Planning Your Legacy: A Handbook on Estate Planning | BR Capital ...

For the pdf version go here: Planning Your Legacy: A Handbook on Estate Planning by Philip B. Janey, Attorney at Law, Landerholm P.S. Used with permission.

Philip B. Janney, Attorney at Law

Find Answers to These Questions

? Will or living trust?which is right for me?

? Who will make decisions for me when I?m no longer able?

? How can I reduce the tax liability to my estate?

? What if I require long-term care?

Acknowledgment

The author wishes to thank his colleagues, Candice Ehrich and Kaye Nelson, for their assistance in the production of this handbook.

Disclaimer

This handbook is written for educational purposes only and shall not be interpreted to constitute legal advice in any form. Furthermore, the dissemination of this handbook by the author, Landerholm, P.S., its employees, agents or any other person shall not be deemed to establish an attorney-client relationship with the author; Landerholm, P.S. or its attorneys.

Copyright ? 2011 by Philip B. Janney. All rights reserved. No portion of the contents of this publication may be reproduced or transmitted in any form or by any means without the express written permission of the author.

PREFACE

Table of Contents

This handbook is intended to assist you with the process of developing your personal estate plan. Estate planning is not ?one size fits all.? It is as individual as you are and must be reflective of your personal objectives while flexible enough to address changes in your life.

Not all of the topics covered in this handbook will apply to your particular set of circumstances, but many of the topics will be appropriate in a comprehensive plan. A good estate plan will consider personal objectives, property rights, marital status, an analysis of one?s particular assets and obligations, and basic legal documents.

The Table of Contents is intended to provide an easy means of navigating the chapters of this handbook. Consider reading Chapters 1, 2, 3 and 9. Then select from the other chapters based on your personal situation and planning objectives.

Finally, it is important to remember that neither this handbook, nor any other book, computer program or form, can be a substitute for the advice of an experienced attorney. If you have questions or need documents, contact a qualified estate planning attorney.

Your comments are welcome and appreciated. The author can be reached using the following contact information:

Philip B. Janney
Attorney at Law
Landerholm, P.S.
805 Broadway Street, Suite 1000
P.O. Box 1086
Vancouver, Washington 98666-1086
360-816-2479 or 503-283-3393 (telephone)
360-816-2496 (facsimile)
philip.janney@landerholm.com (e-mail)

Table of Contents

Preface
Chapter One ? Introduction to Estate Planning
Chapter Two ? Concepts in Estate Planning
Chapter Three ? Estate Planning Tools
Chapter Four ? Trusts
Chapter Five ? Taxes and Estate Planning
Chapter Six ? Estate and Gift Tax Planning
Chapter Seven ? Charitable Giving
Chapter Eight ? Life Insurance
Chapter Nine ? Probate and the Post-Death Administration of Estates
Chapter Ten ? Asset Protection Planning
Chapter Eleven ? Planning for Disability and Long-Term Care
Conclusion
Estate Planning Questionnaire
Appendix 1
Appendix 2

CHAPTER 1 ? INTRODUCTION TO ESTATE PLANNING

Table of Contents

What is estate planning?

Important decisions in life require at least some advance planning. Decisions such as selecting a career, starting a family, and planning for retirement all require careful consideration of your abilities and goals to ensure that your personal objectives can be achieved. Estate planning is no different; in fact, proper and effective estate planning can be more important than many of life?s other decisions since it is very difficult (if not impossible) to modify your plan after incapacity or death.

Estate planning is more than just a will, power of attorney, or other document designed to distribute your property. It is a process of identifying your goals and taking steps to achieve those objectives, including the preparation of appropriate legal documents. However, the process does not end there. Certain additional steps are also required to ensure that your objectives are achieved in the most efficient manner. Finally, regular review of your plan and periodic adjustments are necessary in order to take updates in the law into consideration aswell as changes in your personal situation and objectives.

Personal planning objectives and the estate planning process

The process of planning your estate must begin with identifying your objectives. It is difficult to plan unless you know where you want to be when the planning is complete. An estate planning attorney who does not start with the client?s objectives is unlikely to achieve results that are entirely satisfactory for the client and his or her family. Estate planning objectives vary with the person; however, the ones that I most frequently hear from my clients are:

? Protecting my spouse after I die

? Avoiding probate

? Reducing estate taxes

? Passing on the family business

? Making gifts to my family or to charities

? Protecting my assets from lawsuits or creditors (referred to as ?asset protection planning?)

? Protecting my assets if I require nursing home care (referred to as ?Medicaid planning?)

? Managing assets in the event of my disability or incapacity

While each of these is a laudable goal, not all will apply to a client?s situation. Consequently, it is important for the client to discuss his or her priorities with the attorney so that the estate plan will be consistent with the client?s objectives.

Implementation of the estate plan

Once your objectives are identified, your attorney can prepare documents and take the steps necessary to implement your estate plan. The type and number of documents prepared for one client may be significantly different than for another. The most common estate planning documents are a will, power of attorney (often referred to as a ?durable power of attorney?); trusts for children, grandchildren or others; living will; or revocable living trust. At a minimum, a complete estate plan will include at least a will, power of attorney for financial matters, power of attorney for health care, and a living will. In Washington (or other community property state), a married couple may have a community property agreement, although such an agreement is not appropriate under all circumstances and you should not sign one without the advice of your attorney. This handbook will review in detail the purpose, advantages, and disadvantages of each of the necessary documents, as well as many others that may be appropriate.

The process of completing an estate plan may take only a few weeks or several months?even years?depending on the client?s objectives and circumstances as well as the complexity involved. A basic estate plan (including wills, trusts and powers of attorney) can be implemented in less than a month under most circumstances.

It is very difficult, if not impossible, to make changes to an estate plan after incapacity or death. If the plan is incomplete, outdated or mistakes were made in the planning process, your objectives may not be achieved. In addition, the expense in administering your estate may be substantially greater.

Involvement of professionals in the estate planning process

When preparing your estate plan, it is important to seek the advice and direction of a qualified attorney. It is generally best to select an attorney who emphasizes estate planning in his or her law practice to assist you with the planning process. Attorneys who emphasize other areas of the law, such as business, criminal or divorce law, are not likely to have expertise or experience in the area of estate planning. Only an attorney may legally assist you in the estate planning process, although your financial advisor, banker, accountant, and insurance agent may be significantly involved in the process as well.

Many law firms have entire departments committed to working with clients in the estate planning process and/or the administration of estates and trusts. These law firms will also have other departments devoted to business matters, real estate, or litigation. Other firms (called ?boutique law firms?) only offer estate planning or estate administration services.

Your estate planning attorney?s professional qualifications are very important. However, it is equally important that you select an attorney with whom you are comfortable in the same way you are comfortable with your doctor or financial advisor. The attorney that you select may very well be the lawyer who assists your spouse or your family with a variety of legal affairs in the event of your incapacity or at the time of your death. This relationship may extend for many years?perhaps decades.

The process of identifying your goals and preparing an estate plan may also involve input from other professionals with whom you work. It may be important for your attorney to consult with your accountant, financial advisor, insurance agent, trust officer, or other professionals from whom you seek advice. Keeping the lines of communication open between you and your advisors will ensure that your estate plan will incorporate all of the appropriate considerations and opportunities.

Regular review of your estate plan

Changes in your personal and family situation often warrant review of your estate plan. For example, you should contact your estate planning attorney in the event of the incapacity or death of a spouse or child, retirement, or a substantial change in your financial circumstances.

In addition, your estate plan may be affected by changes in federal laws (such as tax and pension laws), state law (including the state probate code and trust law), and local laws affecting property rights (such as your real estate). When these laws change or new laws are implemented, there may or may not be a resulting need to update your estate planning documents.

It is generally recommended that you contact your estate planning attorney at least once every three years in order to review your current situation and to determine whether any changes in the law will have an impact on your estate plan.

Preparing for the estate planning process

The first step in the estate planning process is the initial conference with your estate planning attorney. Your attorney can be most effective if you prepare for the conference by considering your estate planning objectives (some of the most common are outlined above) and preparing a net worth statement so that your attorney can identify potential tax and other legal considerations. Also, it is helpful to consider who should be appointed as your fiduciaries, such as your executor, trustee, and health care representative.

Preparation for the initial conference also includes considering whether there are any special factors in your personal and family situation, such as the disability of a spouse or child or circumstances involving a family-owned business, that should be taken into account in the estate planning process.

Many attorneys use an estate planning questionnaire to assist their clients in preparing for the initial conference. Completing the questionnaire prior to the initial conference will help your attorney be as efficient as possible which, in turn, will reduce the legal costs in preparing your plan.

A sample estate planning questionnaire is included in the appendix to this handbook. You may also download this questionnaire from our firm?s website at www.landerholm.com. Go to the Estate Planning Practice Group page and click on the link to the Estate Planning Questionnaire.

CHAPTER 2 ? CONCEPTS IN ESTATE PLANNING

Table of Contents

Introduction

Before beginning the process of designing your estate plan, it is important to understand the various laws that impact estates and how these laws may apply in your circumstance. This chapter is intended to introduce you to some of these considerations.

Planning considerations for everyone

Of course, the final objective of any successful estate plan is to have property distributed to those people or organizations that you wish to benefit, at the time and in the fashion that you intend with the least possible tax cost. However, it is important to understand that simply signing a will (or other estate planning document) may not achieve this objective. The manner in which you own your property may result in a distribution of your estate that is inconsistent with the written provisions of your will or trust.

A will controls only the distribution of assets that are subject to probate (see Chapter 9). A variety of other methods will control the distribution of nonprobate assets. In general, the other methods of distribution fall into one of two categories: operation of law and contract/agreement.

Because only assets subject to probate are distributed in accordance with the terms of a person?s will, it is important to have an understanding of how the titling of assets will ? or will not ? be consistent with the terms of your estate plan. In my experience, it is quite common for an asset to be distributed in a manner that is different than the intent of the client, at least as such intent was expressed at the time the estate planning documents were signed.

Operation of Law

The term ?operation of law? refers to a variety of distribution mechanisms that rely on the law (typically the laws of the state where the assets are located) to determine the rightful recipients of the assets following a death. While there are many forms, common examples include joint tenancy with right of survivorship, transfer-on-death accounts, and pay-on-death accounts. These assets will be distributed to those individuals designated as joint owners (referred to as ?joint tenants?) or death payees immediately upon your death.

Assets held in your name along with another person (referred to as a ?joint tenancy?) with right of survivorship commonly include bank accounts and accounts held at other financial institutions. United States Treasury instruments (such as savings bonds) may also be held in joint tenancy with right of survivorship, as can real estate. Such assets will not be subject to the terms of your will.

For example, if your will provides for an equal distribution of your estate to children but you name one child as a joint owner with right of survivorship on your bank accounts, your assets will not be distributed equally among your children. The joint tenancy bank account will be distributed to one child, and only the other assets that are subject to probate will be divided equally among all of your children. If the child receiving the joint assets with right of survivorship elects to share a portion of the joint account with others, this will constitute a gift and, if substantial enough in value, may result in adverse tax consequences to the child making the gift.

Joint ownership (with or without right of survivorship) may also be subject to the claims of the joint owner?s creditors. Thus, it is generally not recommended to name another person as a joint owner on any of your assets. There are several other estate planning strategies that are available for achieving the same benefits of joint ownership without the risks inherent in such an approach. These strategies are reviewed in detail throughout this handbook.

Contract or Agreement

Your estate may also be distributed by contract. This merely refers to the fact that you and another person (or entity such as an insurance company) have agreed to distribute your assets in accordance with your instructions. The two most common types of distribution plans subject to a contract or agreement are assets that are subject to the terms of a trust and assets that will be distributed according to a beneficiary designation.

The term ?trust? refers to a form of legal relationship between the creator of the trust (referred to as the ?settlor? or ?trustor?) and the person responsible for the management and distribution of the trust assets, (referred to as the ?trustee?). The trustee must hold the assets of the trust for the benefit of the beneficiary who is the person or persons entitled to benefit from the assets held in the trust. There are many different forms of trusts and these are discussed in greater detail in Chapter 4.

The other common form of distribution under the terms of a contract or agreement is a beneficiary designation. Similar to a payable-on-death or transfer-on-death account described above, a beneficiary designation is an agreement between you and another party to distribute your assets in accordance with your instructions following your death.

Caution: It is critically important to recognize that the beneficiary designation on an asset will control over the terms of your will or other estate planning documents. If the beneficiary designation is inconsistent with the term of your will or living trust, your objectives cannot be achieved or will at the very least, be compromised.

Common examples include life insurance policy death benefits paid at your death and retirement plan benefits (including individual retirement accounts). Beneficiary designations may be revocable or irrevocable.

Probate

The term ?probate? refers to the legal process of transferring your assets (referred to as the ?estate?) at the time of your death to those who are entitled to receive your property. Each state has laws regarding probate. Only those assets that cannot be distributed in some other way are subject to probate. The particulars of the probate process are discussed in greater detail in Chapter 9.

If you do not have a valid will at the time of your death, state law controls the distribution of your estate. The process of distributing assets of a decedent who died without a will is called ?intestate succession? and is discussed further in Chapter 3.

Planning considerations for married couples

In addition to the factors outlined above, there are several other issues that married couples must take into consideration in the planning process. Some of these questions include: Will the children benefit from the estate at the first death or only after both spouses have died?Are there estate taxes likely to be due at the surviving spouse?s death that can be minimized though proper planning now? Are there problems surrounding the children and other beneficiaries from this marriage or from a prior marriage (the blended family)? Are both spouses equally able to manage the estate after the first spouse?s death, or should the estate plan consider the need for assistance with the management of assets if the ?less capable? spouse survives? All of these questions, and many others, should be addressed in the planning process.

Property ownership considerations

Property ownership is a key component in the estate planning process. Whether the assets of the estate are owned by husband, wife, or both? with or without others?must be determined and factored into the plan.

As a general rule, property rights are determined by state law. The state in which real property is located will control the rights respecting real property, while the law of the state of a person?s residence will control rights regarding personal property.

In the marital planning setting, states are either community property states or common law states. Oregon is a common law state and Washington is a community property state. Estate planning in the Northwest can be complicated because Oregon is surrounded by community property states. Washington, California, Idaho, Nevada, New Mexico, and Arizona (along with a few others) are community property states. Alaska has an elective community property regime.

In common law states, the title to the property in question will likely control its ownership. For example, property held in the names of both spouses will be deemed to be equally owned unless there is evidence to the contrary. Property held in the name of only one spouse will, likewise, be deemed to be owned by that spouse.

Conversely, the title to the asset is almost meaningless in a community property state. Instead, community property law considers the ?source? of the asset to determine its ownership. For example, under most circumstances, assets acquired during the course of the marriage (including the income earned by each spouse) is community property and is, thus, owned equally by both spouses (the ?marital community?) regardless ofthe title on the deed or account.

One common exception to this rule occurs when assets are acquired by gift or inheritance. In community property states, a gift or inheritance received by one spouse during the course of the marriage is the separate property of that spouse and will not become community property unless the owner spouse chooses to convert it to community property. However, some community property states (such as Idaho) nonetheless characterize the income and increase in value (appreciation) of a spouse?s separate property as community property.

Assets owned by a spouse prior to marriage is another exception. Such assets may be retained by the spouse as his or her separate property, or converted in whole or in part to community property.

In preparing a comprehensive estate plan the estate planning attorney must consider the source and ownership of the assets owned by the spouses. Whether the couple lives in a community property or common law state, it may be necessary to modify the ownership rights of the spouses to achieve their estate planning objectives.

Similar to the property ownership considerations outlined below, the estate planning attorney must also consider the proper beneficiary designations to be utilized in coordinating the estate plan for the married couple. Assets such as life insurance, annuities, qualified retirement plans, and individual retirement accounts will most likely be distributed in accordance with a pre-established beneficiary designation. An incorrect beneficiary designation will thwart the effectiveness of the estate plan and may result in substantially increased estate and income taxes.

The Blended Family

Second (or more) marriages have become very common in our society over the last fifty years. As a result, it is common that one or both spouses may have children from a prior marriage (step-children to one of the spouses) as well as children together. Special attention is necessary to plan for such situations.

Similarly, your children may also have step-children. It is common that these step-grandchildren are treated the same as grandchildren by blood or adoption. However, step-grandchildren have no legal rights in your estate; therefore, if you wish them to benefit along with your grandchildren, you must name or properly designate them in your will or trust.

Planning to protect children in blended families can be complicated, but many strategies are available that can protect each spouse?s side of the family. Many forms of trusts (described further in Chapter 4) may be used to benefit the surviving spouse during his or her lifetime while providing for the ultimate distribution of assets to the children (and their descendants) of the first spouse to die. In some cases giving your surviving spouse the right to live in your home for his or her life (referred to as a ?life estate?) may be a viable and relatively simple approach. At the end of your spouse?s life, the home will pass to your children (or other intended beneficiaries).

Note that making provisions for your descendants (i.e., the step-children of your spouse) is not a matter of whether the spouses trust one another to distribute the accumulated estate to both sides of the family. Instead, this issue is based on individual circumstances and how those circumstances may evolve following your death. If, for example, your spouse has limited contact with your children at the present, it is not likely that the communication between them will increase (or even exist) after your death. Thus, you cannot reasonably expect your spouse to provide for your children in any significant manner at his or her death, especially if your spouse has his or her own children. Your estate plan must provide a sense of security to your spouse and children after your death, rather than being a source of conflict.

Estate taxation considerations

As discussed in greater detail in Chapter 5, the United States Internal Revenue Code (?IRC?), along with numerous states, imposes a tax on a decedent?s estate. Generally, the tax is imposed on all assets owned at death. In some cases however, assets that you do not own at your death will also be taxed as part of your estate. These assets include those that may be subject to your control or from which you receive a benefit.

Subject to certain important exceptions, transfers between spouses during life and at death are not subject to gift or estate taxes. The ?marital deduction? allows the value of the taxable estate to be reduced by the amount of any assets distributed to a surviving spouse. Outright transfers, transfers to a qualifying trust for the surviving spouse, life estates, and certain annuities will qualify for the marital deduction.

Caution: This discussion and the discussion that follows assumes that the surviving spouse is a United States citizen. The availability of the marital deduction is significantly reduced for non-citizens.

Another important provision of tax law is the applicable exclusion. The applicable exclusion amount may be used at death to partially or completely shield your estate from estate taxes, during lifetime to offset gift taxes otherwise payable, or a combination of the two. Currently the applicable exclusion for gift tax purposes is $1 million, and for estate tax purposes is $3.5 million. The 2001 Tax Act provides for an estate tax applicable exclusion amount to $3.5 million in 2009, a repeal of all federal estate taxes (but not gift taxes) in 2010, and a return to $1 million as the exclusion amount in 2011. (See Appendix 2 for additional information about the 2001 Tax Act and its provisions on other tax issues related to estate planning.)

Caution: If the applicable exclusion is not used at the time of the first spouse?s death, it will be wasted and cannot be used when the surviving spouse dies and distributes his or her estate to children or other intended beneficiaries. Thus, if you leave your entire estate to your spouse, there will be no estate tax to pay since the transfer will qualify for the marital deduction. However, your spouse will only have his or her applicable exclusion amount available to offset estate taxes at the time of his/her death.

Estate tax rates begin at 16%. The maximum rate at which estate tax or gift tax is payable is 45% until 2011, when the highest rate returns to 55% .

The applicable exclusion amount is part of federal tax law. Many states also impose an estate (or inheritance) tax of one form or another. For example, in 2009 the applicable exclusion amount available in the Internal Revenue Code is $3.5 million. However, Oregon will only have a $1 million exclusion amount, and Washington will have a $2 million exclusion.

Needless to say, proper tax planning can be a critical component to your estate plan. Seeking advice from a capable attorney with experience in implementing strategies for the purpose of minimizing or eliminating estate tax can have a dramatic impact on the amount of your estate that reaches your intended beneficiaries.

Special considerations for the unmarried cohabitant

The increase in the number of unmarried couples (both heterosexual and homosexual) in our society has given rise to some special and particularly complex issues in estate planning.

Neither Oregon nor Washington recognizes common law marriage. However, both of these states, among others, have passed laws that grant certain rights to domestic partners as though the partners were legally married. The partners must meet specific qualifications and register their domestic partnership with the appropriate state office for the benefits of the laws to apply to their partnership.

Some of the rights that are granted under these laws include hospital visitation, the authority to give consent for medical procedures and the authority to control the disposition of a deceased partner?s bodily remains. Furthermore, the laws grant to the surviving partner certain rights to receive a portion of the deceased partner?s estate. However, a properly registered domestic partnership should not be viewed as a substitute for proper estate planning. Furthermore, none of the rights granted under these laws will apply to the unregistered domestic partnership.

Furthermore, unmarried cohabitants are not considered married for estate and gift tax purposes. Thus, transfers between unmarried partners during lifetime or at death are subject to gift and estate tax without the benefit of the marital deduction. However, most of the estate tax planning strategies that are utilized to reduce estate taxes are available to the unmarried couple.

More profound and painful are the issues that surround health care and personal decision-making during incapacity. In the absence of a durable power of attorney for health care or a properly registered domestic partnership, an unmarried partner has no legal right to make health care decisions for his or her partner during incapacity. State law presumes that a person would want a family member (such as parents or siblings) to give instructions to physicians and healthcare providers, not the partner. The partner also has no right to be appointed as guardian or to make funeral and burial arrangements.

These concerns can be overcome by a carefully drafted durable power of attorney for health and personal care. This durable power of attorney should include such powers as the authority to consent to medical procedures, to gain access to medical records, to hire and discharge medical personnel, to place a partner in appropriate health care facilities (including convalescent care), and to have the right of first priority for visitation in such facilities. In addition, the durable power of attorney may provide for the authority to take possession of personal property; to make funeral arrangements, and to take custody of human remains, including consenting to an autopsy.

An estate plan (including wills, trusts and appropriate beneficiary designations) will minimize complications in the transfer of an estate to a partner and other beneficiaries. Proper planning should be completed well before incapacity in order to ensure that objectives are achieved and to minimize the likelihood of a will contest or other litigation in the estate.

Incapacity

The term ?incapacity? refers to the inability to make informed decisions regarding one?s health and personal care, to properly manage one?s financial affairs, or both. While the term defies a clear and concise definition, most people know it when they see it. Actions that others may deem to be unusual or eccentric do not necessarily mean that a person is incapacitated. Until we become incapacitated, we continue to have the right to make decisions for ourselves. The right of self-determination is fundamental to living in our society.

However, planning for incapacity is a critical part of any thorough estate plan. The days of living a healthy and physically fulfilling life up to the moment of death are over. Today, each of us must plan for a period of disability or incapacity. Death by accident or as the result of a critical and short-term medical emergency is rare.

If you fail to properly plan for incapacity, it is likely that a guardianship will be required in order to address the management of your financial affairs and give informed consent for your personal and medical care. A conservatorship or guardianship of the estate is used for the former, and a guardianship or guardianship of the person for the latter. One or both may be necessary depending on the gravity of your incapacity.In the chapters that follow, several relatively simple and inexpensive options to guardianship are discussed.

Types of fiduciaries

The term ?fiduciary? means a person (or institution such as a bank) appointed to act for the benefit of another. Common fiduciaries include the executor of your estate (called the ?personal representative? in Oregon and Washington) or trustee of a trust. An attorney-in-fact under a power of attorney and a guardian are other types of fiduciaries.

Personal Representative.Commonly referred to as the ?executor,? this person is responsible for handling the administration of your estate after death. This administration is called ?probate.? The personal representative may be named under the terms of your will, or if you die without a will or the person or persons named in your will as personal representative(s) cannot serve, the court will appoint an appropriate individual to serve.

The basic duties of the personal representative include taking possession of your assets (called ?marshaling?), giving notice of the probate to your heirs and those who are entitled to receive your estate, determining your debts and giving notice of the probate to your creditors (referred to as ?notice to creditors?), filing your final income tax return and estate tax return (if required), managing and investing your estate, and distributing your estate in accordance with your will or state law.

Attorney-in-fact. The attorney-in-fact, often called an agent, is the person you appoint under a durable power of attorney to handle your financial affairs. Some durable powers of attorney become effective at the time of execution while others only become effective at the time of incapacity. Some powers of attorney are effective for a defined amount of time or for a specific purpose; however most durable powers are effective from the time of incapacity through the time of death.

An attorney-in-fact can have very broad powers including the purchase and sale of real estate, power to invest your assets, pay your bills, sign tax returns, and make gifts of your assets.

You may also appoint an attorney-in-fact to make health care decisions for you if you are incapacitated. Similar to the person acting under a financial power of attorney, the person acting under a health care power of attorney can have very broad powers, including the ability to give direction regarding the removal and withholding of life-sustaining treatment if you are terminally ill or in an irreversible coma.

Trustee.The term ?trustee? is used in many areas of the law. In estate planning, the term trustee refers to the person or entity (such as a bank) that is appointed to manage the assets of another under the terms of a trust. A trust may be established under a will (referred to as a testamentary trust) or during lifetime (known as a living trust). For a more thorough treatment of trusts, see Chapter 4.

As with other fiduciaries, a trustee owes the highest duty of loyalty under the law to those persons entitled to benefit from the trust (called the beneficiaries). Common duties of a trustee include the investment of the trust assets (such as real estate, stocks and bonds, personal property, and businesses), working with the trust?s advisors (such as the accountant, lawyer and investment advisor for the trust), filing necessary tax returns, advising beneficiaries on the proper management of the assets distributed from the trust to the beneficiary, and many more.

In addition, it is advisable to name one or more successor trustees. Thus, if your primary trustee is unable or unwilling to serve or dies prior to the time determined for terminating the trust, a successor is named to take over the management of the trust. A third party (often called a ?trust protector?) or even the beneficiaries of the trust, may be given the authority to remove trustees for proper reasons and to appoint successor trustees.

Unlike a personal representative, whose term of service may only last several months to a few years, a trustee may be required to serve as such for many years, even decades. Therefore, one of the considerations in selecting a trustee is that person?s ability to serve during the entirety of the trust. For many long-term trusts, it may be appropriate to name a bank or other financial institution as trustee or successor trustee to ensure that the assets will be properly managed during the entire term of the trust.

Guardian. The law recognizes two forms of guardian: the guardian of the person and guardian of the estate. The guardian is appointed to serve as an advocate, advisor, and often caretaker for a person who lacks the ability to properly manage his or her personal care and financial affairs. The person needing the guardianship is called the ?incompetent,? ?ward? or ?incapacitated person.? Most states have replaced antiquated terms such as ?incompetent? and ow use the generic reference ?incapacitated person? to identify any person in need of a guardianship.

The guardian of the person is responsible for the personal care of the incapacitated person. This may include ensuring the incapacitated person?s living arrangements are proper, seeing to his or her health and personal care, serving as a companion during trips away from home, and acting as an advocate for the incapacitated person?s medical care and legal needs.

The guardian of the estate (called the ?conservator? in many states) is responsible for the financial affairs of the incapacitated person including handling investments, collecting income, payment of bills, and working with providers of services to the incapacitated person.

Guardianship proceedings are initiated in the court, generally in the county where the alleged incapacitated person resides. The judge will appoint a guardian ad litem to evaluate the case and report to the court regarding the propriety of the guardianship and the appointment of a guardian. Usually, a member of the incapacitated person?s family will be appointed as guardian, although at times the appointment of a professional guardian is required. The decision is solely in the discretion of the judge.

An inventory of the incapacitated person?s assets must be filed with the court. In addition, the guardian is generally required to file an annual accounting of the income and expenses incurred by the guardian on behalf of the incapacitated person. Guardianships are a matter of public record; thus, the personal and financial affairs of the incapacitated person are available for anyone to review.

Guardianships are also expensive. Due to the complications associated with the legal proceedings, attorneys? fees can be substantial. In addition, accountants and other professionals may be required. The guardian ad litem is also paid from the guardianship. Finally, the guardian must be bonded. A guardianship bond is an insurance policy that protects the incapacitated person if the guardian makes a mistake resulting in a financial loss to the incapacitated person?s estate.

Selecting your fiduciaries

Selecting your fiduciaries can be one of the most complicated and difficult parts of the estate planning process. Many clients default to using children or other family members without considering the complexities of such choices.

In selecting your fiduciaries, consider such factors as their background and education; personal temperament and concept of fairness; special abilities and training; and willingness to seek the advice of appropriate experts (such as an attorney, financial advisor and accountant). Individuals who, for example, lack the ability to make reason-based decisions in their own lives or ask for (and listento) the advice and guidance of professional advisors are not likely to make good fiduciaries.

Each of us has certain talents, capabilities, and weaknesses. As a result, the parties that you appoint to manage assets and financial matters may be different from the parties to make health care and personal care decisions for you. Another factor to be considered is whether the proposed fiduciary will have the time and interest to take on the responsibility of serving in a fiduciary role for you.

You should also consider the use of a professional trustee such as a trust department at a bank or other financial institution. This is especially true if, after considering the factors above and other issues relevant to your situation, you are unable to identify individuals to serve satisfactorily in one or more of the fiduciary roles that will be needed to carry out your estate plan.

The use of a professional fiduciary has many benefits including investment management, bill paying, training minors and adults with limited experience in the proper management of their financial affairs, and the preparation of necessary tax returns. In addition, the professional fiduciary has perpetual existence; it cannot die or become unable to handle your financial affairs.

Also, consider the duration of time that your fiduciaries will likely have to serve. The person you choose as your personal representative may only have to serve for a short period of time?several months to two years in most cases. However, incapacity may last for many years and your trustee or attorney-in-fact will be responsible for your financial and heath care during this entire period.

Logistics matter as well. If you live in the Pacific Northwest, a fiduciary living on the East Coast may find it very difficult to handle your ongoing financial affairs and make your health care decisions from a distance, even with the broad spectrum of communication devices available today. This is less of a concern when it comes to handling your estate. Usually, a trustee or personal representative can administer your estate from a distance with little difficulty.

Careful consideration of the parties to serve in the various roles will be beneficial to you during incapacity and to your beneficiaries following your death. In short, the selection of your fiduciaries may be one of the most important aspects of planning your estate.

CHAPTER 3 ? ESTATE PLANNING TOOLS

Table of Contents

Introduction

Everyone?s situation is different?their personal and family situations, financial resources, estate planning objectives, and the particular needs of their family. Therefore, every estate plan is different. There may be common elements such as a will, trust, durable power of attorney, etc., but each plan will be unique. It should be designed to achieve your objectives. Your estate planning attorney, in conjunction with the advice of other professionals, will assist you in making the important decisions regarding the proper legal documents necessary to complete your estate plan.

The purpose of this chapter is to review the basic legal documents and procedures necessary to complete an estate plan. More complicated estate planning strategies, including the use of trusts, estate and gift tax reduction techniques, planning for Medicaid and government assistance, and asset protection planning will be covered in other chapters. If your current estate plan does not cover the basics outlined in this chapter, it is likely that your plan is incomplete and will not achieve your objectives. Poor or incomplete planning, like no planning at all, will result in increased expenses in the administration of your estate and the possibility that your objectives will not be achieved.

What is a will, and why is it so important?

It is helpful to think of a will as a blueprint. It tells your family, the court, and taxing authorities how your estate is to be administered and distributed.

Your will has no effect until your death; it is purely a testamentary document. After death your will is submitted to the court for review and approval and to appoint the personal representative of your estate. This is the beginning of the probate of your estate. Probate is discussed in detail in Chapter 9.

The Personal Representative

An important part of every will is the designation of the person you wish to administer your estate (referred to as the ?executor? or ?personal representative?). If your personal representative is willing and able to serve, and if the person otherwise qualifies under the law, the court will appoint the person you designate. If there is no person named in your will who is able or willing to serve, the court will appoint someone to serve as the personal representative for your estate. This may be another member of your family, or other qualified person or institution (such as a bank). Persons convicted of certain crimes are not allowed to serve as personal representatives. The person you designate in your will as a personal representative need not be a resident of your state.

Dying Without a Will

If you do not have a will at the time of your death (or if it is otherwise determined to be invalid or ineffective for whatever reason) you are said to have died ?intestate.? This means that the court will appoint a personal representative for you from a list of potential appointees under state law.

In addition, your estate will be distributed to those individuals who are entitled under state law (called ?intestate succession?). This means that certain individuals, and perhaps the state of your residence or wherever you owned property, will receive your estate even if you would have not chosen to benefit them had you written a will.

Creating a Valid Will

The requirements of a valid will are fairly simple. First, a will must be in writing. Oral wills are recognized only under very limited circumstances. Second, the will must be witnessed. At least two witnesses are required. The witnesses should be disinterested, meaning that they will not receive any benefit from the estate. Many states, including Oregon and Washington, have relaxed these requirements but the consequences can be severe, so the use of an interested witness should be avoided.

The will should be signed before a notary public or signed by the witnesses in the form of a declaration that is recognized under state law as having the same effect as testimony in court. This will allow the court to admit your will into probate at your death without further testimony as to the circumstances of your execution of the will. This will reduce the time and cost of having your will entered into probate.

Distributions under the Terms of Your Will

Your estate may be distributed in many ways under the terms of your will. Again, your objectives will dictate how your will is drafted so your estate is distributed to your intended beneficiaries.

Every complete will should include a residuary clause. This is the provision that distributes the residue (also called the ?remainder?) of your estate to the people that you wish to benefit and in the manner that you wish them to benefit. If there is more than one person to benefit, the distribution of the residue can be made equally among them or by shares or percentages.

Many people also like to include specific gifts (called a ?specific bequest?) in their will. This can be in the form of a specific asset (?I give my mother?s wedding ring to ??) or a fixed dollar amount (?I give the sum of $500 to ??). If the particular asset given as a specific bequest (e.g., the wedding ring) is not in your estate at your death, it is said to ?lapse? and the person designated will receive nothing from your estate unless you have made an alternative gift to him or her in your will.

Many states allow you to include a provision in your will that indicates your intent to create a list of personal possessions to be distributed to the persons designated on the list. This list may be modified at any time without the need to change your will. This can be an efficient approach to dealing with the distribution of your personal items. The list must be executed with the formality that is required under law; anything short of exact compliance with the law will render the list void. Furthermore, the list cannot be used for the transfer of real estate or intangible personal property such as cash or financial assets. At present Washington State law allows for the use of the tangible personal property list, while Oregon law does not.

As to a specific bequest or a fixed dollar amount, it is important to note that these will be paid before the gift of the residue of your estate. Thus, if you include several specific distribution of large dollar amounts, there may not be much left for the beneficiaries of the residue of your estate.It is also important to remember that the costs of administering your estate (such as legal fees, funeral expenses, taxes and debts) will need to be paid before your estate is distributed. Thus, using several specific gifts may be complicated if the estate has limited cash to pay these expenses.

Gifts ?In Trust?

Usually, the time of death cannot be predicted with any accuracy. Thus, your will must be drafted with enough flexibility to take into consideration changes in circumstances over time. A will needs to be modified from time to time to take into consideration changes in life and in the law that cannot be anticipated.

For example, if your intended beneficiaries are minors or otherwise lack the maturity to handle their inheritance if you died sooner than expected, you do not want to draft your will assuming that you will live your natural life expectancy. Some beneficiaries may never be able to properly manage their inheritance. These beneficiaries include the disabled, especially those who are receiving benefits from a governmental agency due to disability; those facing a major financial crisis such as bankruptcy or other creditorrelated problems; and those who, for whatever reason, never gained the skills necessary to properly manage money (often called ?spendthrifts?).

In these cases and others, the use of a trust is appropriate. A trust is a set of instructions in a will directing that a person?s inheritance is to be held in a trust for the benefit of that person and not distributed outright. The will also appoints a trustee who will hold, manage, and distribute the assets (referred to as the ?trust estate?) for the benefit of the named individual. Trusts are covered in detail in Chapter 4. A trust can be as unique and flexible as necessary to meet the needs of the beneficiary, and as a result, the trust provisions need to provide direction to the trustee as to when and how distributions should be made to the beneficiary. Trusts can last for a term of years, until the beneficiary reaches a specified age or accomplishes certain objectives, or even for the lifetime of the beneficiary and beyond.

Most importantly, it is essential to be realistic about the capability of the persons who will benefit from the estate. Giving an inheritance to a person who is not capable of managing money is not a gift, it is a burden. Most likely, the inheritance will be lost to poor decisions, the beneficiary?s creditors, or expenses that would have otherwise been paid by a government program that the beneficiary would have been eligible for had the inheritance not been received.

What Assets Does My Will Control?

A common misunderstanding is what assets your will controls at death. Many people believe the will controls the distribution of all of their assets at death; however, this is not true. A will only controls the distribution of assets that have no other means of being distributed. Thus, for example, bank accounts owned with another person at your death ?with right of survivorship? will pass to the surviving joint owner. Likewise, assets with beneficiary designations are not controlled by your will. These assets include annuities, life insurance policies, and retirement accounts.

The community property agreement

The community property agreement, which is a contract between a husband and wife, is available in many community property states. In general, the community property agreement has three prongs. First, it will state that all of the assets owned by the couple are their community property. Second, the community property agreement may include a clause that will convert property acquired after the execution of the community property agreement into community property. Finally, the community property agreement may include a clause that will distribute all community property to the surviving spouse when one spouse dies. The third clause is authorized under Washington law but not necessarily in other community property states.

Community property agreements are appealing to couples because they are simple and will allow the surviving spouse to avoid probate on the death of one of the spouses. However, there are several disadvantages to the community property agreement and you should not sign one without the advice of an estate planning attorney. Some of these disadvantages include:

? Increased estate taxes at the surviving spouse?s death. Since the entire estate is transferred to the surviving spouse under the community property agreement at the first death, there is no opportunity to use the estate tax exclusion amount on the first spouse?s death. See Chapter 6 for a discussion on estate tax planning for the married couple.

? No planning for the protection of assets and eligibility for Medicaid and other benefits if the surviving spouse requires long-term care. Certain trust provisions can be included in your will that will protect assets on the first spouse?s death should the surviving spouse require long-term care and want to maximize the opportunity for eligibility for government benefits such as Medicaid. See Chapter 11 for a discussion regarding eligibility for Medicaid and other government benefits.

? For couples with children from prior to their marriage, the community property agreement may result in the disinheritance of the children of the first spouse to die.

? Conversion of gifts or inheritances into community property. Gift and inheritances received by one spouse during the marriage are generally separate property. A community property agreement with the second prong outlined above will convert these gifts and inheritances into community property. The objectives of the couple must be considered before signing a community property agreement that includes the second prong.

The durable power of attorney

An integral part of any complete estate plan is the durable power of attorney. Planning for incapacity is an important part of proper estate planning. During incapacity, someone needs the authority to manage your financial affairs, including such tasks as paying your bills, filing your tax returns, and managing or selling your assets. Traditionally, a court-appointed guardian has been used for this purpose; however, guardianships are expensive and time consuming.

The durable power of attorney is intended to give you the authority to appoint someone for this purpose before you become incapacitated. In your durable power of attorney you appoint an attorney-in-fact to manage your financial affairs and make decisions for you. Alternate attorneys-in-fact can be appointed, as well, should your primary appointee be unable or unwilling to serve.

Your attorney-in-fact has broad powers and a significant level of authority over you and your property. Carefully consider whom you name to exercise these powers. You do not want the appointment of your attorney-in-fact to be the source of friction in your family or a cause for litigation.

Your durable power of attorney can be revoked at any time during your life and is revoked at your death. Your attorney-in-fact has no authority to manage your assets after your death; this is the responsibility of your personal representative.

In addition, your durable power of attorney may be revoked by a court if a guardian is appointed for you.

Many states also include restrictions on the authority of the attorney-in-fact to engage in certain transactions. For example, the power to change your estate planning documents, transfer assets to a trust for your benefit, make gifts of your assets to others, and certain other powers must be specifically referenced in the durable power of attorney or the attorney-in-fact will not be able to exercise these powers. There may be significant adverse tax consequences to granting these powers to individuals who will also benefit from your estate. Your estate planning attorney can counsel you on the propriety of including these powers and who should be named in your durable power of attorney to exercise them.

Furthermore, the Internal Revenue Service may not recognize the validity of a gift made under a durable power of attorney unless the attorney-in-fact is granted the specific authority in the durable power of attorney to make gifts. The power to make gifts may be important to reduce estate taxes payable at your death.

Health care and personal decision-making

The ability to have health care and personal decisions made during incapacity is a very important part of any thorough estate plan, perhaps the most important part. Certainly, how we are treated during incapacity is at least as important as when we are fully competent.

All states have enacted some form of legislation to address this concern. Most states such as Washington, allow you to execute a health care power of attorney and a living will. Some states, such as Oregon, have combined these two instruments into a single document, know as an Advanced Directive. Regardless of the form, the purpose is the same.

As the name implies, a health care power of attorney authorizes another person or persons to make decisions for you in the event of your incapacity and inability to give consent for treatment. A health care power of attorney will most likely also cover such areas as access to medical records, consent to work with your insurance providers (including Medicare), determining a proper placement care facility, and enforcement of your objectives regarding the use of extraordinary measures to prolong your life (often referred to as ?life support?).

A living will, referred to as a Health Care Directive in Washington, is your statement regarding the use of extraordinary measures to prolong your life if your health care provider has determined that you are not likely to survive without the use of such measures. Most living wills now cover medical conditions that are certified by your health care provider as terminal as well as an irreversible coma.

Asset ownership and beneficiary designations

The form of asset ownership is very important in achieving your estate planning objectives. Proper designation of your beneficiaries on such assets as life insurance policies and retirement accounts is also critical in achieving your objectives. The reason is that your will or living trust can only control the distribution of your assets if the ownership and beneficiary designations are designed properly.

Many very well-written wills have failed to operate as the testator intended due to poor decisions made during life regarding the ownership of assets. If assets are owned or titled in a manner that is inconsistent with the terms of the will, there may be an increase in estate taxes, inadvertent gift taxes, family conflict, and/or other problems. Poorly planned beneficiary designations can have the same results.

A common example of this is where a parent places a child on the parent?s banking or investment account. This is often done to provide for access to the account in the event of the death or incapacity of the parent. Unfortunately, most of the time this creates a joint tenancy with right of survivorship and the parent may be overriding the terms of his or her will by doing so.

The steps of designing the ownership of your assets and proper beneficiary designations are part of any thorough estate plan and you should discuss this matter with your estate planning attorney. Ask that the ownership and beneficiary designations be put in writing for you as part of the planning process.

It may be necessary to re-title assets that you currently own at the time your estate plan is implemented. In addition, it will be very important to follow the instructions with regard to titling when new assets are acquired or new accounts are opened in the future.

CHAPTER 4 ? TRUSTS

Table of Contents

Introduction

In general terms, a trust is the creation of a right to property that is held by one person for the use and enjoyment of another. The person who holds the property is referred to as the ?trustee? and the person who will benefit from the property is the ?beneficiary.? A trustee is a fiduciary under the law and is obligated to manage the property of the trust for the benefit of the beneficiary (and not for his or her own benefit) and to follow the directions of the trust and applicable law. No higher duty of one person to another exists in the law than that of a fiduciary.

In any given trust there can be one or more beneficiaries. The rights of those beneficiaries to distributions from the trust are defined by the trust document as well as applicable law. Some beneficiaries (referred to as the primary beneficiaries) have the current right to benefit from the trust property. Other beneficiaries (referred to as secondary beneficiaries) only benefit after the rights of the primary beneficiaries have terminated under the terms of the trust.

For example, a wife may create a trust that will hold her assets after she has died for the lifetime benefit of her husband if he survives. During his life, the husband is entitled to receive the income of the trust and may receive the trust principal if necessary for his health and general welfare. After the husband dies, the children of the wife receive the assets of the trust. In this case the husbandis the primary beneficiary?receiving the current benefit of the trust for his lifetime, and the children are the secondary beneficiaries?receiving the assets only after the husband?s death.

There are many types of trusts, some of which will be explored in this chapter and some in other chapters.

Trusts generally fall into two categories: living (or what the law refers to as inter vivos) and testamentary. Living trusts, as the name implies, are trusts that are created during the trust creator?s lifetime. The creator of a living trust is called the trustor, settler or grantor. Testamentary trusts are established at death under the terms of the decedent?s will or as part of a living trust described above.Living trusts can be revocable?that is, the trustor can revoke or change the trust at any time?or irrevocable, meaning that the trust, once executed, is not subject to change or revocation.

Trusts are very flexible and can provide many different benefits based on the client?s objectives. For example, certain irrevocable trusts can be used to reduce estate taxes, provide for deferred gifts to charities, protect assets from creditors, or shelter assets in the event the beneficiary requires long-term care or is receiving government benefits. Other irrevocable trusts are used to allow the intended beneficiary more time to develop the necessary level of maturity to properly manage the assets of the trust or for those individuals who may never achieve the necessary level of financial capability. Such trusts may last for the lifetime of the trust beneficiary.

Living trusts

As stated above, living trusts are established during the life of the trustor. Living trusts fall into two categories: revocable and irrevocable.

Revocable Living Trusts

The revocable living trust has become a bit of a phenomenon in the estate planning world over the last thirty years. Revocable l

Source: http://brcapitalinc.com/2012/07/16/planning-legacy-handbook-estate-planning/?utm_source=rss&utm_medium=rss&utm_campaign=planning-legacy-handbook-estate-planning

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