Estate Planning

This week the focus has been centered around estate planning. We've looked at wills, trusts, and guardianships individually, and today we are going to see how they all fit together.

Estate planning encompasses all tangible, real and personal, assets of a natural person. It is the process of accumulating and disposing of an estate to maximize the goals of the estate owner. These goals usually include making sure the greatest amount of the estate passes to the estate owner's intended beneficiaries, often including paying the least amount of taxes and avoiding or minimizing probate court involvement. Additional goals typically include providing for and designating guardians for minor children and planning for incapacity. This can also include planning for home care, long term care in a nursing home, and use of insurance, social security, or disability benefits. Another major benefit from creating an estate plan is to eliminate or minimize the hassle of contingent litigation or family conflict brought on by disgruntled relatives fighting over the proceeds of a sizable estate.

The property of the estate must either be bequeathed through a will or transferred through the laws of intestacy (the condition of the estate of a person who dies owning property greater than the sum of his or her enforceable debts and funeral expenses without having made a valid will) if there is no will. A will is the most commonly used legal instrument for the distribution of the property of a deceased person. Before property can be disposed of pursuant to the terms of a will, the will must be submitted to a probate court having jurisdiction of the estate of the deceased. Probate is often considered a relatively lengthy and expensive process. Probate can usually take several months to process, and the United States federal estate tax very quickly approaches 50% of one's taxable estate. Avoidance of probate taxes, sometimes called inheritance tax or death tax, therefore is very prudent.

The idea of avoiding probate revolves around the concept that you cannot be taxed on what you don't own. Through the use of trusts, foundations, charitable remainder trusts, and other tools, you can transfer ownership of your possessions to another legal entity while still maintaining control over its use. These structures can eliminate the probate process and can pass bank accounts, houses, cars, possessions, etc. to the intended beneficiaries or documented trustees for continued use or liquidation. Similarly, jointly held property (in common law systems), life insurance, annuities, 401(k) Retirement Plans or Individual Retirement Accounts (IRA), will also avoid probate as these devices allow property to transfer to beneficiaries outside the probate process. Special needs trusts can also be created to ensure that beneficiaries who are developmentally disabled or mentally ill can receive inheritances without losing access to essential government benefits.

There is currently an exemption incorporated into the estate tax law. The applicable exempt amount is currently two million dollars in 2006. The exempt amount is scheduled to increase to three and a half million in 2009, after which the estate tax is temporarily repealed for one year in 2010. The year after, the estate tax is scheduled to be reinstated, with the previous exemption of one million dollars.

It should be noted the difference between a living will and a durable medical power of attorney. A living will usually covers specific directives as to the course of treatment that is to be taken by caregivers; or, in particular, in some cases forbidding treatment and sometimes also food and water, should the principal be unable to give informed consent (individual health care instruction) due to incapacity. A durable medical power of attorney for health care appoints an individual to direct health care decisions should the principal be unable to do so. The former controls solely those decisions that must be made at the end of the patient's life, while the latter is used to give decision-making authority to someone else (usually a family member or close friend). This person, the attorney-in-fact, then makes all medical decisions leading up to the person's death, but has no such power to make end of life decisions for the patient. Those decisions are made by the patient in the living will; in the absence of a living will, and where the patient is incapable of making end-of-life decisions for him or herself, such choices are left to family members.

Tomorrow, we will look at foundations and how they fit into estate planning. Stay tuned ...

Estates and estate planning have been around since the beginning of time. Take a look at the conversation between Jacob and his wives.
Then Rachel and Leah replied, "Do we still have any share in the inheritance of our father's estate? Does he not regard us as foreigners? Not only has he sold us, but he has used up what was paid for us. Surely all the wealth that God took away from our father belongs to us and our children. So do whatever God has told you." Genesis 31:14-16 (NIV)

If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com