What is an estate plan?
An estate plan consists of various documents that state your personal wishes and address what happens to your property when you die. If you have a taxable estate, a good estate plan will help minimize estate taxes. In addition, your plan will address retirement assets, life insurance, health care issues and disability.
Every individual has an estate plan. If you do not have a formal written will or trust, your estate plan is created by default. Each state has laws governing the distribution of property when a person dies without a will or trust. If you have not made any provisions for the distribution of your assets before you die, your property will be distributed according to your state's rules governing “intestate succession”. In Massachusetts if you have children and are married and die without a will, your probate property will pass one-half to your spouse and the other half to your children. Your children will be entitled to receive their inheritances when they turn 18 years of age. The court will appoint a lawyer to protect a minor's financial interests until age 18.
A written estate plan overrides the rules of intestate succession and dictates instead how your assets will be distributed and who will be named to oversee the administration of your estate.
Who should have an estate plan?
You should have an estate plan if:
(1) you have minor children;
(2) you want to designate who will receive your property, when they will receive it, and who will manage it for their benefit;
(3) you want to choose the person or persons to make medical and financial decisions for you if you cannot do so for yourself; or
(4) you are concerned about estate taxes.
What is a taxable estate?
A taxable estate is the sum total of all your assets that are subject to estate tax when you die. For estate tax purposes, your estate includes the fair market value of all your personal property, real estate, stocks, bonds, cash, life insurance, retirement benefits, certain kinds of trusts, artwork, copyrights, royalties and patents and any other assets that have value. When you die, your Personal Representative is required to file a federal estate tax return if, for federal purposes your assets exceed $5,000,000 (indexed for inflation) and, for Massachusetts purposes, $1,000,000.
What is probate administration
When you die, your probate assets need to be identified, collected and distributed to their rightful owners. Your bills need to be paid. Until someone is named by the Probate Court, no one has authority to act for you. Probate administration is a procedure where someone (your Executor if you have a Will and a court appointed Administrator if you do not) is named by the Probate Court to take charge of all your probate assets, pay your bills and ultimately make the proper distributions.
HOW CAN MY ESTATE PLAN LOWER THE FEDERAL TRANSFER TAX LIABILITY?
Every person living in the US can shelter $5,000,000 of assets from federal estate, gift and generation skipping taxes. This sum is indexed for inflation.
Massachusetts permits residents to exempt $1,000,000, creating a significant discrepancy between federal and state law.
For Federal purposes a heterosexual couple can avoid all state and federal estate taxes on the first death. In Massachusetts, a same-sex couple can defer all state (but not federal) taxes on the first death. However, the time to pay the piper (Uncle Sam and Commonwealth of Massachusetts) occurs when the second spouse dies.
A good estate plan will ensure that both Massachusetts and Federal exemptions are not wasted and that, where possible, there are no estate taxes when the first spouse dies, by incorporating the following techniques:
(1) a trust that takes advantage of the federal and state exemption of the spouse who has died first, while still providing for the surviving spouse during his/her lifetime,
(2) a gift program to take advantage of the current $14,000 per year per person gift tax exclusion,
(3) an irrevocable trust to handle and manage property outside of your estate (such as life insurance), so that the property is not part of your estate at the time of death, and
(4) proper beneficiary designations for your retirement assets so that your benefits can continue to grow income tax free for as long as is permissible.
What is probate property?
Probate property is any property that is governed by your Will (or is subject to a court administration if you do not have a Will),and that you own in your individual name, such as stocks, bonds, cash, certificates of deposit, or real estate. Probate property must be distributed in accordance with your Will or in accordance with the laws of intestate succession if you do not have a Will. If you do not have a Will, the court will name someone to administer your probate estate ( an “Administrator”) and make sure that your property passes to the correct beneficiaries.
Some examples of non-probate property are jointly-owned assets, life insurance, retirement benefits and accounts that are “payable on death”. Jointly-owned d property passes automatically (by “operation of law”) to the surviving joint tenant. Life insurance and retirement benefits will pass to whomever you have designated on the beneficiary designation forms. (If you do not designate someone then your life insurance and retirement benefits will pass to your estate and become probate assets). Accounts that are “POD” or “held for the benefit of …” with a bank or mutual fund will pass to whomever you have named.
Just because an asset is not a probate asset does not mean that it is not part of your taxable estate. Any property, whether it is probate or non-probate, must be taken into account to determine if you have a taxable estate.
HOW CAN I PLAN FOR LONG TERM CARE AND DISABILITY OF A CHILD OR ADULT?
This is a specialized type of estate planning which focuses on how to preserve assets in the face of the high cost for long term care. Issues to consider are how to qualify for governmental benefits, maintain access to funds, protect assets for the community spouse, preserve one’s home, avoid unnecessary capital gains, gift and estate taxes and pass on assets to the next generation. Strategies include life estates, trusts, permissible investments and transfer of assets.