Estate planning lawyers frequently emphasize the fact that estate planning is something that people of all ages should take seriously. Of course we would all like to live long and healthy lives, and the average lifespan is in fact over 78 years in the United States at the present time. So of course estate planning is going to become more and more relevant as you reach an advanced age, but there are people who pass away before their time.
Catastrophic illnesses sometimes strike, and accidents take the lives of younger people. In fact, younger drivers are more likely to be killed in accidents than older ones for the most part. Being prepared for all eventualities is important, and too many people simply don't take the proper precautions.
We all recently heard the terribly sad news about the death of British singer Amy Winehouse. She enjoyed remarkable success during her relatively brief career, capturing multiple Grammy awards while single-handedly revitalizing the British music scene. Though she appeared to be troubled, her talent was unmistakable and she will surely be missed by her fans and music lovers around the globe.
According to reports that are circulating in the British newspapers, Amy Winehouse did indeed have a solid estate plan in place unlike many other celebrities whose affairs were in disarray after their deaths. The overall value of the Winehouse estate is estimated at approximately $16.4 million, and the heirs to this estate are going to be her parents and her brother.
It was particularly important for her to engage in careful estate planning because she had an ex-spouse named Blake Fielder-Civil who may have been in line to inherit her fortune had the necessary documents not been executed, especially in light of British laws that favor former spouses.
The tragic death of Amy Winehouse underscores the reason why it is important to have a current estate plan in place regardless of your age because you just never know what the future holds.
The prospect of passing away is something that really doesn't cross the minds of people very often until they reach an advanced age. As a result, many individuals do not think that they need an estate plan until they reach their retirement years. It is true that the typical American lives into his or her late 70s, and in fact more and more people are living into their mid-80s and beyond. However, just because the majority of people live to see their senior years does not mean that everyone does. If you were to pass away before your time without having an estate plan in place you would probably be putting your family members in a very difficult position.
One thing to remember is the fact that the modern estate plan includes an incapacity component. If you were to become incapacitated and unable to communicate your decisions in real time with regard to things like being kept alive via the use of artificial life support systems if you were in a terminal condition, your next of kin would be faced with this decision.
This is clearly something that could be emotionally excruciating without knowing what you would do if you were capable of making your own choices. Family members could also disagree about the correct course of action, making an already devastating situation that much worse. If you simply take the time to create an estate plan that includes the appropriate advance health care directives you leave nothing to chance and record your wishes in a legally binding fashion.
People of all ages are victimized by accidents that render them incapacitated, and the fact is that younger people are more frequently involved in accidents than those who are older. Estate planning is not only about transferring assets, and it is not only for senior citizens. If you are a self-supporting adult in your own right you really should have an estate plan in place that includes advance health care directives for your own sake and for that of your loved ones.
Though there are estates that will require some complex plans, the majority of people are going to have to concern themselves with two major issues. The first one is very obvious: you must execute a vehicle or vehicles of asset transfer. The most common way to leave your property to your loved ones is through the utilization of a last will.
Though the last will is the most widely used vehicle of asset transfer, it is not always the best one. When you use a last will your estate must pass through the process of probate, which can be lengthy, expensive, and public. Many people choose to avoid probate for these reasons, and the most common way of doing so is through the creation of a revocable living trust.
With these trusts you appoint a trustee, which can sometimes be a bank or trust company, who will administer distributions to your beneficiaries after your death in accordance with your wishes. These asset transfers take place outside the process of probate, and the creation of the trust provides some asset protection for your beneficiaries as well.
In addition to facilitating the transfer of assets, the fundamental estate plan will also include an incapacity planning component. You can protect yourself through the execution of a durable financial power of attorney and a durable power of attorney for health care. With these documents you empower representatives of your choosing to make decisions on your behalf should you become unable to do so due to incapacitation.
These are a couple of the basics, but in the end the best way to truly demystify the process of estate planning is to consult with an experienced estate planning attorney. This type of communication is invaluable, and you will invariably feel a weight lifted off your shoulders when you exit your attorney's office with a solid estate planning strategy having been decided upon.
When you are planning your estate it is likely that you have multiple objectives in mind, and if you're like most people making sure that your loved ones are provided for is at the top of that list. To make sure that your family members get everything that you would like to leave them without allowing a significant portion of their inheritances to go to the IRS you sometimes have to take steps to gain estate tax efficiency. At the present time the estate tax exclusion is $5 million, but if no changes are made in the meantime it is going down to just $1 million at the end of 2012, and this is something to keep abreast of during the upcoming election season.
In addition to protecting your assets from erosion as you pass them along to your loved ones you may also feel the desire to make charitable giving a part of your legacy. There are a number of charitable giving vehicles that people utilize when they are planning their estates, and one of them that provides multiple benefits is the charitable remainder unitrust or CRUT.
These vehicles provide an ongoing source of income to the non-charitable beneficiary during the term of the trust, and then when the term expires or the grantor passes away the charitable beneficiary assumes ownership of the remainder. Most the time the grantor will act as the beneficiary and receive the annuity payments from the trust, which must be at least 5% and no more than 50% of the value of the trust per year. Once the term has concluded or upon the death of the grantor the charitable beneficiary must receive no less than 10% of the original value of the trust.
The creation of the trust removes these assets from your estate for estate tax purposes, and you are also entitled to a charitable deduction that is calculated via valuation of the remainder interest. Additionally, if you were to fund the trust with appreciated securities you could have the trust sell them and your capital gains liability would be spread out rather than being due all at once.
It is logical to assume that passing along assets to your heirs after you die is not something that will cost you a lot of money. Why should it? Of course you have to retain the services of an estate planning attorney to get the correct documents in place, but after that it would seem as though no further costs should be incurred. Unfortunately however, there is indeed a formidable source of asset erosion out there that must be addressed in the form of the federal estate tax.
Who has to pay the estate tax? This is a very good question, and it is not an easy one to answer because the parameters of the estate tax are constantly changing. The dividing line that you need to keep an eye on is the estate tax exclusion. Right now the estate tax exclusion is $5 million, which means that only the portion of your estate that exceeds this amount is subject to the estate tax, which is presently carrying a 35% maximum rate. However, if the laws stay the same as they are right now, in 2013 the estate tax exclusion will be $1 million, and the top rate of the tax will be 55%. In 2008 the exclusion was $2 million; in 2009 it was $3.5 million; and during 2010 it was repealed, so you can see that it is difficult to plan ahead considering the way that the exemption is always changing.
Estate planning attorneys often emphasize the fact that your estate plan is going to have to be updated as your life changes. But in addition to the changes that take place in your own life you have to be ready to react to circumstances that are not under your control, such as alterations to the estate tax laws. The wise course of action is to stay in touch with your estate planning attorney who will keep you apprised of changes that may have an impact on your estate plan.
Making advance plans for the latter portion of your life is always going to be the wise course of action because the reality is that we all get older, we all reach retirement age, and we all eventually pass away. Unfortunately, many people procrastinate until it is too late to their own detriment and to the detriment of their family members. But even people who are proactive about making advance plans are faced with challenges because life does not stand still. Your estate plan at any given time is going to be based on a snapshot of your life as it was when you devised the plan. As things change, your estate plan must be updated to reflect these changes.
One of the first big events in your life that will impact your estate plan is marriage. Though young single people should have an estate plan in place, many do not, but when you get married an estate plan becomes a must. It is very likely that you and your spouse are living a standard of life that requires two incomes to maintain. Should one of you pass away suddenly in an accident or due to an illness, the other individual could be placed in a very tenuous financial situation. This is why it is so important to have sufficient life insurance coverage in place. Advance health care directives are also important for married couples of all ages.
We live in an era when 4 or 5 out of every ten marriages end in divorce, and when your marriage comes to an end you must revisit your estate plan and make sure that you update your beneficiaries. In addition, should you remarry, you and your new spouse must discuss the dynamics of your blended family and create an estate plan that reflects your current situation.
Estate planning is a lifelong process if you are serious about making sure that all of your bases are covered. This is why it is important to identify an estate planning attorney that you feel comfortable with who will gain an understanding of your situation and assist you as you move forward and experience life's inevitable twists and turns.
Intelligent retirement planning that is given enough time to succeed will usually pay huge dividends. However, the fact is that the future is uncertain and there are no absolute guarantees. Many people thought that they had effective retirement plans in place during the early part of the 21st century, but the financial meltdown of 2008 certainly changed the landscape. Events that are out of the control of the individual such as the sub-prime crisis are difficult to plan for, but the solution is to be flexible, informed, and proactive about doing everything that is within your power to seize control of your own financial destiny.
Being apprised of all of your options is key, and one of these is the reverse mortgage. To qualify for a reverse mortgage you must be at least 62 years of age, own your home outright or have significant equity in it, and you must live in the home as your primary place of residence. The lender under a reverse mortgage provides you payments either in a lump sum, in increments, or on an as-needed basis in a manner similar to a home equity line of credit. In return, the lender receives equity in your home.
While you are living in the residence you are required to keep up with routine maintenance and pay the property taxes, and if you were to fail to do these things the loan could be called. The loan is due and payable upon your death or after you voluntarily choose to move out of the residence. Most of the time the property is sold upon your death and the loan is paid off with proceeds from the sale. If there were a remainder of proceeds after satisfying the debt, it would go to your heirs. However, if the property is worth less than the outstanding loan amount your estate is generally not responsible for the deficiency.
When people debate the fairness of the estate tax the primary argument against it is the fact that it is in and of itself an instance of double taxation. You pay income and payroll taxes, and then you have the remainder which may be as little as 70% of what you actually earned. With this remainder you go forth, and as you do you must pay sales tax, property tax, capital gains tax, and any number of additional taxes. Then when you pass away your estate is taxed yet again, and at an exorbitant rate exceeding one third of the taxable portion.
The above is a pretty convincing argument, isn't it? But it really doesn't stop there. Let's say you leave a bequest to your children that is subject to the estate tax. They are successful in their own right and never touch that money. When they pass away and leave it to your grandchildren the taxable portion is once again going to be shaved down by the death levy, and in fact this can go on and on into future generations until nothing is left but the exempt amount.
This can be avoided, at least in part, through the creation of a generation-skipping trust. With these vehicles you name your children and grandchildren as the beneficiaries. They can receive cash distributions, live in property that has been placed into the trust rent-free, and even direct trust administration in large part through a special power of appointment. Plus, since these assets are not owned by the beneficiaries they are protected from the beneficiaries' potential future divorces and creditors (e.g., lawsuits). Perhaps the greatest benefit, upon the death of your children, and even your grandchildren in states like Nevada, because the assets are owned by the trust and not the beneficiary, they are not once again subject to estate taxes.
The children and grandchildren can receive liberal benefits from the trust, but the assets can be passed down to future generations estate tax free. The generation-skipping transfer tax is applicable, but there is a $5 million exclusion so many people will limit their contribution into the trust to this amount.
The estate tax can be devastating to your legacy, and it is important to take steps to mitigate your exposure for the well-being of your loved ones. At the present time the estate tax exclusion is $5 million but it is scheduled to be reduced to $1 million in 2013 if there are no changes made in the meantime. Believe it or not, the maximum rate of the tax is scheduled to go up to 55% at that time. So for example, if you had a $5 million estate $4 million of it would be subject to a 55% tax. If you do the math that equals $2.2 million. So out of the $5 million that you were able to accumulate throughout your lifetime, your family members would receive $2.8 million and the government would receive $2.2 million.
Of course it is logical to simply give gifts to your loved ones while you are alive in an effort to avoid the estate tax, but there is a gift tax in place as well that is unified with the estate tax. Because of this unification, even though there is a $5 million lifetime gift tax exclusion at this time, it really does you no good because any portion of it that you use to give gifts will be deducted from your available estate tax exemption.
There are however additional exemptions that do not impact this unified exclusion and one of them enables you to pay the college tuition of an unlimited number of students equaling any amount of money free of the gift tax. It should be noted that this exemption does not allow you to pay for living expenses, books and fees. However, there is a $13,000 per person annual exemption that does not impact the lifetime unified exclusion. So you could utilize this to help to cover these costs, and if you are married you and your spouse could combine your respective exemptions and provide your student with as much as $26,000 per year.
The field of estate planning contains many different legal instruments that most people have never heard of, so it can be kind of confusing when you start to do your research. On the other hand, there are some estate planning tools that are commonly used that most people have heard of that exist in some variations. As they say, a little bit of knowledge can sometimes lead to misconceptions, so we would like to clear up the difference between some of the basic terms that are often confused.
Everyone has heard of the last will, which is of course the most commonly used vehicle of asset transfer when a person dies. Many individuals are aware of the fact that there is an alternative to the will that prepares assets for eventual distribution while you are still alive. Since the last will is a vehicle of asset transfer, when some people hear the term "living will" they assume that this must be the way that you prepare assets for distribution while you are alive, but this is not the case.
A living trust is the vehicle of asset transfer that is executed while you are still alive. You can actually serve as both the trustee and the beneficiary while you are living so that you retain full control of the resources. But you name secondary beneficiaries and a successor trustee who will distribute the assets to your beneficiaries upon your death or incapacitation in accordance with your wishes.
The living will, on the other hand, is an advance health care directive. It is used to express your preferences with regard to the medical procedures you would accept and those that that you would prefer to deny in the event of your incapacitation. The matter of being kept alive through the utilization of life support systems is at the core of most living wills.
There are people who view estate planning as something that is separate from retirement planning and the rest of the financial planning that they do throughout their lives. But the fact is that all of this is intimately intertwined, and there is another stage of your life that you should prepare for as well, one that bridges active retirement planning and estate planning.
According to the United States Department of Health and Human Services, 70% of American senior citizens will eventually need some form of long-term care. One of the most alarming trends in the elder law community is the growing cost of long-term care. The national average for a year in an assisted-living facility in 2010 was close to $40,000, and the same period of time in a nursing home averaged over $83,000. Considering the fact that the average nursing home stay is about 2 1/2 years these are some very significant expenses, and most people will need to plan carefully to be able to meet them.
In addition, incapacity planning is something that should be considered. We've all heard of Alzheimer's disease, but many people are surprised when they learn that four out of every ten people who reach the age of 85 are Alzheimer's sufferers. Alzheimer's causes dementia which can strip you of your ability to make sound decisions on your own, and of course the oldest old can experience diminished faculties due to other causes. For this reason, it is a good idea to have powers of attorney in place, empowering attorneys-in-fact to act in your behalf should you become unable to handle your own affairs.
As you can see, retirement planning, estate planning, and making sure that you are prepared for possible eventualities that could take place during your twilight years are all connected. With this in mind, it may be a good idea to arrange for a consultation with an experienced estate planning attorney who will help you put a comprehensive long-term plan in place.
Last year, estate planning attorneys were placed in a difficult position because there was a lot of uncertainty regarding the future of the estate tax parameters. If the laws stayed unchanged as they were throughout most of the year, the estate tax exclusion would have been $1 million and the rate of the tax would have been 55% at the beginning of 2011. Due to provisions contained in the Bush-era tax cuts, the estate tax was repealed for 2010, but in 2009 the rate of the estate tax was 45% and the exclusion was $3.5 million.
Because of the new tax relief legislation that was signed into law by the president on December 17th, we now have a $5 million exclusion and a 35% maximum rate, but this act is set to expire at the end of 2012. As it stands right now, at the beginning of 2013 the rate of the tax will once again go back up to 55% and the exclusion will revert to the $1 million that was in place in 2002.
All this movement has a lot of people scratching their heads and this is one of the reasons why there is so much support for a permanent repeal of the estate tax. But the reality is that some people have already been victimized and treated differently than others over a period of just a few years. Let's look at a very simple example.
Let's say that you live on a block where everyone has a $5 million estate. If your across-the-street neighbor died in 2007 or 2008 when the estate tax exclusion was $2 million and the rate was 45%, his family would have had to pay the IRS $1.35 million. If your next-door neighbor died in 2009 when the exclusion was $3.5 million with that same amount of money, her heirs would have to pay $675,000. Now if your neighbor on the other side died this year, her $5 million estate wouldn't be taxed at all.
These are hundreds of thousands and even millions of dollars we're talking about that could make an enormous difference in the lives of your family members going forward into future generations. Even the most staunch pro-tax advocate would have to admit that there's something fundamentally wrong with the inconsistencies highlighted above.
Before we take a look at a couple of simple probate avoidance tools, let's examine the reasons why people avoid probate in the first place. For one thing, probate can be quite time-consuming. Depending on the complexity of the estate and whether or not the will is being challenged it can take anywhere from 6-9 months to even multiple years in complicated cases. In addition to the time involved, probate can be expensive, consuming up to 5% of your estate, in addition to extraordinary costs, again depending on the complexity of the matter and the size and scope of your assets.
So if you want to save time and money you may want to arrange for the transfer of assets outside of probate. One way to do this is through the creation of pay on death accounts. You simply open the account at a bank or financial institution of your choosing and name a beneficiary. Should you pass away, your beneficiary would assume ownership of the funds in the account, and this transfer would take place outside of probate. It's as simple as that.
In some states, including Nevada, you can execute a deed conveying your real proeprty to a beneficiary upon your death. Even though the deed is recorded while your are alive the conveyance does not occur until after your death.
Another way to transfer assets to your loved ones outside of probate is to give tax-free gifts. You can give up to $13,000 to an unlimited number of recipients each year free of the gift tax, in essence giving loved ones a part of their inheritance while you are still alive and before probate would be a factor. Other tax free gifts can be made.
And finally, purchasing life insurance is also a very simple but effective and efficient way to provide inheritances to your family members outside of the process of probate.
These ideas are something to keep in mind as you are contemplating your legacy. But in the end, the best way to implement a comprehensive probate avoidance strategy is with the assistance of an experienced estate planning attorney who will recommend the ideal combination of estate planning tools given the unique nature of your situation.
Intelligent planning sometimes involves the necessity to work backwards, identifying your long-term goals and then acting appropriately as you walk the path toward achieving them. When it comes to estate planning there are a couple approaches that you can take. Most of us have seen a car passing by us at some point in our lives with a bumper sticker saying something about how the driver is spending the children's inheritance. This is a statement that defines the approach that some people take to their legacies. They intend to spend as much as they can as long as they can make it through their own lives with no particular concern about what may be left over for their children and the rest of their families.
On the other hand, some people take an entirely different approach. As you get into your twilight years and the reality of the end of your life comes into more clear focus you may get that moment of clarity when you truly come face-to-face with your own mortality. Many people who are in this situation find that their own passing is something that they can readily accept, but what is difficult to get past is the reality that they will no longer be able to help their family members should need arise once they pass away. This realization can add a dimension to one's view of estate planning because your legacy is going to be your final opportunity to provide for those you love.
How you choose to approach inheritance planning is a personal matter and no one can say with certainty what is right and what is wrong for the next person. One thing that is certain in all cases is that the best way to optimize your resources and achieve your goals regardless of what they may be is with the assistance of an experienced and dedicated Nevada estate planning attorney.
The subprime crisis and financial meltdown certainly has taken its toll on the real estate market, and most areas of the country have made slow strides to recover. But the fact remains that home ownership has traditionally been the foundational instrument of wealth building in the United States and most Americans would likely still tell you that their homes are their most valuable asset.
When the market is healthy and appreciation is robust it can certainly make sense to invest a large percentage of your income into your residence. So when you're inventorying your assets as you prepare your estate plan you may find that it is the value of your home that pushes your overall worth above the estate tax exclusion of $5 million.
If the value of your home is making your estate vulnerable to the 35% federal death levy one option that is available to you is the creation of a qualified personal residence trust or QPRT. With these trusts you name your beneficiary, appoint a trustee, and fund the trust with the residence. By doing so you remove the value of your home from your estate for estate tax purposes, but it is considered to be a gift into the trust and it is taxable as such.
However, the trust states a term during which you will continue to reside in the house. By so doing you retain an interest in the home, so the taxable value of the gift is reduced by the amount of your retained interest. When the retained income period ends ownership of the residence will be transferred to the beneficiaries designated in the trust and this asset will no longer be subject to an estate tax in your estate.
As we all know politics has everything to do with spin. This is true not only during election cycles but it is also true once legislative processes have begun. We were led to believe that the changes to the estate tax that came out of the new tax act at the end of 2010 represent a positive example of true tax relief, and there is some truth in this. We now have an exemption from estate taxes of $5 million and a tax rate of 35%, which is the lowest rate in recent memory. The real question is whether there ought to be permanent repeal of the estate tax.
Why should the estate tax be repealed? There are a number of very compelling reasons and any one of them would be enough to provide logical support for a repeal.
The death tax is an instance of double, triple or more taxation. The tax brings is a very small portion of the revenue to the federal government and it is expensive to collect and enforce. It tends to break up family owned businesses and keep them from continuing because they have to be liquidated or take on substantial debt to pay the excessive tax.
Left in the hands of the family members who are anxious to see the business continue and grow, the economy will see added employment, and growth in the revenue to the government in the form of income taxes. Wealth that is inherited is invested, again allowing for growth and capital gains taxes.
There is some good news to report for those who agree that enough is enough when it comes to taxation. During the current legislative session no less than five bills (H.R. 86, H.R. 99, H.R.143, H.R. 177, and H.R. 123) have been introduced to the United States House of Representatives calling for a repeal of the estate tax. This is a positive development for anyone who is in favor of paying their fair share of taxes, but encouraging sustained growth at the same time.
We tend to draw dividing lines in our culture regarding the things that are relevant during particular segments of our lives. Sometimes this makes sense and sometimes it doesn't, but when it comes to estate planning this propensity can lead to some very risky business. To put it bluntly, passing away is something that is generally attached to advanced age, but the fact is that people don't always die due to natural causes when they're in their late 70s, 80s or 90s.
When you are engaged in the active stages of your professional career you may well feel healthy and full of life, and this is fantastic but it can lead to procrastination when it comes to planning your estate. Successful people who make a practice of covering all their bases don't just mindlessly ignore the need to plan for the future. They just put it off for any number of reasons.
One of these is the fact that things are always changing in your life and ironically these changes can at first make you think about taking action with regard to your estate. These events are things like the marriages of your children and the birth of grandchildren. Your first thought may be to stop procrastinating and create an estate plan, but on second thought you may then anticipate future changes just over the horizon and decide to wait until things "settle down" before you make an appointment with an estate planning attorney.
Regardless of your age or your reasoning, the fact is that when you go through life without an estate plan you are putting your family at risk. Conduct a thought experiment and consider the situation that your family would be in if you were to pass away in a car accident on the way home from work. Simply put, if you're not comfortable with that picture, make an appointment with an experienced estate planning lawyer sooner rather than later.
There's an old saying that goes something to the effect of "youth is wasted on the young." This may sound like the musings of some bitter old curmudgeon but there's a kernel of truth in it. When we are young we may squander certain opportunities that we may not recognize at the time. When we get older we may have moments of clarity when we recognize that we would be in a better position if we had done things differently early on.
There are those who recognize the need to make long-term plans at a young age, and these are the people who generally enjoy comfortable retirements and subsequently find themselves more prepared for the eventualities of aging. If you start considering your retirement on the first day you embark on your career you may be a couple of decades ahead of most people. Aside from the fact that you will be better prepared to retire at the typical retirement age, you may well be able to call all of your time your own at a much sooner time.
Aiming high and keeping your eye on the prize is key, but the fact is that it takes intelligent long-term planning to simply be prepared for the basic expenses that you will be facing after retirement. People are routinely living into their late 80s and beyond these days. If you want to be successful and make the most of your retirement years, the sooner you get started the more time you'll have to accumulate assets, situate them properly, and ultimately reach your financial objectives.
