Estate taxes have been in the news over the past year, and the 2011 Federal estate tax exemption is now $5 million.  This is only temporary, as this law expires in two years, leaving the future of the Federal estate tax, once again, unknown.  But who is responsible for paying estate taxes?  Do your heirs or beneficiaries, those who receive an inheritance, have to pay it?

No, the estate itself pays estate taxes.  When a person dies, the executor of the estate is named when the estate is probated, the legal process that administers an estate.  The executor is in charge of gathering up the estate’s assets and distributing them in accordance to the decedent’s Will. Depending on how much a person owns at his or her death, there is a possibility that an estate tax might be due.

Prior to distributing the assets of an estate the executor must pay all estate taxes owed. This becomes important if you have an estate of mostly real estate or other difficult-to-sell assets and little cash. The executor must file both a federal and state estate tax return within a specified time, normally nine months from the date of death.

Unless an extension is requested, in most cases, the full tax payment will be due within that time frame. In the event that one dies with a large amount of real estate or other difficult-to-sell assets and little cash, the executor may be forced to liquidate some of the real estate assets to get the cash needed to pay the taxes.  This may impact the amount that your beneficiaries receive, so in essence, they do ultimately pay.

The estate tax, along with any of the other debts of the estate, must be paid before heirs receive their inheritances.  An estate planning attorney can work with you to ensure that your estate has not only addressed any estate tax burden, but to ensure that you have estate planning tools in place to provide enough cash to get the bills, including the tax bill, paid.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

You don’t need to be wealthy to have an estate plan, but what you should have is fiscal fitness within an estate plan.  What do you need in a fiscally fit estate plan?

A Will

A will is necessary even if you are using a trust in an estate plan, since the will is used to name an executor for an estate as well as a guardian for minor children.  A pourover will is used together with a trust to transfer any property that may not be held within the trust after you pass away.  If the will is the primary estate planning document, it should also document how you would like your property distributed.

Life Insurance

Life insurance can play an important role in estate planning.  It can be used to not only leave money to the family to replace your income, but for other purposes, such as taking care of funeral expenses, estate probate expenses or estate taxes.

Retirement Account

A retirement account can not only help fund your retirement, but upon your passing the balance passes to a named beneficiary, such as a spouse, and can help take care of them later in life.

A Durable Power of Attorney

Incapacitation planning is an important aspect of estate planning.  Plans should be made to handle your personal and financial affairs in the event you are no longer able to do so on your own.  A durable power of attorney that names a proxy or attorney-in-fact can help avoid the intrusiveness and expense of guardianship proceedings.

Advance Medical Directives

Advance medical directives allow you to document your wishes concerning end-of-life treatments and the use of life sustaining measures.  Besides lightening the burden of these decisions on family, they help avoid the expense of litigation should there be a disagreement concerning your care while you are incapacitated.

The fiscal fitness of your estate plan depends on your personal and family situation.  An estate planning attorney can advise you on the tools that can meet your family’s estate planning needs and goals.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

A trust is a powerful estate planning tool, but how much do you know regarding what a trust can accomplish within an estate plan?

First, to review how a trust works:

A trust is a legal entity that is set up by a “grantor” to hold and manage property for the benefit of beneficiaries named within the trust documents.  Nearly any type of property can be owned by a trust, including stock, life insurance policies, cash, real estate and even personal property.

Why would a trust be used in an estate plan?  A trust can accomplish several goals for your estate plan, such as:

• Avoiding probate – since the trust legally owns the property rather than the deceased, the property avoids probate and can be transferred much more quickly.
• Allowing confidentiality – since trust property does not need to be probated, there is no public record of the probate court proceeding.
• Retaining control – a trust allows you to retain some control over how assets are managed and distributed after you pass away by appointing other persons or entities to manage the trust when you are no longer alive.
• Managing property in case of incapacitation – a living trust allows you to have a successor trustee who can manage your trust property in the event of your incapacitation.
• Reducing estate taxes – some types of trusts can be formed to reduce the tax burden of an estate.

Many are familiar with a living trust, as they have become heavily advertised over the past decade, but there are several types of trusts:

• Living Trusts – A living trust becomes effective during the grantor’s lifetime and can be used as part of an incapacitation plan to manage your property should you no longer be able to do so on your own. It can also be effective after you pass away.
• Testamentary Trusts – Testamentary trusts are created by a will and they are only formed upon the death of the grantor.  They are often used to create a trust for minors to manage property until they reach an age specified within the trust documents.
• Marital Trusts – A marital trust helps married couples minimize estate taxes  by ensuring that the estate tax exemption amounts of both spouses are fully used and holds all assets available to the surviving spouse for his or her needs.

To determine if a trust fits into your estate plan, work with an estate planning attorney to ensure that you are using the tools that meet your family’s needs and goals.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

A will trust is a trust that is literally contained within a will and created upon the death of the testator, the person who created the will.  A trust is a legal arrangement in which a ‘grantor’, the person creating the trust, transfers ownership of property to the trust and selects a trustee to manage it. The trustee may be a family member, a friend, professional trustee or a trust attorney, and in the case of a living trust, the grantor may also be the trustee, and they invest, distribute or manage the property for the beneficiaries named within the trust. 

A will trust, which is also known as a testamentary trust, is often funded by the proceeds of a life insurance policy.  It is often used to ensure minor children receive an income and property is held until they are able to handle the finances on their own, which is an age usually specified within the trust documents.  A will trust may also be used to ensure the care of a loved one with special needs, since it allows oversight over the trustee, as a probate court supervises the trustee during the life of the trust. 

While a testamentary trust is a powerful estate planning tool, particularly when it comes to children and those with special needs, it takes away one of the primary advantages of a living trust, which is avoiding probate.  Another drawback to a will trust is that it is an irrevocable trust, meaning the terms of the trust cannot be modified or changed once the trust is created upon the death of the grantor.  Up until that point, the trust terms may be changed by an update or change to the will.

Using a will trust within an estate plan can meet a family’s goals and needs in certain circumstances, but it important that you work with an estate planning attorney to make sure that all aspects of the estate plan coordinate to use this tool successfully.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

During the estate planning process, you hope your family will accept your final wishes, and it helps to discuss your estate plan with them so there are no surprises.  But following the death of a loved one, hurt feelings and misunderstandings can become magnified by the emotions and stress, which can lead to a will contest.  Here, we discuss one of the legal arguments used in contesting a will, that of capacity.

Family dynamics, feeling slighted, as well as blended family issues are often motivating factors for contesting a will.   But these emotional issues are not actual legal, valid reasons for a will contest.  A valid reason for contesting a will often focuses on the capacity of the person creating the will, who is called the testator.  In order to sign a valid will, a person must have the mental capacity to do so, which is known as testamentary capacity.  The testator must be able to understand:

• That they are creating a will;
• The value of their assets;
• The relationship of close relatives and friends; and
• The logical distribution of their property according to the first three elements above.

Contesting a will using a lack of capacity normally involves proving that the testator lacked the mental capacity to make a will due to dementia, senility, illness or insanity.  Adults are presumed to have the capacity to make a will, and it is normally up to person challenging the will to prove otherwise.

An estate planning attorney can assist you with creating a will that can better stand up to a will contest, as well as take steps to establish the capacity of the testator when creating the will.  An estate planning attorney can also assist with preparing a comprehensive estate plan to meet your estate planning goals and the needs of your family.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

Two very important tasks when creating a will are naming the executor of your estate as well as naming a guardian for minor children.  What happens if either of these people is unable or unwilling to serve in that capacity?

Taking on executor duties for an estate or guardianship duties for children is a huge responsibility.  It’s important to discuss these choices not only with family members, but with those appointed, prior to drafting a will.  You may find that your choice for an executor or guardian is not comfortable with taking on that challenge. 

It is also important to keep a will updated to make sure you still have viable candidates for these appointments.  For instance, if you have appointed your parents as guardians for their grandchildren, they may not be up to the task in later years.

You should always have a backup plan included in your will, both in the case of appointing a guardian and appointing an executor for your estate.   Having a successor guardian as well as a successor executor named within your will can keep this decision in your hands, rather than allowing this decision to be made in probate court.  While a probate court will always make these decisions with the best interests of children and the estate in mind, as well as allow input from loved ones, naming a successor in both cases allows the decision to remain yours.

Estate planning, including creating a will, naming executors and naming guardians for children, allows you to maintain a semblance of control over what happens to your family should the unthinkable occur.  Since one of the goals in estate planning is easing the burden of your passing on loved ones, naming successor guardians and executors is an important aspect of it.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

Charitable trusts are a gift that keeps on giving.  Not only can they fund a meaningful cause, but they can also reduce estate taxes and capital gains taxes in the process.    To review how a trust works:  A trust is a legal arrangement in which an individual (the grantor) gives control of property to a person or institution (the trustee) to manage for the benefit of beneficiaries.

With a charitable trust, a donor signs over an asset or group of assets to create a charitable trust. The assets are held and managed by the trustee of the trust for a specified period of time, with some or all income that the assets produce, or the assets themselves,  going to the charity.  Charitable trusts are irrevocable, meaning the trust terms (except in some trusts, the charities which will receive the assets of the trust) cannot be altered nor terminated.  A charitable trust can be set up two ways, as a charitable remainder trust, which is more often used, or a charitable lead trust.

A charitable remainder trust will have two beneficiaries. Normally, the grantor, the person creating the trust, is one beneficiary, and the other a qualified charity or tax-exempt organization.  During the grantor’s lifetime, he or she receives a set percentage of income from the charitable trust.  Once they pass away, the charity then receives whatever is left over.  With a charitable lead trust, the charity receives an income from the trust for specified period of time, while the principal of the trust usually passes to the children of the grantor.

Why would someone set up a charitable trust rather than simply donate money to a charity?  There can be a significant tax break, particularly for an asset like stocks which can appreciate and lead to capital gains issues and estate taxes if retained in the estate of the grantor.   

If you wish to make smaller donations to fund numerous causes that are meaningful to you, then donations or bequests within a will may be a better estate planning option.  But if you wish to fund a cause with a significant asset that can offer a tax break while fulfilling a purpose, then speak with a trust attorney regarding this estate planning tool.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

It’s a horrible prospect, a husband and wife dying at the same time, but when accidents occur, particularly vehicular accidents, unfortunately it can happen.  While the tragedy is obvious, what happens in terms of estates and probate, particularly when a couple names each other as beneficiaries of the other’s estate?

To address this issue, most states, including Ohio, have enacted the Uniform Simultaneous Death Act.  This Act states that if a person is not established by ‘clear and convincing evidence’ to have survived another specified person by one hundred twenty hours they are considered to have predeceased, or died before, the other person.

This Act is often applied when a person or persons die intestate, meaning without a will, as when a will or other estate planning document provides for this situation, the Act does not apply.

The Uniform Simultaneous Death Act covers situations where the title or transfer of property depends on the order of death, such as in certain forms of ownership of real estate.  It also applies in determining the disposal of property, and each deceased person is considered to have survived the other, and an insured individual is considered to have survived a beneficiary when it comes to life insurance policies unless the policy provides otherwise.

With the other spouse presumed to be gone already, nothing would go from one dead spouse to another, which would then necessitate another probate and transfer to other heirs or beneficiaries.  If there is no will, property is distributed according to the state law of intestacy, which determines the distribution of property according to the relationship to the deceased.

 The Uniform Act does not specify who gets what property, as it deals with the order of death only. Once that is determined, state law or the will takes over to control the actual distribution of property.

Estate planning allows you to control what happens to your estate in many situations, rather than allowing a law to dictate the details of the distribution, so it’s important that you work with your estate planning lawyer to make contingency plans for situations such as a tragic accident.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

You would like to leave something special to a friend or relative, but you’re worried that your bequest will be a curse, rather than a blessing.  Will they have to pay taxes, or will it impact their tax bracket?  We discuss three myths involving leaving an inheritance to a loved one.

Myth:  Your beneficiaries will be stuck with paying estate taxes on anything you leave them.

Fact:    Your estate is subject to federal estate taxes if it exceeds the current Federal estate tax threshold, which is slated to be just $1,000,000 in 2011, and Ohio estate taxes if it exceeds $338,333.  The estate pays the estate taxes before property is distributed. 

Myth:  Your heirs will need to pay income tax on their inheritance.

Fact:  Normally the inheritance itself is not taxed, but any income it produces will be.  An exception to this generality is a retirement plan like a IRA or 401(k), as withdrawals from the plan are taxed to the heir just as they would have been taxed to the original owner (in many cases, that means  taxable as ordinary income).

Myth:  If I leave property as an inheritance, and the person sells it, they will pay a huge capital gain tax since I purchased the property 40 years ago for very little money.

Fact:  The capital gain or loss on the sale of an inheritance is determined by the “stepped-up basis.” This means that your beneficiary’s investment in inherited property is considered to be the value as of the date of death. When they sell property that is inherited, the capital gain or loss is determined by the difference between the amount they sold it for and the value of the property on the date of death. Remember that not all inherited property may be subject to the stepped-up rule, since it depends upon the type of property and the size of your estate at death.

An estate planning attorney can advise you of the best way to handle leaving a bequest to a loved one, and they can help you ensure that the inheritance truly is a blessing, not a curse.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

A payable on death account is a simplistic estate planning tool that can be fast, easy and inexpensive to set up.  This account is any bank account that has been set up with a named beneficiary on a form.  Nearly any bank account may be set up as a payable on death account, as a beneficiary form simply needs to be completed.  You should also notify the beneficiary of your plans.

With a payable on death bank account, the beneficiary has no rights to the funds until you pass away. Until that time, you are free to use the money kept in the bank account, to change the beneficiary or to close the account. You control everything until you pass on, at which time the beneficiary takes control of the account.

A payable on death account is fast and easy to establish, but it does have another big benefit – the funds in the account also avoid probate.  This allows the funds to be accessed very quickly and they can be used to help pay immediate expenses upon the passing of a loved one.

While there are several advantages of a payable on death account, there are disadvantages as well.  One ils that there is not much flexibility in terms of naming different beneficiaries.  While some accounts may allow you to divide the account equally among beneficiaries, there are other estate planning documents that allow more flexibility.

Another drawback is that there are no tax advantages to payable on death account, as the balance is included in the tally of the deceased’s estate.  For larger estates, there may be alternate tools that give them the flexibility and tax advantages that may be needed.  Still another possible downside is that the recipient may not be willing to voluntarily contribute to the final expenses of your estate, such as funeral and burial costs, probate fees, estate taxes and appraisal fees.

An estate planning attorney can advise if a payable on death account meets your estate’s and family’s needs, as well as advise you of other tools that are suitable for your situation.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.