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What You Need To Know About Estate Planning

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.

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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:

  • Bad investments
  • Poor money management skills
  • Creditor problems
  • Spouse problems
  • 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.

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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!

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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!

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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 the result of changes in the law, the 2016 estate tax exemption amount is $5.45 million.

The federal tax above that amount is 40%. There is an unlimited marital deduction and an unlimited charitable deduction.

These laws are constantly changing, which means it is important to consult with an attorney upon initial creation of your plan and update it over time.

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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.

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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:

  • Your home, subject to the following limitations: In a city, town or village, up to one acre of land, selected by the owner. Outside a city, town or village: Not more than 160 acres in one or more parcels, selected by the owner.
    • NOTE: At least 75% percent of the total square foot area of the improvements for which a homestead exemption is claimed must be used as the principal residence in order to qualify for the exemption. If more than 25% percent of the total square foot area of the improvements for which a homestead exemption is claimed is used for business purposes, the homestead exemption amount shall not exceed $5,000.
  • A manufactured home.
  • All household and kitchen furniture held primarily for personal, family or household use (NOTE: A household computer may be considered an item of household goods, under certain circumstances).
  • Any lot or lots in a cemetery.
  • Implements of husbandry necessary to farm the homestead.
  • Tools, apparatus and books used in any trade or profession for the personal, family or household use of such person or a dependent of such person, not to exceed $10,000.
  • The person's interest, not to exceed $4,000, in wearing apparel that is held primarily for personal, family or household use of such person or a dependent of such person.
  • The person's interest, not to exceed $3,000 in aggregate value, that are held primarily for personal, family or household use of such person or a dependent of such person.
  • All books, portraits and pictures that are held primarily for the personal, family or household use of such person or a dependent of such person.
  • All professionally prescribed health aids for such person or a dependent of such person.
  • Five milk cows and their calves under six months old that are held primarily for personal, family or household use of such person or a dependent of such person.
  • One hundred chickens held primarily for personal, family or household use of such person or a dependent of such person.
  • Two horses and two bridles and two saddles held primarily for personal, family or household use of such person or a dependent of such person.
  • Such person's interest, not to exceed $3,000 in one motor vehicle.
  • Guns, not to exceed $2,000 in aggregate value, held primarily for personal, family or household use of such person or a dependent of such person.
  • Ten hogs held primarily for personal, family or household use of such person or a dependent of such person.
  • Twenty head of sheep held primarily for personal, family or household use of such person or a dependent of such person.
  • All provisions and forage on hand, or growing for home consumption, and for the use of exempt stock for one (1) year.
  • 75 percent of all current wages or earnings for personal or professional services earned during the last 90 days.
  • Such person's right to receive alimony, support, separate maintenance or child support payments to the extent reasonably necessary for the support of such person and any dependent of such person
  • Any interest in a retirement plan or arrangement qualified for tax exemption purposes under present or future Acts of Congress.
  • Such person's interest in a claim for personal bodily injury, death or a worker's compensation claim, for a net amount not in excess of $50,000.
  • All right, title and interest, including cash value, in and to any life insurance or annuity policy.
  • Any interest in an Oklahoma College Savings Plan account.

Essentially, those items necessary for living are exempt. However, the following items are NOT exempt (unless they are part of a qualified retirement plan):

  • Parcels of real property other than your personal residence
  • Stocks
  • Bonds
  • Savings accounts
  • Boats
  • Collectibles
  • Mutual funds
  • Vehicles in excess of $7,500
  • Patents and trademarks
  • General partnership interests

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.

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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 five 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 five 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.

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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!

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