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The knowledge that we will eventually die is one of the things that seems to distinguish
humans from other living beings. At the same time, no one likes to dwell on the prospect
of his or her own death. But if you postpone planning for your demise until it is
too late, you run the risk that your intended beneficiaries -
This is why estate planning is so important, no matter how small your estate may be. It allows you, while you are still living, to ensure that your property will go to the people you want, in the way you want, and when you want. It permits you to save as much as possible on taxes, court costs and attorneys' fees; and it affords the comfort that your loved ones can mourn your loss without being simultaneously burdened with unnecessary red tape and financial confusion.
All estate plans should include, at minimum, two important estate planning instruments: a durable power of attorney and a will. The first is for managing your property during your life, in case you are ever unable to do so yourself. The second is for the management and distribution of your property after death. In addition, more and more, Americans also are using revocable (or "living") trusts to avoid probate and to manage their estates both during their lives and after they're gone.
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For most people, the durable power of attorney is the most important estate planning
In that case, the person you choose will be able to step in and take care of your financial affairs. Without a durable power of attorney, no one can represent you unless a court appoints a conservator or guardian. That court process takes time, costs money, and the judge may not choose the person you would prefer. In addition, under a guardianship or conservatorship, your representative may have to seek court permission to take planning steps that she could implement immediately under a simple durable power of attorney.
A power of attorney may be limited or general. A limited power of attorney may give
someone the right to sign a deed to property on a day when you are out of town. Or
it may allow someone to sign checks for you. A general power is comprehensive and
gives your attorney-
A power of attorney may also be either current or "springing." Most powers of attorney take effect immediately upon their execution, even if the understanding is that they will not be used until and unless the grantor becomes incapacitated. However, the document can also be written so that it does not become effective until such incapacity occurs. In such cases, it is very important that the standard for determining incapacity and triggering the power of attorney be clearly laid out in the document itself.
However, attorneys report that their clients are experiencing increasing difficulty
in getting banks or other financial institutions to recognize the authority of an
agent under a durable power of attorney. A certain amount of caution on the part
of financial institutions is understandable: When someone steps forward claiming
to represent the account holder, the financial institution wants to verify that the
While you should seriously consider executing a durable power of attorney, if you do not have someone you trust to appoint it may be more appropriate to have the probate court looking over the shoulder of the person who is handling your affairs through a guardianship or conservatorship. In that case, you may execute a limited durable power of attorney simply nominating the person you want to serve as your conservator or guardian. Most states require the court to respect your nomination "except for good cause or disqualification."
Your will is a legally-
First, with a will you can direct where and to whom your estate (what you own) will go after your death. If you died intestate (without a will), your estate would be distributed according to your state's law. Such distribution may or may not accord with your wishes.
Many people try to avoid probate and the need for a will by holding all of their
property jointly with their children. This can work, but often people spend unnecessary
effort trying to make sure all the joint accounts remain equally distributed among
their children. These efforts can be defeated by a long-
The second reason to have a will is to make the administration of your estate run
smoothly. Often the probate process can be completed more quickly and at less expense
to your estate if there is a will. With a clear expression of your wishes, there
are unlikely to be any costly, time-
Third, only with a will can you choose the person to administer your estate and distribute it according to your instructions. This person is called your "executor" (or "executrix" if you appoint a woman) or "personal representative," depending on your state's statute. If you do not have a will naming him or her, the court will make the choice for you. Usually the court appoints the first person to ask for the post, whoever that may be.
Any complete estate plan should include a medical directive. This term may encompass a number of different documents, including a health care proxy, a durable power of attorney for health care, a living will, and medical instructions. The exact document or documents will depend on your state's laws and the choices you make.
Both a health care proxy and a durable power of attorney for health care designate someone you choose to make health care decisions for you if you are unable to do so yourself. A living will instructs your health care provider to withdraw life support if you are terminally ill or in a vegetative state. A broader medical directive may include the terms of a living will, but will also provide instructions if you are in a less severe state of health, but are still unable to direct your health care yourself.
A trust is a legal arrangement through which one person (or an institution, such
as a bank or law firm), called a "trustee," holds legal title to property for another
person, called a "beneficiary." The rules or instructions under which the trustee
operates are set out in the trust instrument. Trusts have one set of beneficiaries
during their lives and another set -
There can be several advantages to establishing a trust, depending on your situation.
A testamentary trust is one created by your will, and it does not come into existence until you die. In contrast, an inter vivos trust starts during your lifetime. You create it now and it exists during your life.
Revocable trusts are often referred to as "living" trusts. With a revocable trust, the donor maintains complete control over the trust and may amend, revoke or terminate the trust at any time. This means that you, the donor, can take back the funds you put in the trust or change the trust's terms. Thus, the donor is able to reap the benefits of the trust arrangement while maintaining the ability to change the trust at any time prior to death.
An irrevocable trust cannot be changed or amended by the donor. Any property placed into the trust may only be distributed by the trustee as provided for in the trust document itself. For instance, the donor may set up a trust under which he or she will receive income earned on the trust property, but that bars access to the trust principal. This type of irrevocable trust is a popular tool for Medicaid planning.
As noted above, a testamentary trust is a trust created by a will. Such a trust has no power or effect until the will of the donor is probated. Although a testamentary trust will not avoid the need for probate and will become a public document as it is a part of the will, it can be useful in accomplishing other estate planning goals. For instance, the testamentary trust can be used to reduce estate taxes on the death of a spouse or provide for the care of a disabled child.
The purpose of a supplemental needs trust is to enable the donor to provide for the
continuing care of a disabled spouse, child, relative or friend. The beneficiary
of a well-
Credit shelter trusts are a way to take full advantage of the estate tax exemption.
The first $3.5 million (in 2009) of an estate are exempt from taxes, so theoretically
a husband and wife would have no estate tax if their estate is less than $7 million.
However, if one spouse dies and leaves everything to the surviving spouse, the surviving
spouse may have an estate that is greater than $3.5 million. When the surviving spouse
dies, any part of the estate over $3.5 million will be subject to estate tax.
To avoid this problem, the spouses can create a credit shelter trust as part of their estate plan. When one spouse passes away, the first $3.5 million of that spouse's estate is put in to a trust. The surviving spouse can receive income from the trust, but as long as he or she does not control the principal, the money will not be included in the surviving spouse's estate when he or she passes away.
Proper execution of a legal instrument requires that the person signing have sufficient
mental "capacity" to understand the implications of the document. While most people
speak of legal "capacity" or "competence" as a rigid black line-
One side of the capacity equation involves the client's abilities, which may change from day to day (or even during the day), depending on the course of the illness, fatigue and the effects of medication. On the other side, greater understanding is required for some legal activities than for others. For instance, the capacity required for entering into a contract is higher than that required to execute a will.
This is a relatively "low threshold," meaning that signing a will does not require a great deal of capacity. The fact that the next day the testator does not remember signing the will, and is not sufficiently "with it" to do so, does not invalidate the document if he/she understood it when he/she signed it.
The standard of capacity with respect to durable powers of attorney varies from jurisdiction
to jurisdiction. Some courts and practitioners argue that this threshold can be quite
low. The client need only know that he trusts the attorney-
The standards for entering into a contract are different because the individual must know not only the nature of his property and the person with whom he is dealing, but also the broader context of the market in which he/she is agreeing to buy or sell services or property.
Competency to enter into a contract presupposes something more than a transient surge of lucidity. It requires not only the ability to comprehend the nature and quality of the transaction, together with an understanding of what is "going on," but an ability to comprehend the nature and quality of the transaction, together with an understanding of its significance and consequences.
As a practical matter, in assessing a client's capacity to execute a legal document, attorneys generally ask the question, "Is anyone going to challenge this transaction?" If a client of questionable capacity executes a will giving his estate to his wife, and then to his children if his wife does not survive him, it's unlikely to be challenged. If, on the other hand, he executes a will giving his estate entirely to one daughter with nothing passing to his other children, the attorney must be more certain of being able to prove the client's capacity.
While the standards may seem clear, applying them to particular clients may be difficult. The fact that a client does not know the year or the name of the President may mean she does not have capacity to enter into a contract, but not necessarily that she can't execute a will or durable power of attorney. The determination mixes medical, psychological and legal judgments. It must be made by the attorney (or a judge, in the case of guardianship and conservatorship determinations) based on information gleaned by the attorney in interactions with the client, from other sources such as family members and social workers, and, if necessary, from medical personnel. Doctors and psychiatrists cannot themselves make a determination as to whether an individual has capacity to undertake a legal commitment. But they can provide a professional evaluation of the person that will help an attorney make this decision.
Because you need a third party to assess capacity and because you need to be certain that the formal legal requirements are followed, it can be risky to prepare and execute legal documents on your own without representation by an attorney.
The exemption from federal estate taxes has increased significantly since 1997 while the estate tax rate has significantly decreased. Below is a chart that shows the changes in the estate tax exemption and estate tax rate from 1997 through 2013.Tax years 2010 through 2012 are based on the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act ("TRA 2010") that was signed into law by President Obama on December 17, 2010. This law is only good for two years and so will sunset on December 31, 2012, meaning that on January 1, 2013, the federal estate tax exemption and rate will default to the numbers that were in effect in 2001/2002.
To view the estate tax exemptions and estate tax rates from 1916 (the first year
the estate tax was enacted) through 1997, please refer to the following: Table Showing
Federal Estate Tax Exemption and Rate: 1916 -
*The heirs of decedents who die in 2010 will have the choice to use the $5,000,000 estate exemption/35% estate tax rate or $0 estate tax exemption/0% estate tax rate coupled with use of the modified carryover basis rules.
**TRA 2010 provides that the estate tax exemption, lifetime gift tax exemption, and
Under the tax law enacted in 2001, whatever you own was subject to the federal estate tax upon your death, until 2010. For the year 2010, estates were entirely free from federal taxation. The law that included this provision expired, however, at the end of 2010 and Congress set a $5.0 million exemption until 2012 at which time the exemption will expire unless Congress extends the deadline or sets a new exemption level.
That said, not all estates will be taxed while the estate tax is in effect. First, spouses can leave any amount of property to their spouses, if the spouses are U.S. citizens, free of federal estate tax. Second, the estate tax applies only to estates valued at more than $5.0 million in 2011 and 2012 after which time Congress will undoubtedly extend the existing exemption or set a new level. The federal government allows you this tax credit for gifts made during your life or for your estate upon your death. Third, gifts to charities are not taxed.
Some states also have an estate or inheritance tax. But more and more have moved to a so called "sponge" tax, which ultimately doesn't cost your estate. The way this works is that the states take advantage of a provision in the federal estate tax permitting a deduction for taxes paid to the state up to certain limits. The states simply take the full amount of what you are allowed to deduct off the federal taxes. Under the 2001 tax law the allowable state deduction was phased out and disappeared in 2005. Thus, many states are changing their estate tax laws to make up the difference. These changes may call for a restructuring of your estate plan; check with your attorney.
One simple way you can reduce estate taxes or shelter assets in order to achieve
Medicaid eligibility is to give some or all of your estate to your children (or anyone
else) during their lives in the form of gifts. Certain rules apply, however. There
is no actual limit on how much you may give during your lifetime. But if you give
any individual more than $13,000 (in 2011), you must file a federal and possibly
a state gift tax return reporting the gift to the IRS and your state. Also, the
amount above $13,000 will be counted against a $1.0 million lifetime federal tax
exclusion for gifts. Each dollar of gift above $1 million reduces the amount that
can be transferred tax-
The $13,000 figure is an exclusion from the gift tax reporting requirement. You may give $13,000 to each of your children, their spouses, and your grandchildren (or to anyone else you choose) each year without reporting these gifts to the IRS. In addition, if you're married, your spouse can duplicate these gifts. For example, a married couple with four children can give away up to $104,000 in 2012 with no gift tax implications. In addition, the gifts will not count as taxable income to your children (although the earnings on the gifts if they are invested will be taxed). For more on gifting, see Gifts to Grandchildren.
Another way to remove assets from an estate is to make a contribution to a charitable
gift annuity, or CGA. A CGA enables you to transfer cash or marketable securities
to a charitable organization or foundation in exchange for an income tax deduction
and the organization's promise to make fixed annual payments to you (and to a second
beneficiary, if you choose) for life. A portion of the income will be tax-
Probate is the process by which a deceased person's property, known as the "estate," is passed to his or her heirs and legatees (people named in the will). The entire process, supervised by the probate court, usually takes about a year. However, substantial distributions from the estate can be made in the interim.
The emotional trauma brought on by the death of a close family member often is accompanied by bewilderment about the financial and legal steps the survivors must take. The spouse who passed away may have handled all of the couple's finances. Or perhaps a child must begin taking care of probating an estate about which he or she knows little. And this task may come on top of commitments to family and work that can't be set aside. Finally, the estate itself may be in disarray or scattered among many accounts, which is not unusual with a generation that saw banks collapse during the Depression.
Here we set out the steps the surviving family members should take. These responsibilities ultimately fall on whoever was appointed executor or personal representative in the deceased family member's will. Matters can be a bit more complicated in the absence of a will, because it may not be clear who has the responsibility of carrying out these steps.
First, secure the tangible property. This means anything you can touch, such as silverware, dishes, furniture, or artwork. You will need to determine accurate values of each piece of property, which may require appraisals, and then distribute the property as the deceased directed. If property is passed around to family members before you have the opportunity to take an inventory, this will become a difficult, if not impossible, task. Of course, this does not apply to gifts the deceased may have made during life, which will not be part of his or her estate.
Second, take your time. You do not need to take any other steps immediately. While bills do need to be paid, they can wait a month or two without adverse repercussions. It's more important that you and your family have time to grieve. Financial matters can wait. (One exception: Social Security should be notified within a month of death. If checks are issued following death, you could be in for a battle. For more on Social Security's death procedures, click on http://www.ssa.gov/pubs/deathbenefits.htm)
When you're ready, but not a day sooner, meet with an attorney to review the steps necessary to administer the deceased's estate. Bring as much information as possible about finances, taxes and debts. Don't worry about putting the papers in order first; the lawyer will have experience in organizing and understanding confusing financial statements.
Some of these steps can be eliminated by avoiding probate through joint ownership or trusts, but whoever is left in charge still has to pay all debts, file tax returns, and distribute the property to the rightful heirs. You can make it easier for your heirs by keeping good records of your assets and liabilities. This will shorten the process and reduce the legal bill.
Health and Elder Law Programs (H.E.L.P.), a non-
Every adult is assumed to be capable of making her own decisions unless a court determines otherwise. If an adult becomes incapable of making responsible decisions due to a mental disability, the court will appoint a substitute decision maker, often called a "guardian," but in some states called a "conservator" or other term. Guardianship is a legal relationship between a competent adult (the "guardian") and a person who because of incapacity is no longer able to take care of his or her own affairs (the "ward").
The guardian is authorized to make legal, financial, and health care decisions for the ward. Depending on the terms of the guardianship and state practices, the guardian may or may not have to seek court approval for various decisions. In many states, a person appointed only to handle finances is called a "conservator."
Some incapacitated individuals can make responsible decisions in some areas of their
lives but not others. In such cases, the court may give the guardian decision making
power over only those areas in which the incapacitated person is unable to make responsible
decisions (a so-
The standard under which a person is deemed to require a guardian differs from state to state. In some states the standards are different, depending on whether a complete guardianship or a conservatorship over finances only is being sought. Generally a person is judged to be in need of guardianship when he or she shows a lack of capacity to make responsible decisions. A person cannot be declared incompetent simply because he or she makes irresponsible or foolish decisions, but only if the person is shown to lack the capacity to make sound decisions. For example, a person may not be declared incompetent simply because he or she spends money in ways that seem odd to someone else. Also, a developmental disability or mental illness is not, by itself, enough to declare a person incompetent.
In most states, anyone interested in the proposed ward's well-
Protections for the proposed ward vary greatly with from state to state, with some simply requiring that notice of the proceeding be provided and others requiring the proposed ward's presence at the hearing. The proposed ward is usually entitled to legal representation at the hearing, and the court will appoint an attorney if the allegedly incapacitated person cannot afford a lawyer.
At the hearing, the court attempts to determine if the proposed ward is incapacitated and, if so, to what extent the individual requires assistance. If the court determines that the proposed ward is indeed incapacitated, the court then decides if the person seeking the role of guardian will be a responsible guardian.
A guardian can be any competent adult -
The guardian need not be a person at all -
Courts often give guardians broad authority to manage the ward's affairs. In addition to lacking the power to decide how money is spent or managed, where to live and what medical care he or she should receive, wards also may not have the right to vote, marry or divorce, or carry a driver's license. Guardians are expected to act in the best interests of the ward, but given the guardian's often broad authority, there is the potential for abuse. For this reason, courts hold guardians accountable for their actions to ensure that they don't take advantage of or neglect the ward.
The guardian of the property inventories the ward's property, invests the ward's funds so that they can be used for the ward's support, and files regular, detailed reports with the court. A guardian of the property also must obtain court approval for certain financial transactions. Guardians must file an annual account of how they have handled the ward's finances. In some states guardians must also give an annual report on the ward's status. Guardians must offer proof that they made adequate residential arrangements for the ward, that they provided sufficient health care and treatment services, and that they made available educational and training programs, as needed. Guardians who cannot prove that they have adequately cared for the ward may be removed and replaced by another guardian.
Because guardianship involves a profound loss of freedom and dignity, state laws require that guardianship be imposed only when less restrictive alternatives have been tried and proven to be ineffective. Less restrictive alternatives that should be considered before pursuing guardianship include:
Power of Attorney. A power of attorney is the grant of legal rights and powers by
a person (the principal) to another (the agent or attorney-
Representative or Protective Payee. This is a person appointed to manage Social Security, Veterans' Administration, Railroad Retirement, welfare or other state or federal benefits or entitlement program payments on behalf of an individual.
Conservatorship. In some states this proceeding can be voluntary, where the person needing assistance with finances petitions the probate court to appoint a specific person (the conservator) to manage his or her financial affairs. The court must determine that the conservatee is unable to manage his or her own financial affairs, but nevertheless has the capacity to make the decision to have a conservator appointed to handle his or her affairs.
Revocable trust. A revocable or "living" trust can be set up to hold an older person's
assets, with a relative, friend or financial institution serving as trustee. Alternatively,
the older person can be a co-
DISCLAIMER: This information was originally obtained from www.elderlawanswers.com and has been updated. The updated information is based on new and/or revised federal, state, or local laws, with some of the updated information applicable to citizens with residence in the state of Tennessee. The effective date of all changes and/or revisions to the information contained on this site: TUESDAY, JANUARY 1, 2013.
The information on this web site is a public resource of general information, which
is intended, but not promised or guaranteed, to be correct, complete and up-