Estate Planning Guide
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Frequently Asked Questions We realize that most people have many questions about estate planning, both before they do their planning and afterwards. Listed below are some questions we are frequently asked by clients and callers: What is estate planning? Estate planning is the process by which everything you own is passed to your family or other intended beneficiaries. It is also the process by which your estate is controlled and managed in the event of your incapacity, and at the time of your death. Presently, you control your estate. You can decide what to do with your money, your property and all of your other assets. You can either use it, sell it or give it away. However, when you become incapacitated due to illness, injury or other cause, you are no longer able to control your estate. Therefore, someone else must do it. That "someone else" can either be someone you choose or someone chosen for that particular purpose by a Court. Additionally, at your death you can choose who receives your estate through either a Last Will and Testament, Living Trust, Joint Tenancy, or Beneficiary Designation. If you fail or neglect to specify who or what receives your estate, the laws of the state of your residency at death will determine how your estate is distributed and to whom. Why do I need to do estate planning? Because if you do not, the government will decide how to distribute your estate! Most people do not want the function of government to interfere with the distribution of their estate. However, in order to achieve the efficient distribution of assets, the laws of all states provide a method for distributing property after death. These laws, known as The Laws of Intestate Succession, provide that your assets will pass partly to your spouse (if you are married) and the remainder to your children. If you are single and have no children, the estate will pass to your parents or, if they are deceased, to your siblings. The laws provide that your estate will stay in your bloodline unless you have no blood or legally adopted relatives, in which case your estate will pass to the state. Although it may be your intention that your estate pass equally to your children, you may not intend for them to have their share of the estate at age 18. However, they will receive it at that time if you do not have a Last Will and Testament or Living Trust. By not doing estate planning, you give up the right to make the choices of distribution for your estate. In some instances, due to the circumstances of your beneficiaries, it may be your desire to protect them from their own inheritance. For example, some beneficiaries may be incapable of managing their own money. Through an intestate distribution, some beneficiaries may end up losing their share of your estate to either (1) bad investments; (2) poor money management skills; (3) creditor problems; (4) spouse problems; or (5) other factors. By carefully thinking out your estate plan and putting a capable representative in charge, you can protect your estate and see that it is used as you intend. Can I do my estate planning myself? Yes you can. However, a wise man once wrote, "Law and brain surgery are two things you do not want to practice on yourself." There is a tremendous value to the advice of a trained and disinterested third party, such as a qualified estate planning attorney. Although there are a large number of inexpensive (and expensive) estate planning kits and software packages that allow you to do your own estate planning, they are only useful if they are properly prepared. Usually, the first time you or anyone else will learn if they are properly prepared is when you are dead or close to it. Why risk something as important as your estate planning to a kit you may not complete properly? Therefore, a form from a kit may work for some people, but it may not work for you. When it comes to estate planning, one size does NOT fit all! What is probate? Probate is the legal, court administered process by which your assets are transferred after your death to your heirs. If you own real estate, such as your home, the deed to that property may be in your name alone. Legally, only you can sign a deed to transfer title to that property to someone else. However, when you die, who has the authority to convey that property? Although you would assume that your spouse or children can do so, they have no legal authority unless and until they are appointed by a court. That is what the probate process involves. First, if you have a Last Will and Testament, that instrument is filed with the court along with a legal document, known as a Petition, requesting that the instrument be accepted as your Last Will and Testament. Realize that you have the right to prepare a Last Will and Testament at any time. However, only the most recent document prepared while you are of sound mind can be accepted as your Last Will and Testament. Before a hearing can be held on the petition, notice must be given to your Heirs at Law. Your heirs at law are the individuals who would be entitled to receive your estate if you died without a Will. In other words, they are the individuals who would receive your estate by Intestate Succession. As an example, if you are married and have three children, but have a Will leaving your entire estate to your brother, notice of the petition for probate would have to be given to your spouse and children, even though you did not provide for them in your Will. On the other hand, if your Will left everything to your spouse and children, there is no requirement that notice has to be given to your brother since he is not an heir at law. Once a hearing is had on the Will and it is accepted as your Last Will and Testament, the Court appoints a Personal Representative who is either a person or entity named in your Will, or a person chosen by the Court. The Court then requires an inventory of your estate as well as the publication of a Notice to Creditors. This notice is in keeping with one of the other duties of probate - protection of creditors. Creditors with proper claims against your estate must be paid before any distribution can be made to your heirs. The notice gives the creditors a certain number of days (usually 60) in which to file claims against your estate. Any known creditors must be personally notified of their right to file claims, and any unknown creditors are notified by publication. During this same time period, an estate tax return is filed. Even if no taxes are owing, due to the small size of the estate, it is necessary to file the estate tax return in order to receive a release of the estate tax lien. Also during this time, allowances can be paid to the surviving spouse or minor children of the deceased person to support them during the estate administration period. When the creditors' notice period expires, all claims are paid, the estate tax has been paid and/or the estate released, the estate is ready to be distributed. At that time, the personal representative asks the Court for permission to make distribution. The personal representative also files a final accounting to show the Court and the beneficiaries what income has been received and what expenses have been incurred. Assuming there are no objections, the Court authorizes the personal representative to distribute the estate and the case is closed. As you might guess, this process is both time-consuming and expensive. The shortest probate process takes approximately six weeks to complete, but can take as long as a year or more. Obviously, contested cases may take much longer. Court costs and publication expenses will cost approximately $150.00 or more, and attorney's fees can range from $2,000.00 to much, much more. The personal representative is entitled to a statutory fee based on the value of the entire estate administered. That fee is 5% of the first $1,000, 4% of the next $4,000, and 2½% of everything above that. Some lawyers still base their fee for conducting the probate on the same statutory schedule for the personal representative. However, attorney's fees can be much more or much less. Lawyers, as well as accountants or other professionals involved in the estate can receive extraordinary fees for their services, all of which can be approved by the Court. The law also provides for sales procedures out of probate cases as well as options to waive accounting, inventory and other facets of the probate process. Keep in mind that probate is a public process. The probate records at the Courthouse are available to anyone who wishes to see them. If my estate is less than $600,000, do I still need probate after my death? Maybe. The value of your estate does not determine the need for probate, it is the character of the property that determines it. For example, you can have $5 million of real estate and it will not be subject to probate at your death if it is held in joint tenancy with your spouse. On the other hand, you can own a $2,000 lot that will be subject to probate if the deed is in your name alone. You can own a $500,000 Certificate of Deposit and it will not be subject to probate if it names a Pay on Death (POD) beneficiary, such as one of your children or grandchildren. However, your $500 checking account will be subject to probate if it is in your name alone. The reason the $600,000 figure has become so well known is that, from 1980 through 1997, $600,000 was the amount of the federal exemption from estate taxes. However, probate and estate taxes are two entirely different things. In each of the examples above, the assets which are not subject to probate ARE subject to estate taxes. Of course, if the entire estate is less than the current exemption amount of $1,500,000, there will be no estate taxes. How can I avoid the need for probate? There are several ways to avoid probate. You can give away your entire estate. You can use joint tenancy to own your assets. You can list pay-on-death designations on certain assets. You can contractually name beneficiaries of certain assets, such as life insurance. You can use a Living Trust. Each of these types of ownership have their advantages and disadvantages.
My Will clearly states that everything goes equally to my children. Why does my Will need to be probated? This is one of the biggest misconceptions of estate planning! Some people feel that as long as their will is self-explanatory, it does not need to be probated. By law, your Last Will and Testament is not effective UNTIL it is probated. It does not matter it if is clear and unambiguous. It does not matter if it you and your family fully and completely understand your wishes. Your assets titled in your name cannot legally pass to your heirs until the Court enters an Order showing that the assets pass to your heirs. Here is an example: You own your home in your name and have a Will leaving your home to your two children. As you know, in order to sell your home during your lifetime, you would need to sign the deed to the new buyer. At your death, a buyer will not just accept a deed from your two children since no legal determination has been made that they are your only children, or that they are entitled to your home (you could have left it to your spouse, your brother, or your church, for instance). Simply providing the buyer with a copy of your will does not solve the problem because there is no assurance the will is your last will and testament (you could have drafted another one later or the one provided might have been signed when you were incapacitated). Therefore, until a court of law has decreed that the will is your Last Will and Testament and that it does legally pass title to the real estate, your two children have no authority to execute a valid deed to the buyer. As a result, no will is effective unless and until it is subject to a probate proceeding. It does not matter how inexpensive or elaborate the will is, it has to be probated to be effective. Are there any reasons why I would not want to avoid probate? Yes. If you do not feel you can find a successor trustee who can properly distribute your estate the way you desire, you may want to require the monitoring of the distribution process by the Court. If you feel that your children or other intended beneficiaries may argue and fight over the distribution of your estate, you may wish to have that distribution controlled by the Court. If you are a high-liability professional who might have a lot of claims or liabilities against your estate, you may wish to have all future claims barred through the probate process. Realize that the probate process is not necessarily a BAD thing! It is time-consuming and more expensive than careful estate planning. However, it is a means of using a disinterested third-party to control the distribution of your estate and to make sure your wishes are carried into full force and effect. Doesn't joint tenancy avoid probate? Joint tenancy can avoid probate on the death of the FIRST joint tenant, but not on the death of the last joint tenant. Joint tenancy has been called the "poor man's will" since it can avoid probate and insure that property held in joint tenancy ends up in the hands of the last remaining joint tenant. For example, if you wish to have your house pass to your child, you can put it in joint tenancy between you and your child. Then, at your death, the house would belong to the child. However, many people do not realize that if the child dies first, the value of the house is included in the child's estate for estate tax purposes. Also, if the child is subject to a judgment or lien, the judgment or lien creditor has an interest in the real property held in joint tenancy. Finally, if you wish to sell the home held in joint tenancy, both your child and the child's spouse will have to sign the deed along with you. Although, in many instances, joint tenancy can be an effective probate alternative, there are sizeable risks that may make probate inappropriate for your use. My family already knows what I want. Do I still need a will or a trust? People change and memories change. Therefore, what you think your family fully understands, may fully unravel after your death. Furthermore, even if your family clearly understands your wishes, your oral instructions are not effective to pass title to property. Even if your family does understand and is willing to follow your wishes, their actions can cause adverse tax consequences for them. Several years ago, a client died with a will leaving everything to her brother. Actually, she had a brother and a sister, although she and her sister had feuded for years. Shortly before her death, she told her brother to just split the entire estate with their sister. At death, after the probate was completed leaving everything to the brother (as were the terms of the deceased sister's will), the brother wrote a check to his living sister for $400,000, following his deceased sister's wishes. That $400,000 "gift" from the brother to his sister cost him $118,400 in federal gift taxes! The tax, however, could have been completed avoided if the deceased sister had changed her will to divide the estate equally between her brother and sister. She didn't do that, because she felt she gave crystal clear instructions to her brother to divide the estate and she was confident the brother would follow her wishes. She was right, but the end result was still a tax of $118,400. In another recent case, a woman died leaving most of her stock portfolio in joint tenancy with her son. The entire family knew for years that, when the mother died, the entire estate was to be divided equally among the son, a daughter-in-law (spouse of a deceased son), and two grandchildren (the children of another deceased child). When the mother died, the son decided that his mother's wishes did not include the stock portfolio (which was the bulk of the estate), but just a small piece of real estate and her furniture. After more than a year of legal contests, the matter settled, dividing a portion of the estate, but costing the parties around $40,000 in legal fees, and an irreparable division in the family. Ignorance of the law is not a SIN, just EXPENSIVE! What are estate taxes? The estate tax is some times referred to as an inheritance tax, a transfer tax, or a succession tax. It is a tax imposed by both the state and federal government on the value of property transferred at your death. It IS different from income taxes. Even in death, you will have to pay your income taxes! However, in addition to the income taxes, you may have to pay an estate tax. The federal government gives each deceased person a credit against the estate tax. Prior to January 1, 1998, that credit was $192,800. This translated into an exemption of $600,000. In other words, if the total value of your estate at the time of death was less than $600,000, you would pay no federal estate tax. As a result of the Taxpayer Relief Act of 1997 and the Economic Growth and Tax Relief Reconciliation Act of 2001, that tax credit, now referred to as "the applicable exclusion amount" is increased between 1998 and 2009 as follows:
The current federal tax rates range from 18% to 48%. There is an unlimited marital deduction and an unlimited charitable deduction. However, using the unlimited marital deduction can result in an overall tax increase for your estate since you lose the estate tax exemption of the first spouse to die. T he laws of the State of Oklahoma grant to each person an exemption of $950,000.00 as to property passing to lineal heirs (i.e., father, mother, child, child of husband or wife, adopted child or any lineal descendant of decedent or of such adopted child). The exemption does not apply to collateral heirs (i.e., brothers, sisters, nieces, nephews, other relatives, friends, etc.). The Oklahoma tax ranges from 1/2% to 15%. Oklahoma also allows an unlimited martial and charitable deduction. The estate tax can be avoided or substantially reduced with proper and timely planning. Didn't Congress just repeal the estate tax? Yes...but it does not become repealed until January 1, 2010. Although that sounds wonderful, there is a federal law which provides that a year later, January 1, 2011, unless some new law is passed before then, the law repealing the estate tax is revoked which means that, January 1, 2011, we have the same estate taxes we had in the year 2002! Realize that, between now and 2011, there will be up to two presidents and three Congresses. ANYTHING is possible! Therefore, doing estate planning now must still include provisions for estate taxes since (1) you could die before 2010 and (2) Congress could reenact a form of the estate tax. Since the days of James Madison, when our forefathers considered outlawing the inheritance of wealth because it went against the American spirit of each person making his or her own money by working, the government has sought to take a taxing advantage of our passage from this world. Regardless of the argument, the fact is that the TAX remains! Even in 2009 -- the last year of the tax -- the estate tax rate would still be as high as 45%! Historically, the estate tax has been RAISED to pay for the costs of wars. Presently, we are in the middle of possibly the most costly war in our nation's history. In addition, with a current Congress almost evenly divided between Democrats and Republicans and budget deficits looming, do not expect any meaningful estate tax reform in the near future. If the value of my estate is less than the estate tax exemption amount, why should I worry about estate taxes? You may not have to worry about them, unless you are leaving all or a portion of your estate to collateral heirs. Collateral heirs, as stated above, are beneficiaries of your estate other than qualified charities, parents, grandparents, children and grandchildren. Even if your estate is less than $100,000, if you are leaving it to collateral heirs, it is entirely subject to estate taxes. Careful planning, involving lifetime gifts, can reduce that estate tax. If my assets are held in a living trust, are they protected from loss if I need to go into a nursing home? No. This is another common misconception of the use of a living trust. Realize that the typical revocable living trust is one that you control. As a result, the assets in the trust are still considered yours. Even if you are not the trustee, if you retain the right to amend or revoke the trust, the assets are still considered resources of yours for nursing home purposes. Finally, even if you use an irrevocable trust which you create, if you are a beneficiary of that trust, the assets within the trust are not protected if you must go into a nursing home. Of course, in order to even avoid the problem of losing your assets to a nursing home creditor, we recommend you consider long-term health care insurance. Such a policy can pay most or all of the cost of your nursing care, whether in a nursing facility or in your own home. Secondly, realize that you do not immediately give up all title to your assets if you go into a nursing home. As long as your income and resources can pay your way through the home, you lose nothing. It is only under those circumstances where your income and resources cannot cover the costs of your nursing care that resort must be had to government assistance in the form of Medicaid. There are certain threshold requirements for Medicaid and we can discuss those requirements with you. There are ways to protect your estate from nursing home creditors. One method involves a Special Needs Trust. Such a trust involves transferring your assets to children or other intended beneficiaries who then create a trust for your benefit which limits your access to the income and principal of the trust. Unfortunately, you cannot be a trustee of the trust and assets transferred to the trust can still be counted against you in qualifying for Medicaid unless they are transferred well in advance of your need for Medicaid. Please make sure you include long-term health care planning as a part of your estate planning decision-making. If my assets are held in a living trust, are they protected from my creditors? No. Once again, as in the case of long-term health care planning, assets in a revocable living trust of which you are the trustee and/or beneficiary are reachable by creditors. However, most of us have all the asset protection we need with the Oklahoma exemption laws. Those laws are some of the broadest and most protective in the country and provide that the following assets are exempt:
Essentially, those items necessary for living are exempt. However, the following items are NOT exempt (unless they are part of a qualified retirement plan):
There are numerous other items not subject to exemption and, for the most part, you will not have an exemption in a particular item unless the exemption is specifically provided for by law. Also, in the event of a judgment or claim against you, you must assert your exemption in order to protect the property attempted to be taken. Therefore, knowing your exemptions is important! Ask for our brochure entitled Asset Protection and Charitable Planning for more information on protecting your estate from creditors and taxes. Can't I give away my estate so that I can qualify for Medicaid? Yes. However, timing is everything. If you are already in the nursing home, it may be too late! Generally, assets transferred from your control within three years of seeking Medicaid qualification are still considered resources of yours. For example, if you give your home and bank accounts to your children in January and then apply for Medicaid in February, you will be denied, even though you no longer own anything. The government dictates the parameters for disqualification from Medicaid. However, in most instances, you will need to divest yourself of assets at least three years in advance of going into a nursing home. For more information, review the next chapter of this brochure on Long Term Health Care Planning. Will the government do more to help pay for long-term care in the future? With the passage of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the federal government defined the limited role it will play in providing long-term care financing in the foreseeable future. For, at the same time this legislation made Medicaid access more difficult, it also established favored tax benefits for people who purchase long-term care insurance. By thus encouraging the purpose of private long-term care insurance, the government has sent a clear message: This is all the help you can expect from us. Otherwise, you are on your own! |
