There are other personal considerations we recommend when planning your Estate, including creating the following:
- A Durable Power of Attorney
- A Health Care Power of Attorney
- A Living Will
A Durable Power of Attorney is a written document authorizing another person to act on the principal’s behalf. A Power of Attorney authorizes another individual to enter into and discharge virtually all legal obligations on behalf of the principal.
A Health Care Power of Attorney authorizes another person to make medical decisions on your behalf, but only after a physician determines that you are unable to make medical decisions on your own behalf.
A Living Will is a directive which states your directives on end of life treatment and decisions about prolonging your life.
What is one of the most understood concepts in Estate planning?
Most people assume that if you have a Last Will & Testament that your assets will avoid probate. Believe it or not, a will guarantees there will be probate. A will controls the distribution of all probate assets. It does not control the distribution of non-probate property. All property that is controlled by your Last Will & Testament must go through the probate court. Once your Estate enters the probate process, the assets are tied up in probate until released from administration.
Why avoid probate?
There are many reasons to avoid probate. Some of these reasons include:
- After your death, the content of your will and the details of your Estate are on file in the courthouse, for anyone to read. The probate files are read by salesmen, by newspaper reporters, real estate brokers and by those that are curious, all seeking in one way or another to take advantage of make something out of the information available.
- The probate process usually ties up property for months, sometimes up to a year or more. In probate, assets must be appraised and the inventory of assets must be approved by the court. Hearings are scheduled to approve and review your Executor’s work. The court, not your family, supervises and authorizes the settling of all debts and the payment of inheritances, and its time and with its delays.
- It can be expensive. Administration fees charge by the executor, attorney and court costs are usually the largest expense of the Estate.
Advanced Estate Planning and Avoiding Probate
Generally, more advanced Estate planning entails creation of a plan through the use of wills, trusts and titling of assets to avoid the probate of your assets and/or planning to reduce or eliminate estate taxes.
A common method of avoiding the probate of your assets is by creating and funding a revocable living trust. This is a document used to control the distribution of your assets upon your death and further, during your lifetime, a revocable living trust provides direction as to how your assets will be managed and controlled. Here is how it works:
After you set up your living trust, you transfer the title of all your major assets (real estate, stocks, bonds, investment accounts, etc.) from your name to the name of your trust. You then name yourself as the trustee and beneficiary. That gives you, and you alone, total control of all your assets. You can buy, sell, trade and do whatever you want with the trust assets, just like you do now.
The real benefit of a living trust is, when you die, there will be no assets left in your name. Therefore, there will be no probate for you or your family to endure. Whomever you name as your successor trustee will immediately gain control of your assets and distribute them according to your instructions in your living trust. Furthermore, in the event of illness or disability which leaves you disabled or incompetent, whomever you name as your successor trustee will immediately control your assets and administer them for your benefit during the remainder of your life, avoiding the need of a guardianship in probate court.
For estates of significant value, an A-B trust or marital/credit shelter trust is commonly used to shelter assets from estate taxes. For married couples, establishing a “B” trust, also called a credit shelter trust, is the key to avoiding the loss of the first spouse’s applicable exclusion amount. An amount equal to the current applicable exclusion amount is applied to the B trust when the first spouse dies. Any accumulation within the trust also remains outside the surviving spouse’s estate.
An “A” trust, also known as a marital trust, is often established in conjunction with a B Trust. An A trust qualifies for the unlimited marital deduction. The surviving spouse must receive income from the trust and may even receive all or a portion of the principal of the trust at the trustee’s discretion.
Qualified Terminal Interest Property Trust (QTIP)
Couples that use an “all-to-spouse” will and have children face an extra challenge if the surviving spouse remarries. For instance, imagine that a surviving spouse brings her deceased husband’s assets to a new marriage. What if that couple then establishes a simple “all-to-spouse” will and the wife predeceases her new husband? The first husband’s assets are ultimately transferred to the second husband, diluting or eliminating any inheritance to the children of the first marriage.
A QTIP trust is one approach to avoiding this situation. Through a QTIP trust, a person can provide for a surviving spouse’s lifetime and define the ultimate beneficiaries of the assets upon the death of the surviving spouse. With this approach, a couple can take comfort in knowing that they have provided for a surviving spouse while protecting the interest of the children, even if the surviving spouse remarries.
Estate Planning is not a (one and done) situation
Estate planning is not something you should do once and then forget about. Over a period of time, state laws change, tax laws change, children grow up and become adults and tomorrow’s needs may not be the same as today’s. Over time, your Estate plan can become obsolete if it is not maintained.
The best way for you to realize the significance of this is through a simple example. If you are maintaining your vehicle properly, you rotate its tires every 5,000 to 8,000 miles and change its oil every 3,000 miles. As you do this, you are investing in preventative care of your vehicle so that the tires last longer and the vehicle drives properly. Maintaining Estate plans is much like maintaining vehicles, a house or other assets. Estate plans need to be maintained in order to insure they operate as you intend, because state and federal law, health, family and financial changes can affect the plan you created in the past.
In addition to the above, certain events may cause you to revisit your plan such as:
- Moving to a new state
- Death of a spouse or any beneficiary
- Birth or adoption of a child
- Marriage or divorce
- Change in the value of assets
- Tax law changes
- Change in job or job status if you are not yet retired
At Barron Peck Bennie & Schlemmer our Cincinnati Estate Planning Attorneys prepare plans that are flexible enough to adjust to change, but it is important that you review your plan regularly to identify what and when any action may need to be taken.