It’s all in the details – property  titles and beneficiary designations.

As part of the estate planning process, I ask clients for a list of their assets and how those assets are titled.  The title to assets can determine who gets the property when the owner dies.  Property that is owned by two or more people  with rights of survivorship or by husband and wife will pass automatically at the death of one owner  to the surviving owner.  When real property is held by two or more people as tenants in common, each is considered to own a separate share of the property and to be able to dispose of that share in his or her Will.

As an example of why this is important, consider the following.  A husband and wife were sure that they owned their home jointly.  However, after the husband’s death, it was discovered that the deed to the property stated their names but failed to describe them as husband and wife. As a result, they owned the property as tenants in common without rights of survivorship.  This meant that the property did not automatically pass to the wife at the husband’s death.  Instead  the Will had to be probated to show that the husband’s share of the property passed to the wife under his Will.

Beneficiary designations on life insurance and retirement plans should be checked as part of the estate planning process also.  As an example of why, consider the following.   A man named his wife as beneficiary of a group life insurance policy that he had through work.   His wife died, and he never changed the beneficiary designation on the policy.  Decades later, after a second marriage, the husband died, and the family discovered the life insurance policy that still named the first wife as beneficiary.  The insurance company decided that the second wife was entitled to take the policy proceeds, much to the dismay of the children from the first marriage.

Property titles and beneficiary designations are an important part of an estate plan.  Make sure they are current and coordinated with your planning documents. 

Q: Is it good to hold my assets in joint accounts with rights of survivorship?

A:  If you want the joint owner to have the property after your death without going through probate, a joint account will accomplish that.  However, joint ownership can complicate matters in the estate planning context in ways that you may not have considered.

1. You can unwittingly undermine an “equal shares” estate plan. If you have planned for your estate to go equally to your children or other beneficiaries under your Will, the jointly owned property or account will have the effect of delivering a share of your estate to the joint owner. This may make the “equal shares” unequal and your other beneficiaries unhappy.
2. You can unknowingly make a gift that incurs gift tax.  For example, if you add a child’s name to a real property deed as a joint owner with rights of survivorship, you have just made a gift to that joint owner.  The value of the real property determines the value of the gift.  If the value of the gift exceeds $13,000 (the annual gift tax exclusion amount for an individual in 2010), you should file a Tennessee gift tax return and a federal gift tax return. Sometimes gifts are not discovered until after a joint owner passes away.  By that time, there may also be penalties and interest owed in addition to the gift tax.
3. You can unknowingly render your estate planning documents worthless.  The property that passes under a Will is the property that is titled in the name of the deceased person alone and that comes to the estate by a beneficiary designation.  Planning to minimize estate and inheritance tax often involves the use of trusts created after death with the property passing under the Will.  If the deceased person owned all his property jointly with his surviving spouse, the trusts created  under the Will cannot be funded and the couple will not get the benefit of the tax planning in the Wills. 
4. Joint ownership may not be what you intend.  Sometimes an older person wants to add a child or friend to a bank account so that person can help them pay bills.  The best way to do this is by making that person an “authorized signer” on the account and not a joint owner of the account. Often this distinction is not clearly understood or communicated to bank personnel and an account that should have had an authorized signer added, becomes a joint account instead.  This can lead to problems later on when the older person dies and a person who was never intended as a beneficiary becomes the owner of the joint account.

Joint accounts can be a convenient way to own property.  Just make sure you understand all the consequences of this form of ownership in the estate planning context.

The newspapers are full of stories about family fights over an inheritance.  Grief and loss can bring out the best and the worst in the survivors.  If you want to make sure your family is not torn apart by a fight over your estate, here are a few tips to incorporate into your estate planning:

1. Hire a lawyer who knows estate planning law.  Your neighbor who handles divorces or your cousin who is a corporate lawyer are not good choices.  Hire a lawyer whose practice is devoted to preparing Wills and administering estates.  You may pay a little more than if you have a friend or relative prepare the Will, but it will be well worth it.
2. Be smart in choosing the executor and trustee.  If hostilities may erupt among your children, do not appoint one of those individuals to be in a position of authority over the estate.  Consider hiring a professional corporate fiduciary, a bank or trust company, to serve as executor if you think a family feud may break out after your death.
3. Tell your family what you are planning.  No one likes to be surprised at the terms of a Will. Sit everyone down for a family conference and let them know what you have planned and why. It can defuse a potential fight if you make clear upfront what your wishes are.  This will keep family members from having expectations that will be disappointed and keep them from claiming later that a certain disposition was not what you intended.
4. If you have moved, make sure your Will takes into account the laws and probate system of your state of residence.   Make sure your Will is up to date and not a relic from the past that reflects your life 25 years earlier.

More tips to come in next posting.

Wake–up call

Last week, in the wee hours of Wednesday morning, I rushed my husband to the emergency room with chest pain. It was a heart attack.  He was treated promptly and successfully and is now home recovering. 

In the emergency room, they asked if he had a power of attorney for health care or Living Will. The unsigned forms were in my computer.  I had prepared the documents months ago, but was always too busy with other people’s work to print them out for him to sign. Fortunately, my husband was conscious and able to consent to treatment himself.

The saying “the cobbler’s children have no shoes” comes to mind.  In this case, the estate planning attorney has not been following the advice she gives to others.  Our Wills and POAs are old and out of date.  Preparing new documents for us has just moved to the top of my priority list.

My husband’s medical crisis was like sharp poke in the ribs for me. We never know when those documents will be needed.  Get it done now while you can.  A medical emergency can happen any time.  Be prepared.

What is a disclaimer?

            A disclaimer is a refusal to accept property that one would otherwise receive by gift or inheritance.  These days the disclaimer is receiving much more attention from estate planners for its usefulness in adjusting estate plans after death when needed.

            Disclaimers are a way of changing the distribution from a Will if there is a tax benefit or other reason to do so.  For example, Grandpa leaves his estate to his Daughter who is already wealthy.  Daughter disclaims the inheritance and allows it to go instead to her children who need the money to pay college tuitions for their children. 

            In order to disclaim property, the person disclaiming must satisfy several requirements.  There must be a written document describing the property to be refused and signed by the person disclaiming.  The written document must be delivered to the Executor and filed in the Probate Court within 9 months of the date of death. The person disclaiming must not have received any benefits from the property they are disclaiming.  In order to preserve the right to disclaim, the person entitled to an inheritance should consult with an estate attorney before doing anything with the estate assets.  The estate attorney will help determine whether the disclaimer is needed, and if it is needed, will prepare the written document and make sure that all the legal requirements are met.

            Disclaimers are useful in this time of uncertainty about the federal estate tax.  The disclaimer can be used to correct planning that relied on tax credits and exemptions that do not exist in 2010.  The disclaimer can be built-in to documents designed now as a way of giving flexibility and allowing for future adjustments to be made to obtain the most beneficial outcomes.

    As you may know, under current law, there will be no federal estate tax assessed against the estates of those who die in 2010.  However, the federal estate tax will be reinstated with a $1 million exemption and a 45% tax rate on January 1, 2011.  Many thought that Congress would have acted by now to set a higher exemption for the estate tax for 2010 and beyond, but so far no action has been taken.  If Congress does act this year, whatever changes they enact may be retroactive to January 1^st.

    How does this affect the average person who already has a Will or Trust in place?  It depends.  For those with simple Wills and no tax planning, there will be no problem.  There is more cause for concern if you have documents that include tax planning language that divides estate assets by referring to estate tax credits and exemptions.  Most of these credits and exemptions do not exist for those who die in 2010.  It is unclear what will happen if someone dies in 2010 with this type of language in their Will or trust.  However, it is certain that in some situations, there will be undesirable results.   

    If you have existing wills or trusts with tax planning and you are able to make changes, you should review your existing estate planning documents with your estate planning attorney.  If your documents divide assets into marital trusts and shares, and “family trusts” or “credit shelter trusts,” and these trusts have different beneficiaries, you may need to amend your documents.  Second marriage situations in particular may require review. Elderly persons or others in poor health are more likely to be impacted by the 2010 situation than others and may want to have an estate planning “check-up”.

            Most people will not need to take any corrective action. If you live until 2011 when the estate tax is restored, the 2010 issues go away.  Hovever, it is a good idea to have your estate planning documents reviewed regularly and adjusted for changes in the law, changing family situations, increasing or decreasing asset values, and other changes.   You should consider making an appointment with your estate planning attorney to have your documents reviewed for 2010 issues and for any other changes that have occurred since the documents were prepared.

Q:  Who should I name to be Executor of my Will?

A:

Choosing an Executor is one of the most important decisions you make when you plan your estate.   When you name someone as Executor you are giving them a job with substantial responsibilities, not just an honorary title.  Being Executor can be time-consuming and difficult, and holds the potential of personal liability for mistakes made.

The Executor is responsible for carrying out the administration of the estate, filing necessary documents in Probate Court, collecting the assets of the deceased, paying debts, distributing the assets as directed by the Will, and filing any necessary tax returns.    The job can last 9 to 12 months if there are no problems.  In a complex estate with assets that may be hard to manage or sell or where family relationships complicate the administration, the job of the Executor can last for several years.  The Executor can be held personally liable for mistakes such as distributing all the assets before the taxes are paid.

Most people choose a trusted family member or friend to be Executor.  Some choose a professional advisor or a corporate entity as their Executor.   If you prefer to name a family member or friend, choose someone with a business  or financial background, someone who is good with paperwork and attention to detail.   Once appointed by the court, an individual Executor can hire an attorney, an accountant, appraisers, investment advisors and others they will need to advise them in various aspects of the job.

A bank or trust company is the type of corporate entity that can serve as Executor.   A corporate entity will have staff who carry out this type of work routinely.  Corporate estate administrators are skilled and impartial.  They usually take control of the financial assets of an estate and hold those assets in-house where they can easily track all income and disbursements.  They charge a fee for their services, usually a percentage of the assets.  A corporate Executor can be well worth the cost, particularly if the estate is complex or where difficult family relationships make the estate administration particularly challenging.

Sometimes the best solution is to name two or more Co-Executors, with one being a family member or friend and the other being a professional advisor or corporate entity.  This can give you the best of both worlds, with the friend or family member providing the personal knowledge of the family, and the professional advisor or corporate Executor providing the needed expertise.  Whatever you decide, don’t underestimate the responsibilities that you are giving to the person you name as Executor.

Giving  gifts as a means of estate planning

                We have all heard the saying that it is better to give than to receive.  This is especially true if you are a wealthy person who wants to minimize estate taxes.  Giving away money or investment assets, whether to charities or to family members, reduces the size of your estate and therefore reduces the amount of estate and inheritance taxes that your estate will pay later.

                The advantage of giving gifts during life is that you get the pleasure of seeing your loved ones enjoy the gift.  It is a relatively low cost means of reducing your estate and can be as simple as writing a check. You don’t have to pay an estate planning lawyer to help you do it.  However, you should get some initial guidance from an accountant or estate planning attorney on the laws covering these types of gifts so that you don’t inadvertently run up a big gift tax liability.   Gift taxes are paid by the donor, not by the recipient of the gift.

                Both the IRS and the state of Tennessee limit the amount that a donor can give during life without incurring gift taxes.  A donor can give $13,000 to anyone each year without incurring federal gift tax.  Tennessee allows a donor to give $13,000 to close family members (Class A donees under the Tennessee gift tax law) without incurring Tennessee gift tax.   For other relatives or non-relatives (Class B), the amount that can be given free of Tennessee gift tax is smaller.             

                The disadvantage of making a gift is that once you give the gift, you may not be able to get it back if you need it later.  Before starting a program of gift-giving, make sure you have more than enough to take care of your own needs for the rest of your life.

                A consistent practice of making annual gifts to family members can reduce the donor’s estate substantially over time.  For example, a donor with 4 children and 8 grandchildren can give away $156,000 per year by making $13,000 gifts to each child and each grandchild.  If each of those recipients is married, the donor could also give to the spouse of each child and each grandchild and the gifts would total  $312,000 in a year.   If these gifts are made consistently over 4 years, the donor’s estate would be reduced by $1,248,000 with minimal transfer costs.   This technique is not an option for everyone, but it can be a low cost way to get your estate to your loved ones and save taxes later.