Your estate is the total of all assets that you own or control, including any debts that are owed to you, minus your debts to others. At the time of your death, your estate becomes a separate legal entity in your place. The estate holds all of the assets and debts you had while alive, and it may enter into transactions and contracts with those assets and debts much the same as you could do while living. Your probate estate is that part of your estate that is owned in your name and requires probate in order to transfer ownership to your heirs (who are the beneficiaries named by state statute if you do not have a Will) or devisees (who are the beneficiaries named in your Last Will and Testament).
The documents you sign during your lifetime can help in the management and distribution of your estate after your death. There are two basic approaches: a “will-centered plan” or a “trust-centered plan.” The most important document in each of these approaches is the foundation document, which will be either a Last Will and Testament or a Revocable Living Trust. The choice of approaches depends upon your particular situation. Our plans also include a Georgia Financial Power of Attorney, which authorizes other persons to manage and control your property during your lifetime, and a Georgia Advance Directive for Health Care, which allows you to nominate someone who can make health-care decisions for you when you are unable to do so (as well as give advance instructions to your health-care agent regarding treatments that you may wish to receive, or not receive, in certain health circumstances).
Probate is a process of proving the validity of a Last Will and Testament, ensuring that all creditors of the estate are paid, and transferring ownership of the assets to the heirs or devisees of a deceased person. Under Georgia law, this is done by the probate court. The probate court appoints the personal representative of your estate or issues “letters testamentary” to the person you have nominated. This is the person who is responsible for the proper administration of your estate through the probate process.
The probate court will admit your Last Will and Testament to probate and determine any disputes over its validity if it is challenged by an heir or creditor. The court will also determine the validity of any claims made against your estate by creditors and require the personal representative to submit proof that any taxes that may be owed have been paid.
What assets must be probated? Only those assets that were owned by the deceased owner at the date of death. Assets that the deceased person held jointly with his or her spouse (or anyone else) and assets that are owned by a trust that the deceased person established prior to his or her death do not require probate. Likewise, life insurance, IRA’s and other benefit plans that name a beneficiary who is to be paid the benefits upon your death do not generally require probate. Note, however, that such assets may still be subject to estate taxes within your estate.
YOUR LAST WILL AND TESTAMENT
Your Last Will and Testament (if validly created) governs much of what occurs in the probate process. Your Will tells the probate court who is to manage your estate (the personal representative) and who is to receive your property after payment of legitimate debts and taxes. If you do not have a valid Will, the court will require that your probate property be distributed to your heirs, who are the persons entitled under state law to receive your property. Needless to say, these persons may not be the persons you would have chosen to receive your property (or your choice of distribution percentages may have been different). Under such a distribution plan, part of your estate will go to your children even if you are survived by your spouse. Such outcomes are contrary to the wishes of most people, who would, in fact, prefer that their spouse receive the entire estate, and then pass the assets on to their children after the surviving spouse’s death.
In order to have a valid Will, you must be at least 14 years of age and be mentally competent. A Will normally must be in writing and signed in the presence of two witnesses.
Note that a Will does not avoid probate. It guarantees that there will be a probate. This fact is a surprise to many persons. In reality, the Will is a document used in the probate process to determine who is to receive your probate property. A Will does not control who receives the death benefits of your life insurance, IRA’s, or other retirement plans, nor does it control the ownership of joint property or the distribution of property from a trust. Such property goes directly to the beneficiaries named in the insurance policy, IRA, retirement plan, or trust and, therefore, does not have to go through the probate process.
If you are the parent of minor children, the Will is a document in which you can express your wishes regarding the person(s) who should be appointed as the guardian(s) of your minor children in the event of your death(s). If you do not have a Will, there is no guarantee that the probate court will appoint the person who you believe would be the best guardian for your children.
A trust is a kind of contract between the grantor of the trust and the trustee of the trust. It requires the trustee to manage the property of the trust and distribute the income and principal of the trust to beneficiaries named in the trust. The trust is a separate legal entity that can own, manage, and distribute property, and pay its debts, much like the grantor can do with property held in his name, alone.
The trust is generally designed to operate for a longer time than a Will and can either be written as part of a Will or as a totally separate document. The term “revocable living trust” usually refers to a trust that is created during the lifetime of the grantor and can be thereafter amended or revoked by the grantor. A testamentary trust, on the other hand, is a trust that is created after the death of the grantor under the terms of the grantor’s Will.
As a general matter, Living Trusts are easy to set-up and require little on-going maintenance other than attention to the titling of assets purchased after the date that the trust is established. Living Trusts can afford an extra measure of protection against loss of control, and can help to shield your assets from the public record even after your death. Be advised, however, that a Living Trust does not provide protection against your own creditors or divorce, and does not reduce estate taxes for estates over $5 million in value ($10 million in value, if you are married and plan properly with by-pass trusts, as described below). Please note that these thresholds are likely to change year-to-year.
FLEXIBILITY AND PRIVACY OF A TRUST: A trust can be as simple or complex as circumstances may require. As the grantor, you can determine most of the terms and provisions of your trust. The most commonly used trusts are revocable, which means that the trust can be changed by the grantor at any time prior to death (after death, the revocable trust becomes irrevocable). For some people, one of the greatest advantages of a trust is that it is a private document setting forth the terms of disposition of assets, not open to public inspection, that does not require judicial scrutiny like a Will.
Trusts need not be filed with the probate court after the death of the grantor, and probate court supervision of the trust is, likewise, not required. For example, after the death of the legendary news anchorman, Walter Cronkite, articles were written describing in great detail the terms and disposition of his estate, because Mr. Cronkite had a Will that was required to be filed for probate. Mr. Cronkite’s Will, therefore, became a public document that was available for review by anyone who might be interested in seeing it for any number of purposes.
On the other hand, after the death of the legendary “King of Pop” Michael Jackson, we discovered that Mr. Jackson chose to set forth the terms regarding the disposition of his assets in the Michael Jackson Family Trust (under Amended and Restated Declaration of Trust executed on March 22, 2002) that was not made public. Mr. Jackson’s Last Will was required to be filed for probate, but the document was a “Pour-Over Will” (described further below) that directed all other assets (not previously titled in the name of his Family Trust) be transferred to the Family Trust for disposition, and set forth Mr. Jackson’s wishes regarding the care and appointment of guardians for his minor children. In this way, a trust-centered estate plan can help to keep private your wishes regarding the disposition of your estate.
NAMING THE TRUSTEE: During the lifetime of the grantor, the grantor may serve as the trustee of his own trust, and also be named as a “lifetime beneficiary” to benefit from the use of the trust assets. For married couples, the spouses usually serve as co-trustees. This is perfectly legal and avoids the necessity of involving another person or entity in transactions involving the trust property while the grantor is alive and capable of managing the trust assets.
When the grantor is also the trustee, however, the grantor should name successor trustees who can take over management of the assets upon the death or disability of the grantor. If the grantor/trustee is no longer capable of managing his or her personal and financial matters, the trust would usually provide a mechanism by which the assets in the trust are to be managed by the successor trustee(s). This determination would be made by a “medical committee” selected and appointed by the grantor/trustee in the terms of the typical revocable living trust.
AVOIDING PROBATE: Trusts avoid probate of the property held by the trust. Only property held in the name of the deceased person at the date of death requires probate. Accordingly, many persons transfer ownership of most of their property to a trust in order to avoid probate of such property upon their deaths. This technique may avoid multiple probates in different states (if the estate includes real estate located in more than one state).
Revocable living trusts are especially useful for avoiding the ancillary probate of real estate owned in another state (if you own real estate in a state other than the state of your residence at your death, probate of those assets may be required in each other state). After the death of the grantor, the trust property (including real estate located in any number of states that has been titled in the name of the trust) is distributed to the beneficiaries as required by the terms of the trust.
PROTECTING MINORS AND DISABLED BENEFICIARIES: As a general rule, all parents of minor children should have a trust receive their property upon their deaths and manage and protect such property for the benefit of the children. If you die without a trust, a conservator may have to be appointed by the probate court to manage the property left to the children of the deceased. When the children reach adulthood at the young age of 18 years they are entitled under Georgia law to have full control of the property left by their parents. This is not a desirable result for most families. A trust will allow the parents to determine in advance when their children will take over control of the property in the trust (many parents choose to have a portion of the trust assets distributed to the beneficiaries in tranches at the ages of 21, 25, and 30 as the beneficiaries mature). The trustee would be responsible for managing the assets for the benefit of the children until the terms of the trust direct the assets to be distributed to the beneficiaries.
For persons who have disabled children or other disabled beneficiaries who are entitled to Medicaid and other governmental benefits, the trust can be designed to maximize such benefits and to ensure that governmental benefits are not lost by virtue of an inheritance from a parent or other person. Normally, such trusts must contain a provision that requires repayment of any Medicaid benefits after the death of the disabled beneficiary. The advantage of such a trust, of course, is that the property in the trust will not make the disabled beneficiary ineligible for Medicaid during his or her lifetime. In order to be effective, such trusts must comply strictly with complex regulations applicable to the Medicaid program.
TAX REDUCTION AND ELIMINATION: Many trusts are designed with features that help to reduce or eliminate federal estate taxes. Fortunately for most people, the federal estate tax is not imposed on property left to the deceased person’s surviving spouse and only affects that portion of the estate exceeding $5,000,000 in value. The “unlimited marital deduction” permits any citizen to transfer an unlimited amount of assets to their surviving spouse without the imposition of federal estate or gift taxes. Nevertheless, in some circumstances a married couple may increase the amount of federal estate taxes imposed upon the total marital estate after the death of the surviving spouse unless proper planning is implemented.
This result occurs because of the so‑called “unified credit” available to each citizen, both husband and wife. The unified credit is applied as a credit against federal estate taxes so that each spouse can pass $5,000,000 worth of property (the credit exemption for 2011) to the next generation free of federal estate taxes. But it is a “use it or lose it” proposition. If the first spouse to die fails to implement proper planning to use his or her unified credit, and instead transfers all of their assets to their surviving spouse utilizing the unlimited marital deduction, the credit will be lost (if not previously used by gifting assets during their lifetime). That portion of your estate that is larger than the credit exemption will be subject to federal estate taxes.
The estate tax not only affects tangible property going through probate, but also insurance benefits, IRA’s and other survivor’s benefits that may not. Jointly owned property is also subject to federal estate taxes. With some exceptions, trust property will also be subject to federal estate taxes.
The applicable tax rates are extremely high, ranging from 35% to as high as 55% over the next several years!
As mentioned above, the marital deduction allows an unlimited amount of property to pass to a surviving spouse free from federal estate taxes. The effect of this deduction is to defer any estate taxes until the death of the surviving spouse (there is no similar deduction for property left to children or other beneficiaries of your estate).
For persons whose estates exceed $5,000,000, there are various trusts that can limit or eliminate the imposition of the federal estate tax. Perhaps the most common is the credit shelter trust (sometimes called the “bypass trust” or “marital deduction trust”) under which the credit exemption ($5,000,000 in 2011) from the estate of the first spouse to die is placed in a trust from which all income is payable to the surviving spouse (and the principal of the trust, called the “corpus,” may be used for the health, education, maintenance and support of the surviving spouse, but the surviving spouse does not have otherwise unrestricted access to these funds). The remainder of the estate of the first spouse to die may be left directly to the surviving spouse and be free from federal estate taxes because of the marital deduction. Because the use of principal for the benefit of the surviving spouse is restricted, the property in the credit shelter trust is not subject to federal estate taxes upon the death of the surviving spouse.
The end result is that the children of the grantors may receive $10 Million of assets free from federal estate taxes, instead of being limited to the $5,000,000 credit exemption from the estate of the last parent to die. The $10 Million that the children receive tax-free results from the $5,000,000 in the credit shelter trust of the first parent to die, combined with the $5,000,000 credit exemption from the estate of the second parent to die.
The trusts described above can often be rather complicated because of the necessity of complying carefully with applicable tax laws and regulations. If drafted properly, however, such trusts can enable your loved ones (rather than the government) to receive a larger share of your hard-earned property. Because such trusts are somewhat complex, they must be drafted by an attorney who has specialized knowledge in this area of the law.
GIFTS TO CHARITY: Trusts are often utilized for the purpose of providing gifts to selected charities, often in combination with gifts to children and other beneficiaries. Charitable trusts, by their nature, take advantage of the charitable deduction allowed under the federal and state estate tax laws and are irrevocable. Usually trusts providing specific estate tax advantages must be irrevocable to be effective (such as life insurance trusts, charitable remainder trusts and credit shelter trusts).
Charitable trusts are especially advantageous for individuals who have highly-appreciated assets from which they derive little current income and who will, absent proper planning, have an estate tax problem. Of course, gifts to charity can be an important part of any estate plan, even if tax reduction or elimination is not a stated objective.
As noted above, a trust is a common method of avoiding probate. There are, however, other things that you can do to avoid the probate of your property after your death.
GIFTS: Any property that you give away prior to your death will not be owned by your estate at the time of your death and will, therefore, avoid probate. Nevertheless, it must be clear that full ownership of the property has been transferred to the donee. Written evidence of the transfer of ownership is usually a good idea and may be required for certain types of transfers.
Unfortunately, even if the gift avoids probate, it may not avoid the imposition of estate tax (the gift tax and the estate tax are basically the same tax with one affecting property given away during your lifetime and the other affecting property transferred after your death). The gift tax laws allow you to give away $13,000 to each donee every calendar year without imposition of federal gift taxes. You and your spouse can combine your annual exclusions to give $26,000 to each donee. If you exceed this annual exclusion you will be required to file a gift tax return with the Internal Revenue Service. In some cases, there are good reasons for persons to exceed the annual exclusion but such proposals should be discussed carefully with your attorney and other tax advisors.
Gifts to minor children are often made under the Uniform Gifts to Minors Act (“UGMA“), a law adopted by most states in which a custodian controls the funds in the account until the minor reaches the age of majority (18 under Georgia law). In other cases, gifts may be made to certain types of “minors trusts” that may allow principal distribution to the minor at a later age. Such trusts are irrevocable and normally do not allow the grantor to retain any control over the property in the trust. In addition to the possible advantage of removing the transferred property from the estate of the parent/grantor (and, thereby avoiding estate tax upon the death of the parent/grantor), the parent/grantor may also avoid income tax on the income earned by the UGMA account or minors trust. Despite the apparent tax advantages, parents must carefully consider the pros and cons of making irrevocable transfers of their property to their children.
If, after giving away some or all of your property, you apply for Medicaid benefits for nursing home care or similar needs, there are also complicated regulations that determine whether the property you gave as a gift will still be counted as one of your resources (and make you ineligible for Medicaid). Under current regulations, any property given away within 36 months of your application for Medicaid benefits will still be counted to some extent as part of your resources. If the gift was made more than 36 months prior to the Medicaid application, such property will normally not be counted against you.
JOINTLY OWNED PROPERTY: Jointly owned property belongs to the surviving joint owner upon the death of the other joint owner. Accordingly, jointly owned property does not require probate upon your death. Especially in the case of a husband and wife, joint ownership of assets is a common way of avoiding probate. There are, however, disadvantages to using joint ownership (including adverse tax consequences), and so it should not be used as a substitute for the benefits provided by a carefully drafted Will or trust.
One disadvantage of joint ownership of real estate is that all of the joint owners must sign off on any sale or transfer of the property. For parents wishing to make their adult children joint owners of their home or other real estate, the potential problem of placing such control in the hands of the children should be considered. Moreover, the joint property would also be subject to claims against the children, including claims in a divorce or claims of their creditors. Transferring ownership of the property to the parents’ trust may be a much better solution.
LIFE ESTATES: Many elderly persons wish to deed their real estate to their children while reserving a life estate in the property. The life estate terminates upon the death of the deceased parent, and thus, the real estate does not require probate. As in the case of jointly owned property, however, the real estate cannot be sold or transferred unless the children sign off their remainder interest in the property. A life estate will also be subject to estate taxes.
YOUR FINANCIAL POWER OF ATTORNEY
A financial power of attorney is a document that you create to authorize someone else to act on your behalf when you are either unable to do so or cannot otherwise be present. Most people sign what is commonly called a “financial power of attorney” (previously referred to as a Durable Power of Attorney), which means that it is intended to continue in full force and effect even after the grantor of the power becomes disabled and incapable of acting on his or her own behalf. The grantor may elect to have the power of attorney become effective immediately or only at such time as the grantor becomes disabled. In either event, a financial power of attorney must be signed when the grantor is competent and able to understand the legal effect of this important document.
One of the advantages of a financial power of attorney is that it may avoid the necessity of having a court appoint a conservator to handle the business and financial affairs of a physically or mentally incompetent person (we use the word “may” because some banks and title companies, because of liability issues, may not accept the financial power of attorney unless it was signed on their form with certain formalities that they may require to assure its validity). The appointment of a conservator will generally result in expense and red tape that can be avoided with the financial power of attorney.
A revocable living trust, discussed above, can also provide a mechanism by which the assets in the trust are managed by a successor trustee should the grantor/trustee no longer be capable of managing his or her personal and financial matters. This determination is made by a “medical committee” selected and appointed by the grantor/trustee in the terms of the typical revocable living trust.
Despite its apparent advantages, there is no guarantee that every financial institution, title company or other entity will accept the authority of the financial power of attorney. Sometimes a third party will want the appointee to prove that the grantor of the financial power of attorney is, in fact, unable to appear and act on his or her own behalf. A buyer of real estate may sometimes feel a bit nervous about accepting a deed signed only by an appointee under a financial power of attorney. For this reason, a revocable living trust containing medical committee provisions can be an effective alternative to managing this concern for real estate. Notwithstanding these concerns, the execution of a financial power of attorney is generally a necessary part of a complete estate plan, because there may be certain assets (such as IRA’s, 401k’s and other qualified plan assets) that will not typically be transferred to your revocable living trust.
YOUR “ADVANCE DIRECTIVE” (Formerly “Living Will”)
The Georgia Legislature has authorized a form of Advance Directive for Health Care pursuant to which you can make your wishes known concerning health-care issues. The new form of Advance Directive combines features of two documents previously known as a Living Will and a Durable Power of Attorney for Health Care. The Advance Directive incorporates the features of a Living Will so that you can set forth in writing your wishes regarding the use of artificial life support and other medical treatment in the event of a terminal illness or state of permanent unconsciousness. For the majority of people, this means a document that states that artificial life support is not to be used to prolong the person’s life if he or she is terminally ill and the quality of life will not be enhanced by artificially prolonging life.
Georgia law also provides for the Advance Directive to replace a document called a “Durable Power of Attorney for Health Care.” By incorporating the features of the Durable Power of Attorney for Health Care, the Advance Directive names a person who has the authority to make decisions regarding the grantor’s medical care in the event that the grantor becomes incapacitated and unable to make such decisions on his or her own behalf. In the case of married couples, the spouse is normally named as the agent or attorney-in-fact.
In the past, lawsuits have been filed in which family members have fought over the use of artificial life support for a loved one in a “persistent vegetative state” (the Terry Schiavo case in Florida being the most noteworthy case in a number of years, causing lawmakers in many states to reconsider this incredibly emotional issue). During an incredibly emotional and difficult time for a family (dealing with the terminal illness of a loved one), it can be comforting for your family and your physician to know that you have made a clear choice regarding the use of expensive extraordinary measures to prolong your life in the event of a terminal illness. We recommend that you discuss these documents with your family and let them know that they reflect your wishes. In many respects, these documents represent an act of kindness and concern for your loved ones who may otherwise have the burden of making a difficult and emotional decision in the event of a terminal illness.
We hope this summary will help you evaluate some of the options and alternatives you should consider in preparing an effective and meaningful estate plan. Many of the matters covered briefly above are very complex and may require that you be provided with much more information than can be covered reasonably in this document.
If you have questions concerning the information discussed in this summary, please call me at the number listed above. We would appreciate the opportunity to assist you.
Contact us now to discuss your estate planning needs.