom they
place great confidence. Washington law places certain restrictions on a General Power of Attorney. Unless specifically provided in the Power of Attorney, your Attorney in Fact will not have the authority to make, amend, alter or revoke your Will, Life Insurance Beneficiary designations,
Employee Benefit Plan Beneficiary
designations, Trust Agreements, Community Property Agreements;
or to make any gifts of property owned by you; or to make transfers
of property to any trust unless the trust benefits you alone and
does not have dispositive provisions which are different from
those which would have governed the property had it not been transferred
into the trust.
The Powers of Attorney we prepare
are normally a "Durable Power of Attorney." This means
that the authority given to your Attorney in Fact continues even
if you become incompetent or if you disappear. This is a result
of the problem that was encountered during the Viet Nam conflict
when Service Men were missing in action and a spouse who had a
Power of Attorney could not certify that their husband was still
alive and competent. Without making that certification the Power
of Attorney was invalid.
With a Durable Power of Attorney,
the Power of Attorney continues in effect until the death of the
party signing the Power of Attorney is known, until the Power
of Attorney is revoked or terminated by the person creating it,
or by a written termination by a Court appointed Guardian or by
other Court Order. Therefore, you may revoke a Power of Attorney
any time you desire, but that should be by a written Notice of
Termination of Power of Attorney.
Please see our disclaimer.
A Springing Power of Attorney contains
all of the elements discussed above in the Section entitled Durable
General Power of Attorney, with one exception.
The Power of Attorney is not effective
when signed, but springs into action when the conditions contained
in the Power of Attorney have occurred.
Most Springing Powers of Attorney
become effective upon the disability of the person signing the
Power of Attorney. Prior to that disability, the person you nominate
as your Attorney in Fact has no authority to act on your behalf.
The problem inherent with a Springing
Power of Attorney is the amount of proof required to prove to
a person relying on the Power of Attorney that you are in fact
disabled. Proving your disability or your disappearance to the
satisfaction of the person relying on the Power of Attorney may
be somewhat cumbersome and will normally involve incurring additional
expense.
Please see our disclaimer.
A Special Power of Attorney may
either be a Durable Power of Attorney effective upon signing
or may be a Springing Power of Attorney. The primary difference
is that you limit the authority in the Power of Attorney document.
For example, we frequently have
cases where one spouse is required to be absent at the time of
the purchase or sale of a particular piece of real property and
they want to give a Special Power of Attorney to their spouse
to sign on their behalf at the time of closing.
Special Powers of Attorney may be
prepared for almost any specific purpose that you desire.
Please see our disclaimer.
A Medical Power of Attorney is a
Special Power of Attorney for the limited purposes of making decisions
regarding your medical and health care. The Power of Attorney for Health Care may be a Durable Power of Attorney effective at the time it is signed or it may be a Springing Power of Attorney that becomes effective upon your incapacity to make your own health care decisions.
Please see our disclaimer.
To assist you in preparing appropriate
Estate Planning documents, we need to have at least a minimum
of information to analyze your current situation and to discuss
with you the options that you need to consider in your Estate
Planning. In an effort to keep our fees at a minimum and your
costs at a minimum, it is helpful to us if you will bring with
you at the time of your interview at least the information requested
by our Short Form Questionnaire.
If you are willing to devote more
time and effort into analyzing your assets and the nature of their
ownership, please go to the Section Questionnaire - Comprehensive.
Please see our disclaimer.
Primarily in estates with a value
of more than $500,000 we should have more information than is
contained in Short Form Questionnaire to assist you in your estate
planning needs. The Comprehensive Questionnaire involves a fairly complete analysis of the assets that you own and the debts that you have so you can determine if those are consistent with your estate planning needs.
It would be helpful if you complete
the Comprehensive Questionnaire and bring along photocopies of
key documents so those may be reviewed as part of your estate
planning process.
Please see our disclaimer.
If you elect to use our office to assist you in preparing your Estate Planning documents, once those documents are reviewed and properly signed, we provide you with an
Estate Planning Portfolio that may
include the following:
We strongly suggest that our clients
establish a regular process of reviewing and updating the information
in their Estate Planning Portfolio. The Estate Administration
process becomes much simpler when the person charged with the
responsibility of collecting assets and paying bills has a current
and complete list of the information contained in the Estate Planning
Portfolio. One of the greatest gifts and benefits you can give
to your heirs is a complete and updated package that would include
a detailed financial statement.
Please see our disclaimer.
Recent Changes in Estate Taxes When the Articles in our web site were prepared the Federal law provided for a unified credit against gift and estate taxes so that $600,000 in assets could be transferred tax free. Legislation approved at the Federal level in 1997 increased that amount from $600,000 to $1,000,000 beginning in 1998 and reaching $1,000,000 in 2006. Therefore, individuals may transfer by gift or inheritance the following total amounts tax free:
Also, the $10,000 annual gift tax exclusion is going to be indexed for inflation, rounded to the "next lowest multiple of $1,000" so we will have round numbers to work with. The Taxpayer Relief Act also added a new section which allows for the exclusion from the gross estates of decedents dying after December 31, 1997 all or a portion of the value of a family business provided rather strict conditions and guidelines are satisfied. The conditions under which this exclusion (up to $1,300,000) applies are very limited and must be examined on a case by case basis. It should provide additional tax relief where a majority of a person’s estate is involved in a family business and family members desire to continue to run the business for an extended period of time after the decedent’s death. Please see our disclaimer.
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