Estate planning is the preservation and the distribution of your assets, both during your life and upon your death. It is accomplishing your personal and family goals and easing the management of your financial and legal affairs, as well as minimizing taxes if your estate is large enough for taxes to be of concern. An “estate plan,” generally, refers to the means by which your estate is passed on to your loved ones on your death. Estate planning can be accomplished through a variety of methods, including:
- Revocable Living Trusts
- Last Will and Testament / Probate
- Lifetime Gifting
- Joint Ownership
- Beneficiary Designations
- Life Estates
If you die without a will or trust, the state determines who will be your ultimate heirs. This distribution plan can be found in the intestacy statute of each state. The applicable state can be either the location of your legal residence (for personal property), or the state in which your assets are located (for real estate).
If you die intestate, the transfer of your property is accomplished through a court-supervised proceeding called probate that takes a minimum of a year in Virginia, and typically longer. These proceedings generally are expensive and time consuming and tie up your property. Probate can be avoided with proper estate planning.
Probate is the court-supervised public proceeding used to change the title to assets from the name of an individual who has passed away into the name of the living beneficiaries. It is also the process by which creditors of a decedent file claims to collect their debts and where interested parties who have a complaint regarding the deceased can file a complaint (a will contest). Even without a contest, probate can be costly and time consuming.
Probate can be avoided with proper planning. There are a number of different techniques for doing so which can be used alone or in combination.
The government allows every individual a credit against estate taxes. In the year 2020, gift and estate taxes are NOT owed at the time of an individual’s death unless the net value of the estate exceeds $11.58 million for an individual and double that for a married couple so long the “portability” option was exercised upon the death of the first spouse to die.
The Internal Revenue Service allows an individual to leave any amount of assets to his or her spouse without taxation. At the death of the surviving spouse, however, all assets in the estate over the Applicable Exclusion Amount ($22.8 million for a married couple so long the “portability” option was exercised upon the death of the first spouse to die) will be included in the survivor’s taxable estate.
An outright gift at death qualifies for the unlimited marital deduction for estate taxes and, therefore, there will be no tax paid on the amount left to the surviving spouse.
When property is held in joint tenancy with rights of survivorship by two or more people, upon the death of one of the owners, all of his or her interest in the property is transferred immediately to the surviving owner. Joint tenancy is not a substitute for estate planning; on the contrary, it is one type of estate planning; however, is not a good way to plan an estate. For married couples, joint ownership does not help to transfer the estate upon the death of the second spouse. And there are numerous problems with putting a child’s name on the title to your property as a joint tenant. One problem is that while it may avoid probate, creditors of the child will be able to reach the joint tenancy property while you are still alive. Adding someone else’s name to your account may also create a taxable gift when none is expected, and may not be consistent with your ultimately desired distribution. Other problems with using joint tenancy with children in estate planning arise if the joint owner dies or becomes disabled prior to your death.
Virginia is one of many states that allows a special type of tenancy between husband and wife known as “tenants by the entirety.” Property owned in this manner will have immunity from the claims of separate creditors and upon the death of one of the owners, all of his or her interest in the property is transferred immediately to the surviving owner.
Yes, but this, unfortunately, has several problems associated with it. There is no guarantee that the surviving spouse will have time to set up a trust after the first spouse dies or will actually get around to setting up a trust, regardless of the amount of time available. This method also loses any Applicable Exclusion Amount tax advantage, because, like an outright gift, joint tenancy lumps all the assets in one spouse’s estate. In addition, the survivor will not see the increase in cost basis (for capital gains purposes) for the survivor’s interest as would happen in a community property state.
Joint ownership is generally not a good way to plan an estate. One problem with putting your child’s name on the title to your property as a joint tenant is that while it may avoid probate, it will not avoid probate if your child predeceased you or becomes disabled or incapacitated prior to your death. Another significant problem arises if you need to apply for Medicaid benefits within five years after adding a joint owner to certain assets, as your act of adding a joint owner might constitute a gift resulting in a Medicaid penalty period. Another huge potential problem is that creditors of your child will be able to reach the joint tenancy property. It may also create a taxable gift when none is expected, and may not be consistent with your ultimately desired distribution. Adding someone else’s name to your account may also not be consistent with your ultimately desired distribution.
A power of attorney is a document authorizing someone else (your agent) to act on your behalf (the principal). The purpose of giving someone such a power in connection with your estate planning is to enable the agent to act on your behalf when you cannot act for yourself. From an asset protection perspective, it is vital that your power of attorney include “asset protection powers,” including the power to apply for public benefits such as Medicaid and the power to make unlimited gifts of your assets to your loved ones. Be very careful when signing a power of attorney to make sure that these provisions are included.
Generally, any individual can create a power of attorney if over 18 years of age, a resident of the state in which it is created, and legally competent. This, however, varies from state to state.
In general, an agent may be anyone who is legally competent and over the age of 18. Usually, it is a family member such as a spouse or a child. More than one person can be named as an agent. However, sometimes naming two or more individuals to act together can prove inconvenient, particularly if a power of attorney must be exercised promptly. A better course is to name one individual as agent and then another as an alternate
A general power of attorney authorizes your agent to do almost everything on your behalf which you could do for yourself. A limited or special power of attorney authorizes your agent to perform only certain acts specifically listed in the document.
Your agent presents the power to the other party involved in the transaction and signs any necessary documents needed for such transactions on your behalf. Your agent signs “Your Name, by His or Her Name, Agent under POA.”
Requirements vary from state to state, but in Virginia signing the power in the presence of a notary is necessary.
This depends upon what the power says. It can be made effective at the time of signing or it can become effective at the time of your incapacity.
All powers of attorney done in connection with estate planning are “durable.” A durable power of attorney is simply a power of attorney that remains effective even if you become incapacitated. Generally, unless the power of attorney document specifically indicates it is durable, it is not durable and will terminate upon your incapacity. A non-durable power of attorney would, of course, be useless in connection with estate planning or disability planning.
Yes. Everyone doing estate planning should execute a durable general power of attorney for financial, property, and legal affairs. This document is also often used in conjunction with a revocable living trust to enable your agent to transfer your assets into your trust in the event you become disabled. A general power of attorney can be made effective immediately upon being signed or can become effective at the time of your incapacity, which is called a “springing” power of attorney.
A general power of attorney is a much better way to deal with incapacity than a guardianship or conservatorship. If you become disabled, A general power of attorney authorizes your agent to act on your behalf and sign your name to financial and/or legal documents. Having a general power of attorney will generally avoid the need to go through the time consuming, expensive, and publicly embarrassing process whereby someone has to go to court to have you declared mentally or physically incompetent and then seek appointment to serve as your legal guardian and/or conservator subject to ongoing court supervision. From an asset protection perspective, the main reason for having a power of attorney is to allow “asset protection powers,” including the power to apply for public benefits such as Medicaid and the power to make unlimited gifts of your assets to your loved ones.
Yes, it is equally important to have a health care power of attorney, to make decisions with respect to your medical care in the event that you are physically or mentally unable to do so, as certified by two physicians. This document includes the type of provisions that used to be in what was commonly called a “Living Will,” allowing you to indicate your wishes concerning the use of artificial or extraordinary measures to prolong your life artificially in the event of a terminal illness or injury. You will also use this document to indicate your wishes with regard to organ donation, disposition of bodily remains, and funeral arrangements.
Death revokes a power of attorney. You may also cancel your power of attorney by signing a revocation. The best way to revoke a power of attorney is to destroy all copies. If the power is a non-durable power of attorney it will terminate upon your incapacity, while a durable power of attorney survives your incapacity.
The annual gift tax exclusion is an amount that can be given away annually without resulting in having to file an informational gift tax return in connection with the transfer. In the year 2019, the annual gift tax exclusion amount is $15,000 per recipient. There is no gift tax to be paid on amounts given over $15,000 per year unless you have already given away more than your lifetime exclusion of $11.4 million for an individual, or $22.8 million for a married couple, so realistically there is no gift tax for 99.9 percent of the population, as fewer than 0.1 percent of the population have taxable estates. There is no limit on the number of recipients to which qualifying gifts can be made. Please note that if you are elderly or disabled, you must be very careful about making gifts of any amount, because all gifts made in the five years prior to applying for Medicaid will be counted against you and will result in a period of ineligibility for Medicaid. See this FAQ about the Perils of Gifting.
Yes, but your power of attorney must specifically authorize your agent to make gifts from your assets to persons whom you would likely make gifts. This is one area in which a power of attorney prepared by an elder law attorney may be drastically different from a power of attorney prepared by an attorney who only does estate planning. The power of attorney prepared by an experienced elder law attorney will contain special provisions allowing your agent to engage in all aspects of Asset Protection Planning and Public Benefits Plannings on your behalf, including the ability to make unlimited uncompensated transfers in an effort to protect your assets from the forced liquidation that might otherwise be required if you were to enter a nursing home.
There is no way to force a third party to accept a power of attorney without going to court. Many banks will require you to complete their own forms to authorize your agent to write checks on your account, so it is advisable to inquire as to whether your banking institution requires such forms that can be completed in conjunction with executing a power of attorney. In addition, the IRS generally will not honor any power of attorney that does not specify the tax matter and the tax year at issue.
First, third parties may not recognize your power of attorney. Second, it can be difficult to revoke a power of attorney, especially if your agent has given copies to third parties that have honored it. Third, the agent can reach your assets without court approval or supervision. Therefore, it is imperative that you select an agent with great care and have tremendous confidence in that individual.
There are several. One is a court-supervised proceeding referred to as a guardianship or conservatorship. This is not an appealing option to most people. The best alternative is the use of a living trust where assets are funded into the living trust. However, a power of attorney is still essential even if you have a living trust.
This is a court-supervised proceeding which names an individual or entity to manage the affairs of an incapacitated person. A guardianship may also include the duty to care for the incapacitated person. Click here for more FAQs on the topic of guardianship.
The primary disadvantages to guardianship and conservatorship is that these are public proceedings, thereby exposing the incapacitated individual to embarrassment as the details of their incapacity are discussed at length. It is also expensive, time-consuming, and requires burdensome annual accountings to be filed by the conservator as part of the lifetime probate process that is required with a conservatorship — the exact same annual accountings that are required for after-death probate. In addition, there is no guarantee that the end result will be in accordance with the incapacitated person’s wishes, and someone unacceptable to the incapacitated person could be placed in charge of his or her affairs. A major advantage to a conservatorship is that the courts watch every move the conservator makes in relation to the assets. Some feel this provides increased protection as well as establishing the authority of a conservator as third parties must deal with the conservator due to the court’s supervision, although some banks have been known to unlawfully deny a conservator’s access to accounts, just as some banks improperly deny access to someone holding a power of attorney. Click here for more FAQs on the topic of guardianship.
A living trust is often recommended to clients as the key document in their estate plan. One reason for this is that the living trust is normally the best method for managing assets during incapacity. A major advantage of the living trust over the power of attorney is that a trustee has actual title to the assets and therefore third parties must deal with the trustee as the owner. An agent does not have title and hence third parties may refuse to deal with the agent. This is a particular problem if the power of attorney was not signed in the last several years because some financial institutions refuse to honor powers of attorney that are more than a few years old.
Not only does a Revocable Living Trust provide for the disposition of your property (like a Will), but it also offers many other benefits, such as:
- Avoiding Probate During Life
- Avoiding Probate Upon Death
- Avoid Probate for Multiple Generations
- Holding Assets for Beneficiaries Indefinitely
- Avoiding Ongoing Probate
- Avoiding Estate Tax (if married)
- Eliminating Probate Tax
- Reducing Legal and Administrative Fees
- Providing Oversight by Family, not Court
- Privacy
Absolutely. While you are alive and mentally competent, you have total control over your property. You can buy, sell, improve, spend, change investments, or give away property just as you would without a trust. The revocable living trust can be modified in any way you desire or it can be completely revoked. Upon your death, the trust becomes irrevocable so that no one can change your testamentary wishes. Upon your incapacity, your alternate trustee simply steps into your shoes and manages your trust until you either recover from your disability, or until your death. For married couples, the surviving spouse still has total control over his or her share of property after its transfer to the survivor’s trust, and the trust becomes irrevocable only as to the deceased spouse’s share.
While you are alive, you act as trustee. For married couples, either one or both spouses may act as trustee or co-trustees. The successor trustee is an individual whom you designate to be in charge of your trust in the event of disability or upon death.
You will need to designate one or more successor trustees. These can be individuals, such as family members, trusted friends, trusted professionals, or you could designate an institution, such as a bank or professional trust company. Individuals may predecease you, while an institution will (most likely) still exist at the time of your death. Institutions provide the benefit of experience in money management and trust administration, while family members and close friends are more “personal” and have first-hand knowledge of your desires. If you choose an individual, the individual should have some business sense, or you might wish to name an individual and a professional trustee as co-trustees. The downside to co-trustees is the possibility of disagreement.
The Farr Law Firm is available to serve as Trustee or Successor Trustee of a Living Trust, and/or Executor of a Will and/or Agent under a Power of Attorney. We do not have a minimum dollar amount limit, but we do have a minimum annual fee, and our firm is selective in the clients we choose to offer this service to. Feel free to contact us via our Contact Form If you would like a copy of our Fiduciary Fee Schedule and Disclosure, which explains in detail our fiduciary fees and services. You should consider and investigate all of the alternatives available to you before deciding whom to select as Trustee and/or Executor and/or Agent under a General Power of Attorney.
A properly drafted revocable Living Trust does not change your income tax liability. The Internal Revenue Service does not require any additional income tax filings when you create a Revocable Living Trust; you continue to file the same annual 1040 tax return that you file now.
Generally, property taxes remain the same when real estate is transferred into a Living Trust, although laws vary from state to state and county to county. Applicable state law is determined by the location of the real property and needs to be reviewed before any transfer is made.
There is no annual fee associated with maintaining a trust. Fees are only involved when an amendment to the trust is made which involves changing the terms of the trust, or when a spouse passes away and the surviving spouse or trustee requests assistance with the Trust Administration, or requests assistance to take advantage of certain tax benefits, if applicable. However, we do offer an optional Lifetime Protection Plan® — please see the answer to the next question.
Yes — we offer an optional Lifetime Protection Plan®, which is a membership program for our clients which allows clients to optionally keep us on retainer. Please see our Lifetime Protection Plan® page for more details about the program.
Funding a trust entails transferring assets you own as an individual into the name of your trust. For some assets, our law firm makes the transfers and prepares the documents for you to sign, for example, real estate. For other assets that our law firm is unable to change for you, we will give you instructions as to how title is changed and will provide you with the necessary paperwork. For example, to fund your trust with bank accounts, a letter is prepared for you to take to the bank to change the title of your accounts. You will have to go to the bank in person to sign a new signature card as trustee of your trust.
Although there’s nothing wrong with having your checking account in the name of your trust, some individuals like to have just their names on the checks. You can do so even if the account is in the trust, or you can simply choose to leave a small checking account outside of the trust. Other assets which are not funded into the trust are IRAs and pension plans, since moving these would be taxable events. What’s important is to coordinate the appropriate beneficiary designation with your overall estate plan. This is a complex area of planning and must be based on each person’s individual family circumstances and size of the estate.
Out of state real estate is transferred into the trust by using a local attorney in that state working with our law firm. We will contact an attorney in the state where your property is located to have it transferred to your trust with a minimum of delay.
Timeshares are transferred based upon the type of ownership you have. Some timeshares are a contract and are transferred to the trust by an assignment of the contract. Other timeshares are a fee simple, which means you have absolute ownership. Therefore, it is transferred by deeding it to the trust. However, many people would rather not transfer their timeshares into their trust, as they would prefer not to saddle their beneficiaries with the annual cost of maintenance fees for a timeshare that their beneficiaries may not want or use.
Enacted as part of the Garn-St. Germain Depository Institutions Act of 1982 (P.L. 97 320; 96 Stat 1501) a due on sale clause can not be enforced on a “transfer into an inter vivos trust on which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.” This exemption applies to residential real property containing less than five dwelling units {12 USC Sec. 1701j 3(d)}. The regulations list that the borrower in this type of situation must remain the beneficiary and occupant of the property {12 CFR 591.5(b)(vi)}. However, “occupancy” is not defined. Therefore, prudence suggests notifying the lending institution before the transfer.
During the lifetime of both spouses, there is no asset protection provided by a revocable living trust. However, there may be some protection for the survivor after the first spouse dies. The trust can also be created to provide creditor protection for other beneficiaries of the trust. Other types of trusts can be created to provide asset protection for both spouses if desired. In addition, there are dozens of techniques for asset protection that do not involve trusts at all. Contact us for more information.
Liquidity planning is part of estate planning. Generally, it is necessary to look at the estate and see if there is enough cash to pay taxes, administrative expenses, and support dependent family members. There are generally two ways to deal with the liquidity issue, either by reducing taxes and expenses which require cash or by increasing the cash and liquidity of the estate. Techniques that reduce taxes include fully using the Applicable Exclusion Amount at death and making annual gifts. Other techniques that reduce expenses include avoiding probate and using a Living Trust. Of course, increasing the liquidity of the estate can be done through the conversion of assets as well as life insurance.
A living will, more often called an Advance Directive or Advance Medical Directive, is a document normally incorporated into a Medical Power of Attorney in which you give directions for life-sustaining treatment should you become unable to communicate your wishes.
Yes, we offer these seminars regularly. Please click here for more information or to register online for one of our upcoming seminars.
