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Estate Planning Basics

This estate planning information is designed to help answer basic questions you may have about estates and estate planning. Questions frequently asked by our clients are set out below along with our answers. Hopefully, you will find the answers to questions asked by others to be an effective introduction to estate planning.

 

What happens if I die without a will?

If you fail to plan your estate and die without a will, the law will create a plan for you. The entire system, which is set forth by statute, is too complex for a discussion here, but some surprising and frequently undesirable results can occur. The law sets out the people to whom your property will pass and the division of your estate among those people. The distributions provided by law are inflexible and may not satisfy your desires. In addition, the amount to be distributed to your children will require a cumbersome and costly legal conservatorship if the children are minors at the time of your death.

The problems of dying without a will are aggravated if a married couple owns a family business. If one spouse dies without a will, the ownership interest of the deceased spouse will pass one-half to the surviving spouse and one-half to the deceased spouse's children. A legal conservatorship will be required to manage the portion of the business interest that passes to any minor children. The surviving spouse will have the conservatorship for the minor children as a “partner” in the family business. Under the requirements of a conservatorship, the surviving spouse may have to post a bond and make a detailed periodic accounting to a court for all business transactions.

If you die without a will and are survived by your spouse and no children, not all of your estate will pass to your surviving spouse. Part of your estate will pass to your parents. Again, such a division of your property may not accurately reflect your wishes.

If you die and are survived by your children only, leaving no surviving spouse, your entire estate will pass to your children. If they are minors, a conservatorship will be necessary to manage their property.

 

What is a personal representative?

Your personal representative is the person who will serve as the primary representative of your estate. You may be more familiar with the terms “executor” or “administrator” for this individual.

 

What is “administration” of my estate?

Administration of an estate involves the collection of assets, payment of liabilities and distribution of assets to the beneficiaries or heirs. Generally, administration involves filing a probate proceeding in the appropriate court and the appointment of a personal representative. An inventory is filed with the court, notice is given to creditors of the estate, heirs and other designated persons, and tax returns are prepared. After approval by the court, the assets of the estate are then paid or delivered to the heirs who are supposed to receive them.

There is an economical and time-saving alternative for settling estates with assets of less than $140,000. Instead of filing a probate proceeding, an affidavit can be filed with the probate clerk. This affidavit procedure can be used for small estates and in instances where a living trust was created but there was property outside of the trust at the time of death.

 

What is a trustee?

A trustee is a person to whom property is transferred for the benefit of another (the beneficiary). Some people have heard horror stories about trusts. These stories often involve an impoverished widow-beneficiary who cannot extract enough money from the well-funded trust to maintain herself.

Present law, well-drafted trustees’ powers and professional trustees now make this concept of trusts obsolete. A trust can be designed to produce almost any result desired by the client, if the client gives the trustee sufficient funds with which to work. We usually recommend that trustees be given very broad and adaptable powers to provide flexibility for future events. The trustee should be empowered to do what is best for the beneficiary, without being hampered by inappropriate restrictions.

If a trust appears suitable for your estate plan, you will want to carefully select the trustee. The family member who comes to mind as a logical first choice may not want to deal with the management of your assets. If a corporate trustee appears appropriate, we will suggest that you have a conference with the representative of the proposed bank or trust company.

 

Is a handwritten will legally effective?

A handwritten will is generally not valid in Oregon. Even in states that recognize hand written or holographic wills, these wills are a frequent subject of litigation, often because they have been composed by someone with no legal training.

 

Why should my will be more than one page long?

Your will need not be any longer than one page. Indeed, any lawyer should be able to turn out an abbreviated will for a relatively small fee.

The problem, however, is that such a will may not accomplish your objectives for your beneficiaries. We prefer to draft wills to cover the various factual and legal situations that reasonably may be expected to arise. The alternative is to hope that, by coincidence, the will may fit the facts at your death.

You may therefore be presented with a lengthy instrument. This “burden” to you may be a possible blessing to your family when they later find that you have anticipated what might have been cumbersome problems.

 

What is community property?

Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin are community property states. These states use marital property law schemes that differ markedly from Oregon and the other states that use the common law scheme. Under the community property system, marital property generally is deemed to be owned one-half by each spouse, regardless of the legal title to the property. In common law jurisdictions in the past, legal title generally controlled the ownership interests.

In community property states, marital property takes its character from the manner and time of acquisition. If you ever lived in a community property jurisdiction while married, we will perform a special review of your estate plan to account for the community property consequences.

 

How will my estate be taxed at my death?

Your estate may be subject to at least two taxes, the federal estate tax and a state inheritance tax. This discussion will be confined to the federal estate tax.

The federal estate tax is calculated on your “taxable estate.” The taxable estate is the excess of your “gross estate” over allowable deductions. The gross estate is based on the fair market value of your property at the time of your death. At the option of your executor, an alternate valuation date of six months from the date of your death can be used.

Your gross estate will include the value of all property in which you own an interest at the time of your death. Additionally, your gross estate may include property that you do not own, but over which you retained or received certain rights or powers.

The estate tax scheme provides you with a “marital deduction” for bequests of property to your surviving spouse. The marital deduction in effect allows inter-spousal transfers to pass tax-free and defers payment of estate taxes on the property transferred until the death of the surviving spouse. In order to qualify for the marital deduction, property must be transferred to the surviving spouse in a fashion that satisfies the technical requirements of the Internal Revenue Code, such as an outright transfer or in certain types of trusts. There are special rules where the surviving spouse is not a U.S. citizen. It is important that you let us know if either spouse is not a U.S. citizen.

The federal estate tax and the federal gift tax have been combined into one progressive set of rates. The rates increase with each taxable gift and with the value of the estate.

The “unified credit” against the gift or estate tax permits the tax-free transfer of prescribed amounts of property. It is called a unified credit because the amount of the credit is the same for both gift and estate taxes and any credit used during a person's lifetime against gift taxes will reduce the credit against the subsequent estate tax. The unified credit tax-free transfer amount (currently $5 million but reverting to $600,000 on January 1, 2013) is exempt from estate and gift tax.

 

What is the Generation- Skipping Transfer Tax?

The generation-skipping transfer tax is a federal transfer tax that is separate from the gift and estate taxes. Generally it applies to a transfer of property to a grandchild (the transfer skips the child's generation). It also applies to a transfer in trust for a child’s lifetime with the property being distributed to grandchildren upon the child’s death.

There are exemptions from the generation-skipping transfer tax. Each person may transfer up to $1,000,000 without the tax being imposed. With proper planning, a couple may transfer up to $2,000,000 before this tax is imposed. If the tax is imposed, then the transfer is taxed at the highest estate tax rate (55% at present).

 

What property will not pass under my will?

Proceeds from life insurance policies and retirement benefits will pass in accordance with the beneficiary designations. In addition, property held in certain joint tenancies with right of survivorship (e.g., joint bank or brokerage accounts with right of survivorship) will pass to the surviving account holder. Therefore, you should review the beneficiary designations and account agreements to be sure they are coordinated with your will.

 

Who will raise my minor children after my death?

The other parent, but if the other parent is not living, this becomes a selection you can make in your will. If you fail to do so, the court will make the choice for you. Needless to say, you should assume the responsibility for this important decision and not leave it up to a judge.

Clients frequently tell us that they have chosen one of their parents as the “guardian” in the event of both clients’ deaths. A quick mathematical computation may shed light on the advisability of this choice. For example, assume that the client’s youngest child is 3 years old and the client’s parent is 58. When that child is 15 (a time when adult-child communication can be difficult under the best of conditions), the grandparent will be 70.  

Under these circumstances another choice may be better for your child.

You should look first to your contemporaries in your families (such as brothers, sisters or cousins). If none is appropriate, then consider friends with children in the same age range as yours. In any case, you should consult with the proposed guardian to ensure that the person is agreeable to assuming this significant responsibility.

If both parents die, your minor children may be left with substantial property interests that need management and protection. Because the guardian has only limited power over the minor’s property, protective proceedings may be initiated in which a court will appoint a conservator to administer the children’s property and affairs. A court appointed conservatorship can be a cumbersome and expensive manner of dealing with property passing to minors and should be avoided. You can guard against the need for conservators by establishing trusts for minors.

If you have planned your estate properly, the guardian should not experience financial strain in raising your children. The trustee should be encouraged to make generous distributions to assist the guardian -- and even provide the funds to pay for any necessary expansion of the guardian’s home.

 

How often should I review my estate plan?

Estate planning is a process, not an event. As a general rule, we suggest that you contact us every four or five years for a conference to review your estate plan and to update the information in your permanent file. We also recommend that you contact us in the event of a dramatic change in your finances or in your family situation. For example, a substantial increase in your estate (through increased life insurance, inheritance, gifts or successful investments) may create opportunities for tax savings, as well as call for further family financial planning. A divorce will, of course, completely reopen the matter of planning your estate.

Do not hesitate to contact us any time you have a question as to whether changes in tax laws or other laws affect your estate plan. While we sometimes send information to our clients on changes in law, we do not assume the responsibility of doing so.

 

What is a power of attorney?

A power of attorney is an instrument in writing by which one person, as principal, appoints another as their agent and gives the authority to perform certain specified acts or kinds of acts on behalf of the principal. The person holding a power of attorney is known as an “attorney in fact” or “agent.” We have found that many clients want to appoint someone to act for them, particularly in the event of disability.

Generally, a power of attorney terminates on the disability of the principal, but the Uniform Probate Code contains provisions that make a power of attorney more “durable” than under the law of some jurisdictions. This power of attorney is referred to as a “durable” power of attorney. Under these provisions, a written power of attorney may specifically provide that the subsequent disability or incapacity of the principal does not affect the power of the appointed attorney in fact. The Uniform Probate Code also permits a power that will become effective in the future at the time of disability.

Who should be the agent? In view of the authority and discretion conferred by a general power of attorney, the agent must be someone in whom the principal has complete trust and confidence. The agent, however, should not be the same person who determines the principal’s incapacity.

 

What is a Directive to Physicians?

A directive to physicians (also known as a living will) is a document which provides instructions to an attending physician on the use of life sustaining procedures in the event you are unconscious or unable to give directions.

 

What is a Durable Power of Attorney for Health Care?

A durable power of attorney for health care is an instrument in writing by which you, as principal, appoint another as your agent to make health care decisions you are incapable of or are incapable of communicating with your physician.

The durable power of attorney for health care is usually coordinated with the directive to physicians.

 

What is a Declaration of Guardian?

A declaration of guardian is a document in which a competent adult designates a person to serve as guardian of the person or estate of the declarant in the event the declarant becomes incapacitated. In the event of incapacity, the guardian of the person would take charge of the care of the declarant while the guardian of the estate would manage the declarant’s property and financial affairs. Due to these different functions, a declarant may wish to appoint different persons as guardians of his person and guardian of his estate. However, husbands and wives frequently appoint each other in both capacities.

Because of the widespread use of powers of attorney, we do not see many guardianships for adult persons. However, the need for a guardianship could arise and our clients sometimes prefer to choose whom the court will appoint as guardian.