One way of introducing estate planning is to answer some questions clients frequently ask us. We believe that these questions and answers are important enough to include here, and we hope you find them informative.
Q. What happens if I die without a will?
A. If you fail to plan your estate and die without a will, the laws of the Commonwealth of Massachusetts will create an estate plan for you. The entire system of “intestate” succession or “descent and distribution” is set forth by statute and is too complex for a detailed discussion here, but some surprising and frequently undesirable results can occur. The law prescribes both the persons to whom your property will pass and the division of your estate among those persons. The distributions provided by law are inflexible and may not satisfy your desires as to distribution of your estate. In addition, the amount to be distributed to your children will require a cumbersome and costly legal guardianship if the children are minors at the time of your death.
If you die without a will and if your descendants and the descendants of your marriage to your spouse are your only descendants, then your spouse will receive all of your intestate property.
Q. What is a Personal Representative?
A. A Personal Representative is a court appointed fiduciary who will serve as the primary representative of your Estate. Your will designates the person(s) who will serve as your Personal Representative.
Q. What is “administration” of my estate?
A. Administration of an estate involves the collection of assets, payment of liabilities, and distribution of properties to the beneficiaries or heirs. Administration of an estate is conducted under some degree of probate court authority and supervision, but different procedures are available.
Q. What is a trustee?
A. A trustee is one to whom property is transferred for the benefit of someone else (the beneficiary).
We find that our new estate planning clients frequently misunderstand trusts. Many of our clients have heard a horror story about a trust, and the story often involves an impoverished widow-beneficiary who cannot extract enough money from the well-funded trust to maintain herself.
Present law, well-drafted trustee powers and professional trustees now make this concept of trusts obsolete. A trust can be designed to produce almost any result desired by the client if the client gives the trustee sufficient funds with which to work. We usually recommend that trustees be given very broad and adaptable powers to provide flexibility for future events. The trustee should be empowered to do what is best for the beneficiary, without being curbed by inappropriate restrictions.
If a trust appears suitable for your estate plan, you will need to exercise care in the selection of a trustee. The family member who comes to mind as a logical first choice may prefer not to deal with the management of your properties. If a corporate trustee appears appropriate, we will suggest that you have a conference with the representative of your bank's trust department. Further, you should consider giving someone, such as a committee, the power to change trustees.
Q. What is a durable power of attorney?
A. Several years ago, a new law was passed allowing you to authorize another individual or entity to manage your affairs. This relatively simple document is known as a durable power of attorney. A durable power of attorney is a written document in which you, as the principal, designate someone you trust, such as your spouse, another family member, a friend or a professional, as “your attorney in fact” or “agent.” Your attorney in fact is authorized to perform certain acts on your behalf.
You may give as much or as little power to your attorney in fact as you desire. For instance, you may authorize your attorney in fact only to have the power to transfer your assets to a trust set up for your benefit, or the powers could be very broad and authorize the attorney in fact to do anything with respect to your assets, including for example, have access to your safe deposit box, manage your investments, run your closely held business, sell and transfer your assets. The powers you give your attorney in fact will be in effect when the document is signed. Generally, a power of attorney terminates on the disability of the principal. If the power of attorney is “durable”, it will not be affected if you become disabled or incapacitated. Not all powers of attorney are durable.
We have found that many of our clients want to appoint someone to act for them in the event of their disability. Who should be the attorney in fact? In view of the significant authority and discretion conferred by a general durable power of attorney, the attorney in fact must be someone in whom you have complete trust and confidence. If the durable power of attorney is a springing durable power of attorney (that is, one that is effective only when you become disabled or incapacitated) the attorney in fact should not also be the person who determines your incapacity.
Q. Why should my will be more than one page long?
A. Your will could be drafted to be no longer than one page. Indeed, any lawyer could produce an abbreviated will for a relatively small fee.
The problem, however, is that such a will may not accomplish your goals for your beneficiaries. We prefer to draft wills to cover all the various factual and legal situations that reasonably may be expected to arise. The alternative is to hope that, by coincidence, the will may fit the facts at your death.
Accordingly, the will that we draft for you may be a lengthy document. The burden to you of reviewing and approving a long will may be a blessing to your family when they later find that you have anticipated and resolved what might have been cumbersome problems.
Q. What is community property?
A. Louisiana, Texas, New Mexico, Arizona, California, Nevada, Washington, Idaho and Wisconsin are community property states (or use a marital property regime very similar in effect to community property). These nine states use a marital property law scheme that differs from the laws in effect in Massachusetts. Under the community property system, marital property generally is deemed to be owned one-half by each spouse, regardless of the legal title to the property. In common law jurisdictions, legal title generally controls the ownership interests.
Even though you now live in Massachusetts, if you ever lived in a community property jurisdiction while married, we will perform a special review of your estate plan to account for the community property consequences.
Q. How will my estate be taxed at my death?
A. Your estate may be subject to at least two taxes: the federal estate tax and the Massachusetts estate tax. In addition, if you own real estate (or tangible personal property) in another state or country there may be an additional estate tax due there.
The federal and the Massachusetts estate tax are based on the fair market value of your “gross estate” at the time of your death. At the option of your executor, an alternate valuation date of six months from the date of your death can be used.
Your gross estate will include the value of all the property in which you own an interest at the time of your death. Additionally, your gross estate may include property that you do not own, but over which you have retained or received certain rights or powers.
The estate tax scheme provides you with a “marital deduction” for bequests of property to your surviving spouse. The marital deduction in effect allows interspousal transfers to pass tax free because they are deducted from the value of the gross estate. In order to qualify for the unlimited marital deduction, property must be transferred to the surviving spouse in a fashion that satisfies the technical requirements of the Internal Revenue Code, such as an outright transfer or in certain types of trusts. It is important that you let us know if either spouse is not a U.S. citizen.
For federal gift, estate, and generation-skipping transfer tax (GST) purposes, the amount that an individual can pass tax-free at his or her death is $5 million. This amount is adjusted annually for inflation.
Massachusetts recently re-enacted its estate tax. The Massachusetts estate tax exemption is now $1 million. The Massachusetts marital deduction is now unlimited. If your estate plan is structured properly the Massachusetts and federal estate taxes will all be deferred until both you and your spouse die.
In the case of a surviving spouse who died after December 31, 2010, the deceased spouse's federal unused exclusion amount is generally available for use by the surviving spouse as an addition to the surviving spouse's applicable exclusion amount for purposes of the federal estate and gift tax. With proper planning, each spouse may make a tax free transfer of the applicable exclusion amount—regardless of whose name the assets are titled in.
Q. What is a bypass trust?
A. A bypass trust is a trust that is designed to be excluded from or “bypass” the surviving spouse's estate for federal estate tax purposes. It enables a couple to utilize the applicable exclusion amount of each spouse. The surviving spouse can be a beneficiary of the bypass trust even though the bypass trust property is excluded from the surviving spouse's estate for federal estate tax purposes. Without a bypass trust, any property left to the surviving spouse will be taxed in his or her estate at his or her death and thus, the applicable exclusion amount of the first spouse to die will be wasted.
With a $5 million federal estate tax threshold (adjusted annually for inflation), if a couple owns less than that sum then under the current law the use of bypass trusts would not be needed to reduce the federal estate taxes. However, the use of bypass trusts is recommended because the Massachusetts estate tax exemption remains at $1 million and, if a couple's assets exceed $1 million, then utilizing the bypass trust will reduce the overall amount of Massachusetts estate taxes the beneficiaries will pay when both spouses die. In addition, it is not clear that the federal exemption will remain at the $5 million level (as adjusted annually for inflation) and, in many cases, if the threshold is reduced, having established bypass trusts will save taxes at the death of the surviving spouse.
Q. What is the generation-skipping tax?
A. The generation-skipping tax is a federal transfer tax that is separate from the gift and estate taxes. Generally it applies to a transfer of property to a grandchild (the transfer skips the child's generation). It also applies to a transfer in trust for a child's lifetime with the property being distributed to grandchildren upon the child's death without having been taxed in the child's estate.
Q. What property will not pass under my will?
A. Proceeds from life insurance policies and retirement benefits will pass in accordance with the beneficiary designations. In addition, property held in certain joint tenancies with a right of survivorship (e.g. joint bank or brokerage accounts with a right of survivorship) will pass to the surviving joint account holder. Therefore, you should review the beneficiary designations and account agreements to be sure they are coordinated with your will.
Q. Who will raise my minor children after my death?
A. If you die leaving minor children, the other parent ordinarily will raise and support them. If the other parent is not living, however, your minor children will require a “guardian.” A guardian is an individual who is appointed by the court primarily to care for the person of a minor. You may appoint a guardian for your children in your will. If you fail to do so, the court will make the selection of a guardian. We recommend that you assume the responsibility for this important decision, rather than leaving it to a judge unfamiliar with your family situation.
Clients frequently tell us that they have chosen one of their parents as the guardian in the event of both clients' deaths, but in many situations, we believe that such a selection is unwise. For example, assume that the youngest child of the client is three years old and the client's parent is 68. When that child is 15 (a time when child-adult communication can be difficult under the best of conditions), the grandparent will be 80. Under these circumstances, another choice may be better for your child. You should look first to your contemporaries in your families (such as brothers, sisters, or cousins). If such family contemporaries are not appropriate, then consider friends with children in the same age range as yours. In any case, you should consult with the proposed guardian to ensure that the person is agreeable to assuming the significant responsibility.
If both parents die, your minor children may be left with substantial property interests that need management and protection. In that instance, the court will appoint a conservator to care for those property interests. Given that the conservator has only limited power over the minor's property, protective proceedings may be initiated in which the court will appoint a conservator to administer the children's property and affairs. In some instances, the conservator may fulfill the duties of making decisions concerning the child's medical care and personal concerns as well. A court appointed conservatorship can be a cumbersome and expensive manner of dealing with the property of the minors, however, and it should be avoided. The conservatorship for financial affairs can be avoided by proper planning for the use of trusts or custodianships for minors.
If you have planned your estate properly, the guardian should not experience financial strain in raising your children. We usually suggest that upon the death of you and your spouse, a trust be established for your minor children. The trustee should be encouraged to make generous distributions to assist the guardian, and the trustee can be authorized to provide funds to pay for any necessary expansion of the guardian's home.
Please list below your choices of a guardian (either one person, or a husband and wife together). (Note that if you are designating a husband and wife to serve as co-guardians you may want to specify that both of them are to serve only if they are married at the time of the appointment of the guardian):
Q. What is a health care proxy?
A. A health care proxy is a document in which you may designate an individual to make decisions concerning your health care. While you are competent you are in charge of decisions which pertain to your health care. If you wish to designate an individual who will make decisions concerning your health care if you are unable to do so, please provide the name, address and telephone number of the person who will make health care decisions on your behalf.
Q. How frequently should I review my estate plan?
A. As a general rule, we suggest that you contact us every few years for a conference to review your estate plan and to update the information in your permanent file. We also recommend that you contact us in the event of a dramatic change in your finances or in your family situation. For example, a substantial increase in your estate (through increased life insurance, inheritance, gifts, or successful investments) may create opportunities for tax savings, as well as necessitate further family financial planning. A substantial decrease in your net worth may also necessitate a revision in your estate plan. A divorce, marriage, or second marriage, of course, will re-open completely the matter of planning your estate. Likewise, do not hesitate to contact us any time you have questions as to whether or not changes in tax or other substantive laws may affect your estate plan.
Estate Planning FAQs