WHAT IS ESTATE PLANNING?

 

 

 

INTRODUCTION

 

There have been many books, articles, etc. written on this important topic and this text will cover such tropics as the estate planning process; forms of property ownership, transfer during life time and at death, Wills, trusts, federal gift taxes and state death taxes, federal estate taxation and estate planning techniques.  There are two objectives: (1) to attempt to provide you with a basic knowledge of the estate planning process; (2) to keep a rather complex body of knowledge as understandable and precise as possible.  It is not within the scope of this book to go beyond the basics.  Once the basics are learned, applying advanced strategies to a given situation should be explored with the advice of specialists in the estate planning field.

A HISTORY

 

The origin and development of estate planning is important in order to understand the true nature of this process.  Estate planning is by no means an American development.  Primitive people did not recognize that land could be owned, as the land belonged to all people.  Only personal property was possessed and owned by primitive people, and at death, our early ancestors either destroyed or buried such property with its owner.  When people began to realize the value in their possession, they became concerned with passing those possessions upon death.  Perhaps the earliest written evidence of the passing of property can be found in the hieroglyphics of the early Egyptians.  Although our knowledge of the early Wills is limited, we do know they passed property to select heirs.

 

In Babylonia, as a result of the Code of Hamurabi, property (with only a few exceptions) had to pass to heirs on death.  This was also true under the law of Solon in Greece.  Roman Law, especially under Caesar Augustus, followed this practice as well.  In fact, it appears that Augustus was the inventor of the estate tax because he levied a tax of 5 percent on the value of all estates to help support his army.  Emperor Justin of the Byzantine Empire created the Justinian Code and the Code recommended the first formal requirements of Wills.  This code also allowed a certain form of contract that is remarkably similar to modern day trusts.

 

Many of our current Will and Estate Law can be traced to both Rome and the Justinian Code.  Rome extended its rule to most of the known world and its rule included creating a system of law for each territory it conquered, and Great Britain was no exception.  Even though the Romans were pushed out of Great Britain by the Anglo Saxons, much Roman Law remained.  Up until the Norman conquest in A.D. 1066, the Anglo Saxon Law allowed people to pass title to most of their property through the use of a Will at their death.  All of this changed after the Norman invasion in England and the advent of feudalism.

FEUDALISM

 

The foundation of the English Feudal system was that the King owned all the land which could only be disposed of by the King, and even though the King distributed land among his nobles he would still retain an interest called a Military Tenure.  The nobles were only allowed to have property if they made financial contributions to the King who had a large war need.  To prevent the division of land into smaller parcels by inheritance, the English Law prohibited land from being left by Will, passing automatically to the eldest living male heir, allowing wealth to accumulate to a small group of people. 

 

English feudal Wills passed only personal property.  There was a constant battle between the Church and the King about who had the authority to administer their feudal Wills.  At first the King took on this task and charged for his services, which created revenue for the King.  When the Church began to administer these estates, it also charged a fee.  It inherited substantial property through deathbed persuasion and the bequests that resulted from that persuasion.  The King feared the power the Church was accumulating by its increased wealth and the saga of their power struggle began. 

 

Over the years, property vested in fewer and fewer hands were distributed to nobles.  The nobles wanted to control the passing of their land; thus, two courts and systems of law developed.  The first was the system of the common-law Courts which applied the Kings law strictly and without compassion.  Participants would appeal to the King and thus a second system started, Royal Courts of the Equity. 

 

The Royal Courts started when a King appointed a Chancellor to take charge.  During this time a new concept was developing that allowed a noble to sell property to a third person (not leave it - but sell it while alive).  Legal Title would be in the name of that third party; however, the property was to be used for the benefit of another person named in the seller’s Will.  This was called Beneficial Ownership, which was the beginning of the Law of Trust.

 

The King was not very happy about this new arrangement so in 1540 the Statute of Will was passed.  The Statute of Will for the first time allowed a person to pass title to Real Estate through a Will.  By the mid 1660's all property was allowed to pass by Will and in the later part of the 17th century the Statute of Frauds was passed. 

 

The Statute of Frauds required that all transfers of land be in writing, signed by the transferor and witnessed.  Most of the rules created through this historic process have been adopted in the U.S. and are referred to as our English Common Law heritage.  Out of this Heritage came the idea and ability for government to tax property at the owners death. 

 

In the late 1700's, England passed the Stamp Act which required people to write their Will on paper which contained certain stamps, and was printed by the Government.  Different paper and stamps were used depending upon the size of the estate.  When the decedent's estate was administered, the Court would check the size of the estate against the stamps on the Will paper to make sure that the proper tax was paid.  They would also check to see whether any gifts were made in contemplation of death (first gift tax law).

The first American attempt at a Federal Estate Tax was the Revolutionary War Tax passed in 1797.

 

 

The purpose of this tax was to pay the war debt.  This was adopted from the English Stamp Act and the person who inherited the estate paid the Stamp Duty.  In  1826, the State of Pennsylvania adopted the first inheritance tax.  By the late 1800's nine states were taxing the recipient of an inheritance.  The second federal estate tax was passed in 1862.  This also was a Stamp Act Tax to raise revenue for the Civil War, which was repealed in 1870. 

 

The forerunner of our current federal estate tax was the German War Tax passed in 1916.  This tax, like the others, was to raise revenue for the war.  This tax however, did not go away.  The federal estate tax was held constitutional by the Supreme Court of the U.S. when it stated, "The Congress Shall have the power to lay and collect taxes, duties, imports and excises, to pay debts and provide for the common defense and general welfare of the U.S., but all duties, imports and excises shall be uniform throughout the U.S.”  The result was that the new federal estate tax was not a direct tax on property.  The federal estate tax was, and still remains, as a tax on the transfer of assets from deceased persons to their heirs.  Technically, it is not a tax against property.  Thus, unlike the income tax, which, to become legal, had to be added as a constitutional amendment, the federal estate tax did fit within the strict original confines of the Constitution. 

 

The gift tax was a natural extension of the federal estate tax.  When the federal estate tax began in 1916, it was constantly amended.  The major amendment came in 1926 as the gift tax was formally recognized.  It was found that substantial revenue was being lost because people were making gifts during their lifetimes and these gifts were free from tax. 

 

In the past, the U.S. enacted estate taxes to fund specific military escapades.  However, according to President F. Roosevelt, the federal estate tax was based on "the very sound policy of encouraging a wider distribution of wealth,” or, redistribution of wealth.  His words have stood for reality for a very long time; but thanks to the Economic Recovery Tax Act and Tax Recovery Act of 1986, the pendulum has started to swing back.

WHAT IS ESTATE PLANNING?

 

Estate planning is the process of creating a master plan for the disposition of an individual's assets.  This will involve the disposition of such assets at death, and may also involve lifetime transfers of property and certain things must be considered.

 

1. Limit administration costs
2. Limit tax liabilities
3. Facilitating timely payment of estate obligation and taxes
4. Satisfying the desires of the estate owner as to property distribution

Many individuals initiate estate plans for the purpose of tax planning.  But as the plan develops, a much more comprehensive view emerges with the emphasis on the safe guarding of assets for the benefit of heirs, playing the critical role.

 

In everyday life, estate planning involves people - spouses, children, grandchildren, favorite family members and close friends.  Estate planning is attempting to provide for an individuals security and prosperity without the "bread winner.”  Estate planning has also been labeled a bundle of (taxes state, federal, income, death and gift) with an army of Lawyers, Accountants, Insurance people, Banks and Financial Planners to help administer the estate.  There are four basic characteristics of estate planning:

 

1. Estate planning takes time:  a little now or a lot later;  time to identify and accomplish goals that are personally important.

 

1. Estate planning involves money, business, and finance.  It involves dollars needed to create and maintain a life style for loved ones after death.  It also involves the sacrifice of dollars to purchase life insurance or to invest in a portfolio.

 

1. Estate planning is human ambition and the fulfillment of that ambition by acquiring and holding property.  It is a life statement of commitment to others.

 

1. Estate planning is "living" planning.  It is an attempt to use resources to create an environment beyond death.  It is the ability to share success with others.

 

It is apparent that estate planning will have different meanings for different individuals.

WHO NEEDS ESTATE PLANNING? 

 

It is never too early to start thinking about estate planning even if an estate is just a few personal possessions.  If an individual dies without leaving any legal instructions for distributions of their property, the state, in which one lives, will make the decision for the individual.  Which government bureaucrat should be trusted to assess the value of property and decide when and how it should be distributed, or who will get custody of the children? 

 

Many people procrastinate in preparing an estate plan because just thinking about the subject makes them uncomfortably aware of their own mortality.  It may be difficult for individuals to meet with a qualified attorney to get affairs in order.  But until this is done there will always be a gap in the best laid financial plans.  Of course, the greater the value of the assets, the more complex the plan will be.

 

As stated above, estate planning is not just for wealthy individuals.  It could be just as vital to an individual with a small estate because of the lack of cash necessary to provide for loved ones.  The smaller estate individual may require more urgent attention due to the fact that each individual asset and its ultimate disposition has greater impact overall.  The waste of any single asset could cause for greater suffering for the heirs of a small estate than the same occurrence in a larger estate.  In summary, an estate plan can turn an uncertain distribution of assets into a certainty.

 

AN ESTATE PLANNING CHECKUP

 

There are a number of events that can occur in a life that will directly affect an estate plan.  The birth of a child may add people to the list of those who will receive an inheritance; a sudden windfall may bring additional assets for which an individual must account.

 

If any of the following situations or circumstances have occurred, an estate plan must be reviewed and changes made which reflect the new situation(s).

 

 1.    Marriage                                             

 2.    Divorce                                              

 3.    Birth of a child                       

 4.    Adoption of a child   

 5.    Death of a child         

 6.    Birth of a grandchild 

 7.    Death of a grandchild

 8.    Marriage of a child     

 9.    Divorce of a child      

10.   Death of a spouse      

1. Increase or decrease in personal wealth         
2. Receipt of substantial inheritance or gift
3. Giving a substantial sum to others
4. Purchase of a life insurance policy
5. Participation in a new retirement plan
6. Moving to another state

 

 

 

 

 

 

OBJECTIVES OF ESTATE PLANNING

 

There are four distinct objectives of a proper estate plan.  Many times a plan is perceived as only having one, or possibly two, of those objectives.  Since there may be different specialists involved in the Estate Planning process, such as Attorneys or Accountants, an individual should be sure to not only realize such shortcomings in a plan, but to safeguard against it.  A truly comprehensive estate plan will address all four of these objectives:

 

1. CREATE LIQUIDITY

 

Liquidity means the ability to convert assets to cash without giving up value.  Because of death and it's related costs that must be paid within a short time following death, one must be absolutely certain that the estate has sufficient liquid assets to cover such costs.  Realistically it would seem that the annual increase in the cost of dying has exceeded the annual increase in the cost of living.  Costs of burial plots, cemetery monuments, funeral director's fee and attorney fees have risen.  Thus, if an individual’s estate presently lacks liquidity, it can be assumed that the liquidity problem would continue to increase in the future.

 

The need for liquidity arises because of four general grouping of expenses materialize upon death.  These expenses generally must be paid within one year of death.

 

A.  Administration expenses - these are the expenses of opening, administering and closing the decedent's estate.  Executor's fees and fees for the Executor's attorney represent the majority of expenses.  Other expenses will include Court costs; costs of appraising estate property; costs of insuring estate property while estate is opened; maintenance or repair of estate property; expenses of defending a Will contested by disgruntled heirs; auction fees; and the cost of administration.  Studies of I.R.S. statistics reveal that these expenses will shrink the estate by 4-5%.

 

B.  Indebtedness of the decedent - mortgages are usually the most significant debt.  Many families will want to retire the mortgage at the death of the first spouse so that the surviving widower and children are not burdened with this debt.

 

Other debts would include automobile loan balances, credit card accounts and other installment credit, and final expenses of the decedent's last illness.  Accrued taxes would also be considered debt.  This would include accrued but unpaid income taxes, (federal, state, local), property taxes and any other taxes which the decedent had incurred but not paid.  It should be noted creditors have a limited period of time in which to file claims against the estate.  The Executor then has a period of time, usually the first six months after death, in which to decide the validity of such claims and settle or pay them.  Debts will vary according to the estate but they (generally) average 5-6% of the total estate.

 

C.  Funeral expenses and related costs are a major cause of shrinkage.  Expenses paid to funeral homes, burial expenses, tombstone, monument or mausoleum expresses, the cost of a burial plot, the cost of transportation of the body, florist's fees and prepaid expenses for future care of the burial site are all included.

 

D.  Death taxes, federal and state, are another cause of estate shrinkage.  Such taxes are important in the large, unplanned (or poorly planned) estate.  The federal estate tax rates are progressive, so a higher percentage of the larger estate is forfeited to taxes unless steps are taken to minimize this.  If an estate is subject to the federal estate tax, it will be taxed at a marginal rate between 27-55%.  ^(Supp.)  This tax must be paid within nine months of death.  This tax presents a serious treat to individuals but there are several techniques to minimize them. 

 

In summary an estate that is not liquid, may have to borrow in order to provide living allowances for spouse and children and to pay estate obligations.  Sometimes the value of estate assets rises or falls dramatically due simply to the owner's death.  Thus, the death of an artist, author or entertainer often increases the values of his/her work.  On the other hand, the death of a business owner has the opposite effect.

 

SOLUTIONS TO LACK OF LIQUIDITY

 

There are two ways to solve the liquidity problem: (1) minimize the need for cash at the time of death and (2) create additional liquidity at death.  By minimizing the need for cash at the time of death a proper estate plan should avoid Probate and reduce taxes.  If, after achieving this objective the estate will probably still have liquidity problems, then the proper estate plan must find a way to create additional liquidity.  Life insurance is probably the best way because of its unique characteristic of maturing at death just when it is needed the most.

 

 

 

 

 

2. AVOID PROBATE COSTS

 

Since Probate expenses tend to vary directly with the size of the Probate estate (the assets passing under the decedent’s Will) actions which reduce the size of the Probate also reduce Probate's costs.  Probate avoidance has become a routine and long overdue part of estate planning.

 

To understand ways to avoid Probate we must first define Probate and why it has become burdensome. 

 

Probate is the legal process of passing ownership of property from a deceased person to others.  Probate Courts have been a part of our legal heritage for centuries.  Generally speaking, every county in every state in the U.S. has its own Probate Court.  These courts all have the same purpose; passing ownership of property to the heirs of people who died with a Will plan or with no plan at all. 

 

In 1965, Norman Dacy authored a national best seller book entitled “How to Avoid Probate”.  Mr. Dace's thesis was that Probate should and could be avoided.  The book generated a new crisis in the relationship between attorneys and clients. 

 

One must understand that if one dies either with a Will or without, the Probate process begins.  Getting the decedent's property into the hands of his/her beneficiaries or the state's beneficiaries is but one part of the Probate process.  The Probate Agent (Executor/Administrator) is responsible for most of the work to be accomplished in the process.  The Agent will report and answer to the Probate Judge through the Estate's Attorney.  There are four problems with Probate:

 

1. Probate is public.  The process can be played out in the media thus creating more problems.

 

1. Probate is time-consuming.  Anywhere from nine months to 10 years has been documented.

 

1. Probate is expensive.  It is not uncommon to see a shrinkage of 10% of the estate.

 

1. Probate puts the real control in the judges chamber.

 

The Probate process will be discussed later in this text.

 

 

3. REDUCE TAXES

 

To the extent one can reduce the tax bite at death the estate will not need extra liquidity for tax payments thus conserving estate assets for the decedents dependents and heirs.  As with Probate avoidance, tax considerations should not drive everything else.  The estate owner should not engage in "off the wall" estate planning techniques which may save taxes but which would be inconsistent with the individuals fundamental objectives.

 

There is a tendency among some estate planners to consider and plan for federal estate tax consequences.  However, the total situation should be evaluated, including the Federal Income Gift Tax and estate taxes and any other applicable estate income, gift and death taxes.

4.  EXECUTE DISPOSITIVE DOCUMENTS

 

Transactions and techniques in the estate planning area are subject to more formality than is usual in the normal course of personal and business affair. 

 

If the proper formalities are not observed a well-planned estate plan my fail in the implementation phase.  There are five areas where these disposition techniques are critical.

 

1. Wills are the best example.  While some states honor Wills written by the individuals own hand (holographic Wills), and even oral Wills (nuncupative Wills) it is always a good idea to have a Will typewritten and execute it in accordance with state law requirements. "Home Made Wills" may be valid but often times fall into trouble when the witnessing requirement is not met, which could invalidate them.

 

1. Deeds for real property are also subject to proper formalities and must normally be recorded in the office of a designated local official.

 

1. Trust agreements are contracts and must comply with the rules for valid and enforceable contracts.  The chief advantages of trusts are professional management of assets by the trustee, potential income tax and estate tax savings if the trust is irrevocable, control over disposition of trust income and principal through the trust terms or discretion vested in the trustee, and the flexibility possible in trusts design so that virtually any plan of disposition can be achieved.

 

1. Lifetime gifts should also be looked upon as a disposition device.  Gifts are a way of disposing of an estate before death.  Gifts are potentially subject to the federal gift tax and to state gift taxes in a few states.  Gift tax avoidance or minimization is a critical part of lifetime gift planning.  Gifts may be made in a variety of ways - outright transfer, transfer in trust, transfer into joint names, etc.

 

1. Jointly owned property is an area that needs particular care to disposition.Example - in some states one creates a tenancy by entirety by transferring title to "Mr. and Mrs. Fred Snow, husband and wife.”  If "husband and wife " were omitted, state law would create a different presumption, either that there was a tenancy in common or a joint tenancy with right of survivorship.  (Discussed in detail in a later chapter).

 

THE PROBATE PROCESS TODAY

 

To further understand the Probate process, the eight steps listed below provides an insight into how it works, assuming a Will was in place.

 

1.  DEATH

 

The Executor (if one is named in the Will) has not yet been formally appointed by the Court and takes only limited action at time of death - such as notifying employer and bank, and requesting cancellation of the utilities to the decedents home.  Family and friends cannot legally take any of the belongings before the Probate Process has been completed, unless they get specific approval from the Court.  In fact there could be serious consequences if they do.

2.  FILE PETITION

 

Probate does not automatically occur upon death.  Someone must request that Probate proceedings begin - usually when property needs to be sold, checks need to be written from a bank account, money withdrawn from an account, or when other assets need to be liquidated or transferred to a new owner; the Executor will request that Probate Proceedings begin.  This is a formal process.  A written petition prepared by an attorney, is submitted to the Court to start the proceedings and will usually include the original Will.  A filing fee, paid from estate assets, will be charged when the petition is presented to the court.

 

3.  PUBLICATION

 

After the petition is filed, in most states the Court will order a formal notice of the death published in a local newspaper for several weeks or months before the first hearing.  This procedure notifies the public of the death, requests that creditors present any unpaid debts to the Court, and invites anyone who feels he/she has a right to part of the estate to come forward and make a claim.  The cost of this advertising is paid from assets of the estate.  At the same time, the Executor notifies the named heirs of the death, sends each of them a copy of the Will and advises them where the Probate proceedings will be held.  This is when heirs discovers how much the decedent left them, or didn't leave them.

 

4.  FIRST HEARING

 

The first hearing is usually held six weeks to two months after the filing of the petition.  Assuming there is no contest of the Will or any other unusual circumstances, the following steps usually occur at this hearing.

 

1. A Will is validated.  The Judge must make sure the Will meets the legal requirements, that it is the correct Will (if more than one was left), and that the decedent was in a competent state of mind when it was drawn.  Also the Judge must certify that all the proper signatures are on it and that it was witnessed.  If a Will is not accepted as valid, the Judge will declare that the decedent died without a Will and will apply the State's Will instead.

 

1. After the Will is validated (and "admitted" into Probate) the Court will formally appoint the Executor (sometimes called a Personal Representative) to manage the estate for the Court.  If the named Executor in the Will is still alive and able to act in this capacity, the Judge will usually go along with the wishes of the decedent.  If not, the Judge will appoint someone else, usually a relative but sometimes an attorney or a Bank's Trust Department.  The Executor helps the Court to inventory all possessions of the decedent and determine the values.  The Executor is also responsible for collecting bills and preparing the final tax returns and presenting them to the Court to be approved and paid.  The Executor also applies to Social Security, Veterans Administration, Union or Fraternal Organizations and other groups or organizations for any death benefits to which the estate is entitled. 

 

1. The Court will grant the Executor "Letter Testamentary.”  This is a legal document, an order signed by the Judge, which formally appoints the Executor giving him/her the authority to act in the decedent’s place under Court supervision.  These "Letters" are documents the Bank and others need to close out the decedent’s accounts and turn the assets over to the Executor. 

 

In effect, the titles of the property are transferred from the decedent to the Executor, who is responsible for their safe keeping while the estate is Probated.  Executors are entitled to receive payment for their services and are often required to post a bond, both of which are normally paid from the assets in the estate.

 

UNUSUAL CIRCUMSTANCES

 

If the Will is contested or if there are any other unusual circumstances, the Court will try to resolve them at the first hearing.  If the differences cannot be resolved at this time, there will be subsequent hearings until the conflict can be resolved by the Court. 

 

The Court will decide if anyone who claims to be an "heir" has a valid right to part of the estate whether or not the decedent included him/her in the Will.  It is not uncommon for these "heirs" to find out how much an estate is worth from the newspaper publication and Court files, and hire an attorney to contest the Will - sometimes when they have no real hope of receiving any assets.  Contesting a Will can get very expensive and prolongs Probate.  Families very often pay off contesting "heirs" just to get rid of them. 

 

Since Executors are entitled to be paid for their services, more than one of the decedent's relatives or friends may want this responsibility, resulting in additional Court hearings to appoint the Executor.  This can significantly increase the time and costs of Probate and could result in hurt feelings as well.  Even if one specifies an Executor in the Will, the choice can be contested.

 

5.  ASSETS FROZEN / INVENTORY ESTATE

 

During Probate, assets are usually frozen so that an accurate inventory of property and possessions can be taken.  This means that heirs cannot receive their inheritances nor can any property or asset be sold or liquidated without the Court's permission.  After the first hearing, the Executor must locate all of the decedent's possessions and property, compile a list of them and their values, and present it to the Court.  This can be very time-consuming and a difficult process, especially if there is no current and accurate records.  The Court will usually require formal appraisals (usually by a certified, Court-approved appraiser) for many items, such as real estate, antiques, collectibles, automobiles, furniture, etc.  Appraisal fees can be an expensive estate expense.

 

6.  FAMILY LIVING ALLOWANCE

 

During this time, the decedent's dependents (spouse, minor children, and perhaps elderly parents) will probably be allowed a living allowance but it must be "reasonable" and approved by the Court. 

 

To request the allowance, dependents must submit a written request to the Court though an attorney.  If there are a number of outstanding debts or if the Will is being contested, a Judge may insist that the assets remain intact and reduce - or even deny - the request.  However, proceeds from assets with beneficiary designations (such as life insurance, IRA's, retirement plans, etc.) are usually paid directly to the named beneficiary without Probate, so the family will probably have some money for living expenses.  (However if the decedent named "my estate" as the beneficiary on a life insurance policy, the proceeds must go through Probate first).  The Court will allow the dependents to continue living in the decedent’s home during Probate, even if it will eventually go to someone else.

 

7.  PRESENTATION AND PAYMENT OF DEBTS, CLAIMS & TAXES

 

Creditors have a certain number of days from first publication notice of the decedents death to come forward and submit their claims against the estate for payment.  After this time has passed, the Executor will audit the claims and present them to the Court for approval to pay them from the assets in the estate.  If there are any disputes over a claim, there could be additional hearing (at additional costs), with the Judge ultimately making the final decision.

 

8.  FINAL DISTRIBUTION / CLOSING OF THE ESTATE

 

Finally after the Court is satisfied that the legal process has been completed - in most cases at least a year or more later - it will order another publication to announce a final hearing to close the estate.  At the hearing, the Judge will review all the paperwork and order all debts, claims, taxes and Probate expenses (including attorney and Executor fees, Probate fees, bonds and appraisals) paid. 

 

The cash assets in an estate can be greatly reduced, even consumed, because of the on going expenses of Probate.  If there is not enough cash in the estate to pay debts, the Judge can order property, including personal belongings sold at a public auction or estate sale.  Many times this will be on a "distressed sale" basis or in a depressed market. 

 

After all bills have been paid, the Court will order the remaining property distributed to the heirs according to the Will.  The Judge will then order the Executor relieved of his/her duties and the file closed.

 

9.  MULTIPLE PROBATE

 

If one owns real estate in more than one state, this entire process (and its expenses) will probably have to be repeated in each state in which the real estate is located.

 

NOTED EXCEPTIONS

 

The only real exception to the process is that in some states there is a shortened process for very small estates.  Estates that qualify can be Probated without an attorney or Executor fairly quickly and with just a minimum filing fee.  But very few qualify for this special process because the limits on the total estate value are usually extremely low,  as low as $15,000 in same states.

As previously stated, Probate is expensive as attorney and Executor fees are difficult to predict.  To Probate an estate could cost anywhere from 5-10% of the estate gross value.  Generally speaking, Probate costs take a greater percentage from smaller estates than larger ones.  Probate causes families to lose control and does take valuable time.  The fact that the estate becomes public record can cause emotional distress.

EIGHT COMMON PROBLEMS IN ESTATE PLANNING

 

1. Tax liability.  Although a major concern, as stated before, it should not be the primary objective of estate planning.  Estate disposition must be planned to reduce potential tax liability to the lowest level consistent with clients needs/goals.

 

1. Outdated plan.  The Will must be reviewed periodically to stay consistent with client's most recent intentions.

 

1. Psychological impediments.  There are two:  (1) Dealing with one's own mortality, making an estate plan requires the client to acknowledge the fact that the client is going to die eventually; and (2)  Procrastination, as the client puts off planning an estate because of the magnitude of the task.

 

1. Failure to plan.  If a person dies intestate (without a valid Will) state law of succession will govern property disposition.  A Will is a legal instrument indicating a person's desire of disposition of property after death.  Wills need to be periodically reviewed and updated to ensure the property owner's most recent interests are handled correctly at death.

 

1. Improper position / Ownership of assets.  The estate tax liability is calculated on the asset ownership form of when the owner's death occurred.  (Tenants in common, joint tenants with rights of survivorship, etc.).

 

1. Effects of inflation.  What seems to be an adequate sum in terms of today's dollars may have little real purchasing power in the future.

 

1. Lack of liquidity.  There are three main considerations in assessing liquidity needs:

 

        A.       Types of assets making up the estate.

        B.       Amount of estate owners debt obligations.

        C.       Projected estate tax liability.

 

8.  Disability / Last illness.  Cost of a lingering illness or disability may eat up valuable estate assets.  Medical expense and disability insurance should help with these costs thus saving assets.

ESTATE PLANNING GOALS

 

In order to properly plan an estate and to make sure that everyone is “playing on the same field”, it is necessary for the estate owner to clearly establish what they expect an estate plan to accomplish.  One method of notifying others as to what the owner expects, is to have the owner to complete an Estate Planning Questionnaire.  As an example, the following list could be used, with the owner assigning a number from one to ten with the 1 being of no importance, 10 being of the utmost importance.  In any event, such a list will probably make the owner aware of situations that they had not considered previously.                                           ^(Supp.)

^{1.  __________  Avoid Estate taxes}

2. __________ Avoid probate

3. __________ Provide for my natural children

4. __________ Provide for stepchildren

5. __________ Plan for possible total disability

6. __________ Provide for my Charities or particular Charity

7. __________ Disinherit a relative that would otherwise be an heir

8. __________ Provide for a handicapped person

9. __________ Avoid Capital Gain taxes  ^(Supp)

10. _________Provide for grandchildren

11._________ Protect heirs from spending all of their inheritance foolishly

12._________ Get personal effects to particular people

13._________ Keep all of my estate effect confidential

14._________ Designate Guardians for my children

15._________ Designate particular person or firm to handle the estate after my death

16._________ Avoid unnecessary or excessive estate planning costs

17._________ Provide for my parents and get their affairs in order

18._________ Avoid quarrels by family members of the estate

19._________ Make gifts to specific persons during my lifetime

 

THE ESTATE PLANNING TEAM

 

One must keep in mind that the following discussion is for individuals with average sized estate and higher.  In today's economy, one who may own a home, furnishing, automobiles, some personal savings and retirement benefits could easily qualify as an individual who would require assistance in developing a estate plan.  Generally there are five important members of the Estate Planning team.  The client, the life underwriter, the attorney, the trust officer and the accountant.  Often, in large estates, the investment advisor may also be part of the team. 

 

CLIENT

 

The client is obviously the most important member of the team.  The client will define what the team is attempting to accomplish and is the ultimate decision maker.

 

LIFE UNDERWRITER

 

The underwriter will probably be the "initiator.”  The life underwriter is not restricted in the manner that he/she obtains clients (as Attorney's and Accountants are).  This individual tends to gain the advantage in the process.  Since the life underwriter is an expert in his/her chosen field (just as is the Accountant and Attorney) this person will be needed to provide crucial solutions to many problems.  Without a life underwriter the team is incomplete and estate plans attempted without the life underwriter will not be complete.

 

ATTORNEY

 

An Attorney is an essential member of the team because it is he/she who will determine the legal and tax consequences of each aspect of the estate plan.  It is simply impossible to be involved in Estate Planning without working with an attorney.

 

TRUST OFFICER

 

The Trust Officer advises on the practicality of the estate plan as well as often playing a major role in the estate administration process.   While performing their duties to conserve and manage estate assets, trust officers are often in a position to suggest the use of life insurance as a major estate conservation tool.

 

ACCOUNTANT

 

The Accountant, often a CPA, is the adviser who is most closely acquainted with the prospects financial affairs.  Additionally, it is the accountants responsibility to advise on asset valuation.  This task could prove to be quite frustrating especially in the case of a business owner or farmer.  The Accountant's talents and expertise are indispensable and his/her knowledge of tax law is of great value to the team as the members seek to solve the problems that arise in many estates.

 

INVESTMENT ADVISOR

 

Investment advisors are usually seen in very large estates.  Usually this person will want to take part to assure that the prospect's investment desires are safeguarded and not overlooked by the other advisors.

 

It must be emphasized that cooperation and mutual respect should be the foundations of the team.  Although each brings a specific specialty and knowledge to the team none are more important than the other.  In order to develop a highly efficient estate plan with your client's objectives as the motivation force, all the team members must communicate and must be offered an opportunity render their expertise to the plan.

 

CHAPTER 1 - STUDY QUESTIONS

 

1. The forerunner of our current Federal Estate Tax was the

A. State of Frauds.

B. German War Tax passed in 1916.

C. Federal Gift Tax.

 

2. Many individuals initiate Estate Planning for the purpose of

A. avoiding probate.

B. providing immediate income.

C. tax planning.

 

3. If an individual dies without a Will the _________________________ will distribute their property according to statutes.

A. State.

B. federal government.

C. Executor.

 

4. One of the main objectives of Estate Planning is to

A. create liquidity.

B. ensure probate.

C. avoid the payment of the decedent’s debts.

 

5. A common problem encountered in Estate Planning would be

A. a liquid estate.

B. a newly designed financial plan.

C. tax liability.

 

6. At the first hearing of a Will

A. the assets are distributed.

B. the Will is validated.

C. a judge will be appointed to manage the estate.

7. During probate

A. assets are usually frozen.

B. a Will must be presented or the proceedings cannot go forward.

C. the executor completes his/her duties without compensation.

 

8. In some states, small estates

A. require a more formal probate process than larger estates.

B. may have a shortened probate process.

C. are not subject to probate.

9. The deceased owned real estate in more than one state, so probate would be

A. only in the state when the deceased was resided.

B. in the residence state of the principle heir only.

C. in all states where real property is located.

 

10. If a Will is contested or there are unusual circumstances the Probate Court will

A. direct the parties to submit to arbitration.

B. try to resolve them.

C. declare the Will null and void and the property reverts to the state.

 

 

Answers to Chapter 1 Quiz:  1B, 2C, 3A, 4A, 5C, 6B, 7A, 8B, 9C, 10B