| Estate planning frequently asked questions answered by
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What documents should I have for a comprehensive estate plan? What happens to my property if there is no Will? Are there limitations on dispositions by Will? How often should a Will be reviewed? How can I change my will once it has been signed? Can I just give all of my property away before I die to avoid estate taxes? Is every gift subject to a gift tax? How can I limit my estate tax liability? What are the benefits of establishing a Trust? What are the disadvantages of establishing a Trust? What is a Credit Shelter Trust? What is a Marital Deduction Trust? What is an Irrevocable Life Insurance Trust? What is a Durable Power of Attorney? Why do I need a Durable Power of Attorney? When does my Agent acquire the right to act on my behalf? If I give a power of attorney to another, do I give up the right to manage my own affairs? How do I change or revoke a Durable Power of Attorney? Can an attorney-in-fact be held liable for his or her actions? Can an attorney-in-fact be compensated for his or her work? What if there is more than one attorney-in-fact? Can the attorney-in-fact be fired? What kind of records should the attorney-in-fact keep? Why should I have a Health Care Proxy? Who should I appoint as my agent? When does my Agent acquire the right to act on my behalf? Who should have a copy of my health care proxy? How do I change or revoke a Health Care Proxy? What is a Standby or Emergency Guardianship Proxy? What is a Homestead Declaration?
What is an "Estate"?Your "estate" consists of all property owned by you at the time of your death, including:
How Can an Estate Plan Help?Regardless of your age, or the size and complexity of your estate, an estate plan can accomplish the following:
What documents should I have for a comprehensive estate plan?
What is a Will?A will is a valuable legal document which directs who receives your property at your death and it appoints a personal representative to make certain that your wishes are carried out. If you have minor children, a will enablesyou to appoint a guardian for their care.
What happens to my property if there is no Will?If you die without a will you are said to have died intestate and your property will be distributed to your heirs at law according to a statutory formula. In other words, the state will determine who receives your property atyour death. These intestacy rules are inflexible and make no exceptions for those in unusual need. If you do not want your property distributed according to the state's formula, it is crucial that you have a will which clearly dictates how your property is to be distributed.
Are there limitations on dispositions by Will?Some property generally cannot be disposed of by will. For instance, property held jointly passes to the surviving joint owner by law and does not become part of the estate affected by the will. Similarly, life insurance proceeds and retirement benefits pass outside the will to the named beneficiaries. The only person who cannot be disinherited from your will is your spouse. If your spouse is excluded from your will, he or she may exercise an election to receive a statutory share of property within a prescribed amount of time. Although your children do not have a statutory right to a share of your estate, if you want to exclude a child you must express that intention clearly in the will.
How often should a Will be reviewed?A will is valid until it is changed or revoked, and it may be changed or revoked as often as you wish, so long as you are competent. However, changes in your personal and/or financial circumstances and changes in the law may require changes in your will to ensure that your will is fully effective. A will should be reviewed at least every 3 years to make sure that it accomplishes your desires. It may be necessary to review it more frequently if:
How can I change my will once it has been signed?A will can be changed, revoked or replaced by a new will at any time, so long as you are competent and you follow the formalities of signing a valid will. To be considered competent, you must understand the nature of your act. You can also change you will through the use of a codicil, which is an amendment or supplement to a will.
What are estate taxes?Estate taxes are a form of death tax levied against your estate by the federal and state governments. The tax is levied on any property in which you had any incident of ownership at the time of death, i.e., life insurance, jointly held property, annuities, etc. You can use a combination of strategies to minimize tax consequences including credit shelter trusts and passing property through your will into trusts.
Will I owe estate taxes?Massachusetts imposes an estate tax on any estate over $1,000,000The Federal government imposes an estate tax on any estate over $2,000,000. In 2009, this amount will increase to $3,500,000. Unless Congress enacts new legislation, the estate tax is scheduled to disappear in 2010. However, in 2011, it is scheduled to return for any estate over $1,000,000. Any property left to your spouse outright is not taxed until the death of your spouse.
Can I just give all of my property away before I die to avoid estate taxes?It depends. If you give away your property during life, you may be subject to a "gift tax." While making smaller gifts which are not taxable during life can yield substantial estate tax savings, you should be wary of giving away all of your possession during your lifetime, as you may run the risk of needing the assets for your care later in life.
What is a gift tax?When you give away assets before you die for less than the assets are worth, you have made a "gift." The federal government may impose a gift tax on this type of transfer.
Is every gift subject to a gift tax?No. Each year you can gift a certain amount (known as the "annual exclusion") tax free. This amount changes each year. Other types of gifts that are not taxed include: charitable gifts, gifts made to a spouse, and gifts in the form of direct tuition payments or medical expense payments made on behalf of another.
How can I limit my estate tax liability?It is important for those with large estates to create a Trust to make sure that each spouse takes full advantage of his or her estate tax exemptions. Otherwise, when the second spouse dies, his or her estate will include all of the assets, but there will only be a single exemption.
What is a Trust?A trust is a separate legal entity in which property is given to a "trustee" to hold and manage for your benefit or the benefit of others (the "beneficiary"). The trustee holds legal title or interest and is responsible for managing, investing and distributing the property of the trust. The beneficiary holds an equitable or beneficial interest. A trust can be either a testamentary trust or a living trust. A testamentary trust is created by will and transfers property to the trust only after your death. A living trust is created during your life, can be funded while you are living or after your death, and can be set up to continue after your death or to terminate and be distributed upon your death.
What are the benefits of establishing a Trust?Depending on your situation, there can be several advantages to establishing a trust. One of the principal advantages of a living trust is avoiding the cost and delay of probate. In a living trust which terminates on your death, any property in the trust prior to your death passes immediately to your beneficiaries by the terms of the trust without requiring probate. This can save time and money for the beneficiaries. Certain trusts can also result in tax advantages for both you and your beneficiaries if your estate exceeds $1 million dollars. Or they may be used to control use or disposition of your property long after you are deceased, to provide for children or any other person you wish to inherit during minority or if disabled, to protect your beneficiaries from creditors, to avoid ancillary probate for property located in another state, or to help you to qualify for Medicaid. Living trusts are also private documents and only those with a direct interest in the trust need know of the trust asset and distribution.
What are the disadvantages of establishing a Trust? One of the most important potential disadvantages of a living trust is the possibility for mismanagement by a trustee because of the lack of court supervision that would otherwise apply to the probate of a will. However, careful selection of trustees and requiring regular and detailed accountings to the beneficiaries under the terms of the trust agreement can minimize the risk of trustee mismanagement or malfeasance. Legal fees for drafting the trust instrument and assisting in funding the trust are more costly than those for drawing a will. All of your property being transferred to the trust must be re-titled in your trustee's name. Some trusts may require periodic maintenance during your lifetime, result in loss of flexibility and/or control over your property, may complicate subsequent dealings with the property in the trust, and may have an adverse impact on eligibility for public benefits such as Medicaid.
What is a Revocable Trust?A Revocable Living Trust, also called a Revocable Trust or Living Trust, is simply a type of trust that can be changed at any time. In other words, if you have second thoughts about a provision in the trust or change your mind about a trust beneficiary or fiduciary, then you can modify the terms of the trust through what's called a trust amendment. Or, if you decide that you don't like anything about the trust at all, then you can either revoke the entire agreement or change the entire contents through an amendment and restatement. The down side to a revocable trust is that assets funded into the trust will still be considered your own personal assets for creditor and estate tax purposes. This means that a revocable trust offers no creditor Protection if you're sued and all assets held in the name of the trust at the time of your death will be subject to both state and federal estate taxes. Revocable trusts are often used to avoid probate since assets held in the name of the trust at the time of a person's death will pass directly to the beneficiaries named in the trust agreement. They also protect the privacy of your property and beneficiaries after you die. Unlike a will, your trust agreement does not become a public document.
What is an Irrevocable Trust?An irrevocable trust is a permanent trust. It cannot be revoked, amended, or changed after the agreement has been signed. With an irrevocable trust the grantor departs with ownership and control of property. Usually this involves a gift of the property to the trust. The trust then stands as a separate taxable entity and pays tax on its accumulated income. Trusts typically receive a deduction for income that is distributed on a current basis. A typical Revocable Living Trust will become irrevocable when the grantor dies and can be designed to break into separate irrevocable trusts for the benefit of a surviving spouse or into multiple irrevocable lifetime trusts for the benefit of children or other beneficiaries. Irrevocable trusts can take on many forms and be used to accomplish a variety of estate planning goals, including estate tax reduction, asset protection, and charitable gifting.
What is a Credit Shelter Trust?Also called a "bypass trust," a credit shelter trust is normally established to take advantage of the applicable federal exclusion amount. This is the amount you can pass free from tax for federal estate tax purposes. The credit shelter trust is normally established upon the death of the first spouse to die and the estate is divided into two parts: one part is placed in the credit shelter trust to benefit the surviving spouse and/or other family members without being subject to tax at his or her death or at the death of the surviving spouse. The other part is passed outright to the surviving spouse or is placed into a marital deduction trust.
What is a Marital Deduction Trust?Established solely to benefit the surviving spouse, it is structured to qualify for the unlimited federal estate or gift tax marital deduction.
What is an Irrevocable Life Insurance Trust?An Irrevocable Life Insurance Trust generally prevents life insurance proceeds from being subject to estate tax. The proceeds on any life insurance policy under which you are insured will not be included in your taxable estate provided that the proceeds are not paid to your estate, you do not own the policy and you have no "incidents of ownership" over the policy. Incidents of ownership include the right to change or add beneficiaries, the right to borrow against the policy's cash value or to cancel or surrender the policy. By establishing an irrevocable life insurance trust, the insurance will be excluded from your estate because you will not own the insuranceat the time of your death; rather, the trust will own the insurance.
What is a Durable Power of Attorney?A Durable Power of Attorney is a written instrument by which you designate someone (your agent) to act on your behalf in financial and related matters. The attorney-in-fact, in effect, stands in the shoes of the principal and acts for him or her on financial and business matters. The attorney-in-fact can do whatever the principal may do-withdraw funds from bank accounts, trade stock, pay bills, cash checks- except as limited in the power of attorney. This does not mean that the attorney-in-fact can just take the principal's money and run. The attorney-in-fact must use the principal's finances as the principal would for his or her benefit.
Why do I need a Durable Power of Attorney?This document is valuable in that it allows you to choose who shall act for you in the event that you become incapacitated rather than allowing a court to make this determination. In most cases, having a Durable Power of Attorney will avoid the need to seek appointment of a guardian or conservator if you later lose the ability to handle your affairs. A Durable Power of Attorney is effective only during your lifetime.
When does my Agent acquire the right to act on my behalf?Typically, a durable power of attorney provides your agent the immediate right to act on your behalf since this makes it more likely that third parties will honor the instrument. However, the document is designed to be used if you become incapacitated and your agent has a legal obligation to act in your best interests. If you are uncomfortable with granting immediate authority you may execute a springing power, which would take effect only when you become incapacitated, or a copy of your power of attorney can be placed in escrow. Placing your document in escrow provides the appearance of an immediate power without risking a premature assumption of authority.
If I give a power of attorney to another, do I give up the right to manage my own affairs?You retain full control over your affairs so long as you are competent.
How do I change or revoke a Durable Power of Attorney?You can change or revoke a Durable Power of Attorney as long as you remain legally competent. If you wish to revoke or change your durable power of attorney, you should properly execute a new Durable Power of Attorney. In addition, it is vitally important that you give written notice to your agent and all other interested parties of the change or revocation.
Can an attorney-in-fact be held liable for his or her actions?Yes, if the principal has agreed to pay the attorney-in-fact. In general, the attorney-in-fact is entitled to "reasonable" compensation for his or her services. However, in most cases, the attorney-in-fact is a family member and does not expect to be paid. If an attorney-in-fact would like to be paid, it is best that he or she discuss this with the principal, agree on reasonable rate of payment, and put that agreement in writing. That is the onlyway to avoid misunderstandings in the future.
Can an attorney-in-fact be compensated for his or her work?Yes, if the principal has agreed to pay the attorney-in-fact. In general, the attorney-in-fact is entitled to "reasonable" compensation for his or her services. However, in most cases, the attorney-in-fact is a family member and does not expect to be paid. If an attorney-in-fact would like to be paid, it is best that he or she discuss this with the principal, agree on reasonable rate of payment, and put that agreement in writing. That is the only way to avoid misunderstandings in the future.
What if there is more than one attorney-in-fact?Depending on the wording of the power of attorney, you may or may not have to act together on all transactions. In most cases, when there are multiple attorneys-in-fact the power of attorney document specifies that they can each act independently of one another. Nevertheless, it is important for them to communicate with one another to make certain that their actions are consistent.
Can the attorney-in-fact be fired?The principal may revoke the power of attorney at any time. All he or she needs to do is send the attorney-in-fact a letter to this effect. The appointment of a conservator or guardian does not immediately revoke power of attorney. But the conservator or guardian, like the principal, has the power to revoke the power of attorney.
What kind of records should the attorney-in-fact keep?It is very important that the attorney-in-fact keep good records of his or her actions under the power of attorney. That is the best way to be able to answer any questions anyone may raise. The most important rule to keep in mind is not to commingle the funds that the attorney-in-fact is managing with his or her own money. Keep the accounts separate. The easiest way to keep records is to run all funds through a checking account. The checks will act as receipts and the checkbook register as a running account.
What is a Health Care Proxy?A Health Care Proxy is a written instrument giving authority over all decisions regarding your healthcare to your designated agent but only when you are incapable of making or communicating those decisions yourself. The health care agent may make decisions concerning the use or terminating the use of life support systems.
Why should I have a Health Care Proxy?In case you ever become incapacitated, it is important that someone has the legal authority to communicate your wishes concerning medical treatment. This is true especially if you were to disagree with family members about your treatment. The Health Care Proxy is designed to avoid conflicts regarding difficult decisions during medical crises and to ensure that the direction you have given your agent will be carried out in the event of such conflicts. In the event that you do not have a Health Care Proxy, your family members must petition the court for a guardian to be appointed to make such decisions.
Who should I appoint as my agent?Since your agent is going to have the authority to make medical decisions for you in the event you are unable to make such decisions yourself, it should be a family member or friend that you trust will follow your wishes. You should choose someone who understands your wishes regarding medical treatment and end-of-life decisions and who understands that they will exercise their best judgment based on your personal values. Before executing a Health Care Proxy, you should talk to the person that you want to name as your agent about your wishes concerning medical decisions, especially life sustaining treatment.
When does my Agent acquire the right to act on my behalf?Health Care Proxies take effect only when you are deemed incapable to make or communicate your health care decisions by a physician. The law allows you to contest such a determination in court. In addition, if you regain the capacity to make or communicate medical decisions, the proxy will have no effect.
Who should have a copy of my health care proxy?Your agent(s) and your physician(s) should have a copy with your medical records.
How do I change or revoke a Health Care Proxy?You can change or revoke a Health Care Proxy as long as you remain legally competent. If you wish to revoke or change your health care proxy, you should properly execute a new proxy. In addition, it is vitally important thatyou give written notice to your agent and all other interested parties of the change or revocation.
What is an Advance Directive?An Advance Directive informs others what medical treatment you desire if you become terminally ill or permanently unconscious and are unable to make or communicate decisions regarding treatment. The Advance Directive is used by those persons who wish to express their feelings about the withholding or withdrawal of life-sustaining treatment that prolongs the process of dying. The Advance Directive may state your intent that extraordinary measures not be use to sustain your life if there is no chance of returning to health; or it may state your intent that all available measures be administered. Although, as current law stands, such a document is not legally binding in Massachusetts, it provides valuable evidence of your intent if you cannot speak or refuse medical treatment and can provide your health care agent with some guidance as to what your feelings are about these sensitive matters. This instrument is especially important if you do not have a person to appoint as your health care agent or if the person you have is unavailable. Without it, a court could be required to determine your wishes regarding withholding or withdrawing life-prolonging treatment.
What is a HIPAA Release?This document appoints a personal representative to receive any and all information, including confidential information, concerning your medical condition(s). Your personal representative is authorized to receive the same information that you would be entitled to receive.
What is a Standby or Emergency Guardianship Proxy?An emergency guardianship proxy allows a parent or parents to appoint another person to be the guardian of their child for up to 60 days without court approval. These proxies are useful when parents anticipate being unable to care for their child due to illness, travel, or any other reason. A standby guardianship proxy allows a parent or parents to nominate a guardian of a minor child and obtain court approval in advance of a future event, such as the death or incapacity of the parents. This type of guardianship provides for concurrent authority over the child. It does not limit the parents' rights to care for the child or the custody of the child.
What is a Homestead Declaration?A Homestead Declaration, once recorded at the appropriate Registry of Deeds, protects your home (within certain limits) up to $500,000 from the unsecured claims of creditors. A Homestead Declaration will protect you or your surviving spouse and dependent children against attachment, levy on execution, or sale to satisfy debts, so long as you occupy or intend to occupy such property as your principal place of residence. Only one spouse can file a Homestead for their family. However, should the parent who declares the Homestead die, the law protects the residence until the youngest unmarried child reaches the age of eighteen (18) and until the surviving spouse dies or remarries. |
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