Estate and Tax Planning is an important practice area with a number of terms that are used universally. In order to support a general understanding of the myriad of complex terms, we created this glossary for our clients’ reference. While many are familiar with terms such as trusts and wills, there are a number of others that are discussed throughout the planning process. Read on to learn more:
The Advance Health Care Directive communicates your health care wishes and appoints an agent to carry out such wishes upon your inability to communicate with a treating physician. This document sets forth your decisions about artificial life support, types of treatment you may or may not allow, and other personal health care matters, well in advance of those questions ever arising. Not only does it ensure that your wishes will be heard, but prevents your loved ones from having to guess about what you would have wanted. In doing so, it prevents potential conflict within the family in a time of crisis. Any well-planned estate will include an Advance Health Care Directive.
Again, this is an area where a business owner can find many self-help legal document services that will claim that you can save money without an attorney. But what will be the cost of making important legal decisions with respect to your business without proper legal advice? A business entity can take many forms, including: Sole Proprietorships, Partnerships, Joint Ventures, Corporations, or Limited Liability Companies. Each form of business entity offers unique advantages, and also involves its own administrative formalities. Selection of the correct business entity when starting a new business is one of the most important decisions for a small business owner. Whether the business is a professional practice, a licensed trade, retail store, or real estate investment, all owners need to be educated as to their options, as well as the benefits and risks that any particular form of business entity can present. Experienced counsel is strongly recommended.
There are two reasons that a business owner will incorporate: The first is to save money on income taxes; and the second is to limit the liability of the owners/ shareholders. In evaluating the decision to incorporate, we strongly advise that our clients properly evaluate their income and expenses, and work with a skilled income tax advisor. While a good errors and omissions, liability, and/or malpractice insurance policy is always prudent, the corporate form will provide the extra degree of comfort that many business owners need.
A Durable Power of Attorney for Financial Affairs (DPOA) appoints someone you trust to handle financial and legal transactions on your behalf while you are alive. Many DPOA documents come into effect upon the mental incapacity of the principal (the person who signed the document). But many also are drafted to become effective immediately upon signing. That is an important decision that is best made upon consultation with skilled counsel. When used properly, the DPOA is not only a crucial tool to have in the proverbial shed during a health crisis, it can also avoid the need to establish a costly and time consuming Conservatorship. Everyone should have a DPOA in place, regardless of the degree of their wealth.
Estate Planning is the practice of analyzing a person’s over-all financial picture, strategizing to minimize estate tax, and other post-death administrative expenses, considering testamentary and other family needs, and implementing the plan of action. The concept of the ‘Family Trust’ or ‘Revocable Living Trust’ is basic to creating an estate plan.
Generally speaking, guardianships are for minors whose parents are no longer caring for their children, or when a child stands to receive an inheritance from a probate estate or a pay-out under a life insurance policy. Conservatorships are created for adults who have become incapacitated. Both Guardianships and Conservatorships are established by court order, create a fiduciary relationship between the Guardian or Conservator and the minor or Conservatee, and have strict accounting requirements. Further, both require periodic reporting to the Court system. The reporting and accounting requirements have been subject to recent changes, which have been implemented to establish a better mechanism of protection for the person subject to the Guardianship or Conservatorship. While these processes can be at first daunting, with proper guidance and representation, a Guardianship or Conservatorship can be the best way to assist a family member through a time of need.
Similar to a corporation, a Limited Liability Company generally shields the owner/ membership interest holder from liabilities in excess of the LLC assets. However, also similar to a corporation, limited liability is not the only factor one should evaluate in selecting this form of business entity. For example, as single-member LLC’s are generally disregarded as separate entities for tax-paying purposes, many solely-owned businesses would be better organized as a corporation. On the other hand, LLC’s are particularly well suited to hold title to real estate held for investment purposes. As each client’s goals and needs are unique, we can help you with the distinct challenge of selecting and forming the most appropriate entity for your business endeavor.
Probate is the court-supervised process of administering a decedent’s estate. It results in your creditors being paid, tax returns being filed and tax paid, and your assets being distributed to the heirs and beneficiaries under your will. Typically, the executor named in your will would start the process after your death by filing a petition in court and seeking appointment. Your executor would then take charge of your assets, pay your debts and, after receiving court approval, distribute the rest of your estate to your beneficiaries. If you were to die intestate (that is, without a will), a relative or other interested person could start the process. In such an instance, the court would appoint an administrator to handle your estate. ‘Personal Representative’ is another term used to describe the administrator or executor appointed to handle an estate.
The probate process has advantages and disadvantages. The probate process functions quite well to ensure that creditors are paid and the correct parties receive the estate. In addition, the probate court reviews the personal representative’s handling of each estate to ensure that no financial mismanagement has taken place, which can ultimately help protect the beneficiaries’ interests.
While it is a functional process, Probate is generally much slower, and much more costly to administer an Estate through a Probate as opposed to a Trust Administration. The formal, court-supervised probate process is required when a decedent dies while owning Probate Assets the value of which are in excess of $184,500, and the decedent dies either having executed a will, or leaving no testamentary instrument whatsoever. If a decedent’s estate is in excess of $184,500 and is being handled through the administration of a trust, the need to go to court is avoided in most circumstances. The legal expenses and time requirements are drastically reduced when handling a decedent’s estate through a trust administration as opposed to being handled through a probate administration.
Summary probate procedures are available for transferring property to a spouse or domestic partner or for handling estates in which the total assets amount to less than $184,500. One disadvantage, however, is that probates are public. Your estate plan and the value of your assets will become a public record. Also, because lawyer’s fees and executor’s commissions are based on a statutory fee schedule, a probate is quite a bit more costly than the management and distribution of a comparable estate under a living trust.
A Revocable Living Trust is a written legal document that partially substitutes for a will. The function of this type of trust is to avoid the slow and costly process of probate, hence the term ‘probate avoidance trust’ is sometimes used to more generically describe this type of trust. It is called ‘Revocable’ because you are allowed to revoke or modify the trust during your lifetime, for so long as you have mental capacity. The terms ‘Living Trust’ and/or ‘Family Trust’ are colloquial. When you set up a Living Trust, you transfer assets (your home, bank accounts and stocks, for example) from your name as an individual to your name as Trustee of your Trust, which you control. The effect of that transfer, in the eyes of the probate court, is to have divested yourself of your ownership interest in the transferred assets to a distinct legal entity, thus removing those assets from the jurisdiction of the probate court. The concept is simple, but this is what keeps you and your family out of the probate court.
The administration of a Trust Estate after the settlor (again, that’s the person that created the trust) passes away. The Trust becomes irrevocable upon the death of the Settlor (person who established the trust). When the Trust becomes irrevocable, it becomes its own distinct tax paying entity and the Successor Trustee is required to obtain an Employer Identification number (EIN) for the trust administration. The EIN is like your Social Security Number, but it’s for the Trust Administration. All of the income and expenses of the Trust Administration are reported to the IRS on a Federal Form 1041 Fiduciary Income Tax Return. The 1041 is required to be filed with the IRS for each year in which the Trust is still operating, and incurs more than $600 of income. It is strongly recommended that the Successor Trustee hire a professional tax return preparer to prepare and file the 1041.
A will is a traditional legal document that:
Names individuals (or charitable organizations) who will receive your assets after your death, either by outright gift or in a trust.
Nominates an executor who will be appointed and supervised by the probate court to manage your estate; pay your debts, expenses and taxes; and distribute your estate according to the instructions in your will.
If you have minor children, we use the will as the document to state nominations of their guardians in the event of your untimely passing. Most assets in your name alone at your death will be subject to your will. Some exceptions include securities accounts and bank accounts that have designated beneficiaries, life insurance policies, IRAs and other tax-deferred retirement plans, and some annuities. Such assets would pass directly to the beneficiaries and would not be governed by the terms of your will.
Simple Wills can be prepared in the ‘Testator’s’ own handwriting. Or, as estate planning attorneys regularly handle in the context of preparing the set of a client’s estate planning documents, a more formal Will is prepared for a client. Again, if a person dies with a Will, and their Probate Assets are valued at more than $184,500, and not otherwise exempt from Probate, the Estate must be administered through a formal Probate proceeding.
Anytime a person uses a trust as their primary testamentary instrument, it is essential to also have a specific type of will in place that is commonly referred to as a ‘Pour Over Will.’ The Pour Over Will is a catch all document to ensure that all assets are distributed in accordance with the intentions reflected in the trust document. The Pour Over Will does not contain the words ‘Pour Over,’ but it does provide that all of the Testator’s Probate Assets be distributed to his or her trust. In the event that a decedent dies without a particular asset titled in the name of his or her trust, and that asset is valued more than $184,500 and we have no other legal means of including that asset as an asset of the trust, we then use the Pour Over Will in the context of a formal probate proceeding to transfer that asset to the trust, which controls the ultimate distribution of that asset to the intended beneficiaries. Without a Pour Over Will in place in conjunction with a trust, unintended results with respect to the distribution of the decedent’s estates could result.
