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Wills & Estates

PLANNING FOR THE FUTURE REQUIRES THOUGHT AND ACTION

Creating or updating an estate plan requires thought and action.  A good place to start is by making a Will.

Everyone Needs a Will 


To ensure that your property goes to the persons you want, you should have a proper Will. 

By making a Will, you determine who will receive your property, and, equally important, when they will receive it. You also can determine other important matters such as:
  • Who will administer your Estate?
  • Who will raise your children if you and your spouse die while they are young?
  • Who will receive your property if your intended beneficiaries don’t survive you?
 
What Happens If You Don’t Have a Will?

If you die without a Will, your property will be distributed according to a set of laws known as the North Carolina Intestate Succession Act.  Sometimes this produces results you would not expect.

For example, if you are married and have children, and don’t have a Will, at your death all of your property will not necessarily go to your surviving spouse.  This surprises a lot of people.  Most married people tend to assume that everything will pass to their spouse, but that simply isn’t the case in North Carolina.  Instead, except for property you and your spouse own jointly or which you have designated your spouse to receive by beneficiary designation, only the following property will pass to your spouse:
  • A $30,000 Years Allowance, which can be allocated by the Court from your personal property only (not real estate)
  • The first $60,000 of your remaining personal property (not real estate)
  • One-third (if you have two or more children) or one-half (if you have one child) of your remaining property
The rest of your property will pass to your children (two-thirds of your remaining property if you have two or more children, or one-half of your remaining property if you have one child).

Without a Will, if any of your children are under age 18 the property passing to each child has to be held in a Guardianship.  This is cumbersome, expensive, complicated and restrictive.  First, a Guardian of the Estate has to appointed by the Court.  Then the Guardian has to post a bond with the Court.  An Inventory has to be filed listing all property of the child.  Accountings have to be filed every year with the Court in the county where the child resides, itemizing every penny of the child’s property that has been received or spent that year.  Prior Court approval is required for any expenditure that exceeds the income produced by the child’s property.  Guardianship can be a very costly and time consuming process.

And, perhaps worst of all, a Guardianship terminates when the child reaches age 18, and all property is handed over to the child at that time.  This can be very unfortunate, since many children are simply not mature enough to handle their full inheritance at such a young age.

If you are married, do not have children, are survived by a spouse and parents, and don’t have a Will, your spouse will receive the following:
  • A $30,000 Years Allowance, which can be allocated by the Court from your personal property only (not real estate)
  • The first $100,000 of your remaining personal property (not real estate)
  • One-half of your remaining property
Your parents will receive the rest of your property (one-half of your remaining property) in this case.  Again, this is a surprise to most people, as most people assume that the surviving spouse will receive their entire estate in this scenario.

By Having a Will You Can Avoid These Problems

By having a Will, you decide who will receive your property, who will manage your Estate (your Executor), who will raise your minor children if your spouse does not survive you (their Guardian of the Person), at what age your children will receive their inheritance outright, who will manage property left to your children (the Trustee), and anything else you want to provide regarding the disposition of your property.

If you have young children, you can direct that any property passing to them will be held in a Trust instead of a Guardianship.  This is far preferable, since it allows you to eliminate all the costly and cumbersome aspects of Guardianships- posting bond, filing Inventories and Accounts, paying Court fees, getting Court approval for expenditures for your children, etc.  All that can be avoided by a Trust.  In addition, by using a Trust you may pick any age you want for your children to receive outright distribution of their inheritance (we usually recommend age 25 or older). 

Getting Started

The first thing that needs to be done to create an estate plan is to compile an up-to-date list of your property and your debts.  This list should show the approximate value of each asset and the owner of that asset. 

The second thing that needs to be done is for you to give some thought as to the basic aspects of estate planning, including:

  • Who you would like to receive your property and in what shares.  As a part of this, it is important for you to consider who you’d like to receive your property if some or all of your intended beneficiaries do not survive you.
  • At what age you would like for your children to receive their inheritance outright.
  • Who you’d like to administer your estate (your Executor).
  • Who you’d like to manage any property passing to your children when they are young, until they reach the age you specify for them to receive this property outright (your Trustee).
  • Who you’d like to raise any children of yours who are under age 18 at your death, if the other parent of your children doesn’t survive you.
  • Who you’d like to take care of your financial matters for you if you become incapacitated (your Attorney-in-Fact).
  • Who you’d like to make health care decisions for you if you become incapacitated (your Health Care Agent).
  • Any specific goals you have regarding the disposition of your estate, such as providing for children who have special needs, providing particular incentives for your children, etc.

When we meet we will discuss all of this with you and answer any questions you may have.  Our goal as your attorney is to take your goals, as you have expressed them, and to advise you of the options you have to accomplish your goals and the one(s) we think will work best for you.  It is particularly important to us that we make you aware of legal issues presented by your particular situation which you may not have considered or even be aware of.

Don’t Forget Your Beneficiary Designations

Please note that it is very important to review your beneficiary designations for your life insurance and retirement plans, including IRAs, to make sure that they match up with who you want to receive this property and your overall estate plan.
 
It is critical to bear in mind that your Will does not override your life insurance and retirement plan beneficiary designations. If you have a beneficiary designation in place for your life insurance or retirement plans, this property will be paid to those beneficiaries, regardless of what your Will says.
 
So, even if you have a proper Will leaving your property to the correct beneficiaries, you still need to examine your life insurance and retirement plan beneficiary designations to make sure they reflect who you want to receive this property.
 
Outdated beneficiary designations can create tremendous problems.  This can arise, for example, in the following situations:
 
  • Where people divorce, and forget to change beneficiary designations naming their former spouses as beneficiary
  • Where people marry and/or have children, and neglect to change beneficiary designations naming their parents or siblings as beneficiaries
  • Where people name a particular child as beneficiary, and neglect to add children born later
  • Where people name their children under age 18 as beneficiaries
 
You can easily correct these problems simply by changing your beneficiary designations for your life insurance and retirement plans.  We will help you with this and provide you with the language you should use for your beneficiary designations.
 
In the case of retirement plan beneficiary designations, there are significant income tax ramifications which have to be considered here as well.  The receipt of a retirement plan distribution is usually all taxable income, and so it may be worthwhile to “stretch” this out by a series of distributions over a number of years rather than receiving it all in one single tax year.  Your beneficiary designation, if done incorrectly, can severely restrict these options.  We will help you arrange your retirement plan beneficiary designations to achieve an optimum result, both for meshing with your estate plan and for preserving stretch payout options.
 
Revocable Trusts: Wonderful for Minimizing Probate

For persons whose estates have a lot of property otherwise subject to probate, Revocable Trusts can produce a dramatic reduction in the complication and expense of the probate process.

Probate is the court-supervised auditing of the administration of Decedent’s estates.  It is intended to provide oversight of estates, which is laudable, but unfortunately it also adds a lot of complication, paperwork, and expense. This can largely be avoided by using a Revocable Trust.

With this approach, you have a Will and a Revocable Trust. These two documents work together, and are more sophisticated than a Will alone.

Because any property you place into your Trust during your lifetime will not legally be owned by you at the time of your death (even though you will have total and absolute control over your Trust and the property in it so long as you are living and serving as its Trustee), this property will not be included in your probate estate upon your death. This may save probate expenses and delays on this property after your death, as well as Executor commissions. 
 

ExampleYou have a $2 million brokerage account in your sole name.  At your death, this account will be included in your probate estate.  There will be a probate fee of up to $6,000 imposed on this asset, but that’s just the beginning.  All the receipts coming into and payments going out of this account after your death will have to be separately listed in an Accounting filed with the Court, which takes time and costs money to prepare.  This account may be subject to an Executor’s commission, which could be as much as 5% of the $2 million value of this account.

You can avoid this by creating a Revocable Trust and by naming it as the owner of this brokerage account.  By doing this, your $2 million brokerage account will not be included as a part of your probate estate.  As the Trustee and beneficiary of this Trust, you will still have complete control over the assets in the Trust.  You may withdraw them at any time, sell or exchange them, purchase new assets, write checks on them, or distribute them to yourself at any time.  You also may revoke or amend the Trust at any time.  Even though these assets will be in your Trust instead of in your name, nothing will really change insofar as your control over them is concerned.


Not all estates have assets which are subject to probate, however, so the benefits of Revocable Trusts are more important for some people than for others.  We can help you evaluate how beneficial a Revocable Trust would be for you.

Fiduciaries

You will need to consider who you will appoint to be your Executor (the person charged with carrying out the terms of your Will), and who you will appoint to be the Trustee named in your Will or Revocable Trust.  You do not have to name the same person or entity for each position, although you can if you so desire.  In addition, you should choose an alternate person or entity, to serve in each position in the event that the primary person chosen cannot serve due to illness, death or disability.

Life Insurance and Annuities

As mentioned above, you will need to ensure that all beneficiary designations are current and correct.  Generally it is not advisable to have life insurance or retirement plan benefits payable to your estate, as this will subject them to claims of creditors of your estate.

You should also determine whether you have enough life insurance to pay death taxes which will come due at the time of your death or the death of your spouse. You may wish to consider a “second-to-die” life insurance policy for this purpose.

If your estate is large enough, you may wish to establish an Irrevocable Life Insurance Trust (“ILIT”).  This can be an extremely effective way to make sure that the proceeds of your life insurance are exempted from estate tax in your estate.  

Gifts During Your Lifetime

During your lifetime you can reduce the size of your estate (thereby reducing estate taxes at your death if you have a large estate), by making “annual exclusion” gifts. Both you and your spouse can give up to $14,000 each per calendar year to any person you wish and you can do this as many times as you like so long as the total amounts given by each of you to each person per calendar year do not exceed $14,000. This amount is indexed for inflation and will increase in future years.  Gifts can be made directly to an individual or to a Trust for an individual.

Estate Taxes: An Issue For Those With Large Estates

Generally speaking, if you anticipate that you (or you and your spouse, if you are married) will have a large estate ($5 million or above), a primary goal of your estate plan should be minimizing or eliminating estate taxes altogether.  To understand how this works, it is helpful to understand the estate tax system.

This is a fairly complicated subject.  The following material is provided to explain the estate tax system and some options for dealing with estate taxes, hopefully in enough detail to have it make sense without being overwhelming.
 
At your death, virtually all of your property (including life insurance and retirement plans) will be included in your taxable estate and subject to federal estate tax.  The federal estate tax rate is effectively a flat 40%.  North Carolina no longer has an estate tax (it was repealed in 2013).
 
There are two primary ways you may avoid estate taxes, as follows:
 
1.  Marital Deduction- Any property you leave your spouse is exempt from estate tax, without limit.
 
2.  Estate Tax Exemption- A certain amount of exemption is also granted for property left to beneficiaries other than your spouse. This exemption amount is $5 million, adjusted annually for inflation ($5.34 million in 2014).
 
Many married couples prefer to arrange their estate plans so that at the death of the first of them to die everything is left to the survivor, and at the second death everything is left to their children.  How does that work from an estate tax standpoint?

It works very well at the first death.  Estate taxes are eliminated then because of the marital deduction.  Regardless of how large the estate of the spouse who dies first may be, there will never be any estate tax if it is all left to the survivor. 

Example 1: First DeathA husband and a wife each have $4 million of property.  One dies and leaves all of his or her property ($4 million) to the survivor.

There will be no estate tax at the first spouse’s death since his or her estate will receive a marital deduction for all property passing to the survivor.  This is true regardless of how large the estate of the one who dies first may be.


But, what happens at the survivor’s death?  That’s when estate taxes can be a problem.  Whether there will be estate taxes at the survivor’s death depends on whether the survivor’s total estate exceeds his or her estate tax exemption.  If so, there will be estate taxes to pay.

Example 2: Second Death.  Same as Example 1 above, except now let’s look at what happens at the death of the survivor.

The survivor’s estate will include his/her $4 million of property, plus the $4 million of property received from the one who died first.  The survivor’s total estate thus will be $8 million. 

The estate tax exemption is $5.34 million in 2014.  This amount will go up as it is adjusted for inflation.  If the surviving spouse dies after 2014, his/her exemption may be more than $5.34 million.  But, let’s assume it is $5.34 million to keep things simple. 

The survivor’s estate ($8 million) exceeds the survivor’s exemption ($5.34 million) by $2.66 million.  $1.064 million of estate tax will be payable on this $2.66 million excess (40%). 

Note: If a married couple’s combined estates exceed the amount of a single estate tax exemption ($5.34 million in 2014), there can be estate taxes payable at the survivor’s death. 


What can we do if we are concerned that the survivor’s estate (including the property left to the survivor by the one who died first) will exceed the survivor’s estate tax exemption?

One of the most effective ways to deal with this is to make sure that the estate tax exemptions of both spouses are effectively used, not just the exemption of the survivor. 

By making use of the $5.34 million exemption of each spouse (two exemptions), we can shelter from tax a combined $10.68 million (or more, as the exemption increases for inflation adjustments).

In the past, in order to accomplish this we typically had to set up a “Bypass Trust” at the death of the first spouse to die.  That was the only way to make use of the estate tax exemption of the one who died first.
But, starting in 2011, we have been able to accomplish essentially this same result merely by making an election to “Port” the unused Exemption of the one who dies first to the survivor, without having to use a Bypass Trust.

1.  Porting of Exemption.  Since 2011, the estate tax law has had “portability,” which allows the estate of the one who dies first to make an election to allocate his or her unused estate tax exemption to the survivor.
 

Example 3: Porting of Exemption. Same as Example 2 above (first spouse dies with a $4 million estate and leaves it to the survivor, survivor has $4 million of his/her own property, survivor has a $8 million total combined estate, survivor’s exemption is $5.34 million), except that now the estate of the one who dies first elects to allocate the unused estate tax exemption of the one who dies first to the survivor, increasing the survivor’s total estate tax exemption to $10.68 million.

So, even though the survivor’s estate is $8 million, the survivor’s exemption has now doubled, from $5.34 million to $10.68 million, which is more than enough to exempt the survivor’s $8 million estate.

Note: This example illustrates a very important concept in estate planning - making use of the estate tax exemption of the one who dies first as well as the one who dies second.

Exemption porting is an effective method for accomplishing this.


Porting of Exemption is not automatic.  It must be elected on a timely-filed estate tax return for the estate of the one who died first.  This return must be filed within 9 months of the date of death of the one who dies first. 

As mentioned above, Porting of Exemption is the latest way to make use of the estate tax exemptions of both spouses.  The older approach for doing this, the Bypass Trust, still has some advantages that are worth considering, however. 
 
2.   Bypass Trust.  This is the traditional approach which has been used for many years.  It involves creating a “Bypass Trust” at the first death, to hold property up to the amount of the estate tax exemption of the one who dies first.  The property of this Trust is held for the benefit of the survivor for life, but is exempt from tax in the survivor’s estate because it is not owned by the survivor. 

Example 4: Bypass Trust.  Same as Example 2 above (first spouse dies with a $4 million estate and leaves it to the survivor, survivor has $4 million of his/her own property, survivor winds up with a $8 million total combined estate, survivor’s exemption is $5.34 million), except that now, instead of leaving everything to the survivor, the spouse who dies first leaves his/her $4 million of property to a Bypass Trust.

The Bypass Trust will hold this property for the survivor’s benefit for his/her lifetime.  But, even though the survivor will have the lifetime benefit of this property, it won’t be taxed as a part of the survivor’s estate at his/her death because the survivor won’t actually own it.  It will “bypass” taxation in the survivor’s estate. 

The $4 million in property left to the Bypass Trust will not be included in the survivor’s taxable estate.  The only property included in the survivor’s taxable estate is the survivor’s own $4 million of property.  All of this will be sheltered from tax by the survivor’s $5.34 million exemption.

At the survivor’s death all property in this Bypass Trust (no matter how much it has appreciated since the death of the one who dies first) will pass directly to the children, free from estate tax. 

So, instead of giving all $4 million of his/her property to the survivor, the one who died first has placed it into a Bypass Trust.  The survivor will be the beneficiary of this Trust for his/her lifetime, but the survivor won’t own it and so it won’t be taxed in the survivor’s estate.  In essence, the survivor is given the use and benefit of the property in the Bypass Trust, but not ownership of it.

By using a Bypass Trust, the one who dies first can shelter up to $5.34 million of property from tax.  The survivor has his or her own exemption and can shelter another $5.34 million of property from tax.  A total of $10.68 million thus can be sheltered.  Both spouses’ $5.34 million exemptions can now being used.

Note: Like Exemption porting, using a Bypass Trust is an effective method for making use of the estate tax exemption of the one who dies first as well as the one who dies second.


3.  Advantages of a Bypass Trust over Porting of Exemption.  It might seem that there is no longer any benefit to using a Bypass Trust at the first death, since the law now provides a similar effect simply by allocating the unused estate tax exemption of the one who dies first to the survivor.  This is not necessarily the case.  There are several possible advantages offered by a Bypass Trust over Exemption Porting, as follows:

  • Creditor Protection.  Property passing outright to a surviving spouse will be subject to any creditor’s claims against the surviving spouse.  By contrast, property held in a Bypass Trust generally is exempt from claims against the surviving spouse arising after the Bypass Trust is funded.
  • No Loss of Exemption if Surviving Spouse Remarries.  In the case of a Bypass Trust, the property sheltered from tax in the survivor’s estate by the Trust remains sheltered even if the survivor remarries.  That’s not necessarily true in the case of Exemption Porting, as in that case the additional exemption allocated to the survivor will be lost if the survivor remarries and outlives the new spouse.
  • Future Appreciation Escapes Tax in Survivor’s Estate.  When property is allocated to a Bypass Trust, that property and all future appreciation on that property is exempt from estate tax in the survivor’s estate.  That is not the case with Exemption Porting, because there the property of the one who dies first is left to the survivor.  All appreciation on that property is included in the survivor’s estate and is subject to estate tax at the survivor’s death.
  • No Estate Tax Return Required.  In order to implement Exemption Porting an estate tax return is required to be filed by the estate of the one who dies first.  Estate tax returns are not simple; they can be complicated and expensive to prepare.
  • Control over who will receive the Property after Death of Surviving Spouse.  In the case of a Bypass Trust, upon the survivor’s death the remaining property in the Trust will pass to whoever is directed to receive it in the Trust instrument (e.g., the children).  By contrast, in the case of Exemption Porting the survivor will have full ownership of this property, and so the survivor will have the ability to decide who to leave it to (e.g., a new spouse).
As noted above, Bypass Trusts and Exemption Porting each have their advantages.

The advantage of Exemption Porting is simplicity.  No Trust is needed.  All property passes to the survivor and will be included in the survivor’s estate, but this is offset by allocating to the survivor the unused estate tax exemption of the one who dies first.

The advantages of a Bypass Trust are outlined above.  In some cases these advantages will be very important, and in other cases they won’t be as important and will not overcome the simplicity advantage of Exemption Porting.

4.  Allowing Your Spouse to Choose Exemption Porting or Bypass Trust.  In an ideal world we would give the surviving spouse, at the first death, the option to choose between a Bypass Trust and Exemption Porting.  That would provide the utmost flexibility.

Is it possible to have this kind of flexibility?  Yes.  We can accomplish this by leaving all property to the surviving spouse, giving the surviving spouse the option to “disclaim” any or all of this property, and directing that any disclaimed property will pass to a Bypass Trust.

A disclaimer is simply a written instrument filed by your spouse with the probate court stating that he/she has chosen not to receive certain property.

If you choose this approach, your documents will direct that any property disclaimed by your spouse will pass into your Bypass Trust.  There, it will be held in trust for your spouse’s benefit for his/her lifetime.  At his/her subsequent death, this property will be exempt from estate tax in his/her estate because it won’t be owned by him/her. 

Disclaimer is the mechanism by which you spouse will determine whether a Bypass Trust will be created and how much property will pass into it.  Only the property he/she disclaims will pass into this Trust.  Anything he/she doesn’t disclaim will pass directly to him/her.  If your spouse disclaims nothing, everything will pass to him/her and no Bypass Trust will be created at all. 

The maximum amount which may be disclaimed by your spouse without causing estate tax to be paid by your estate is the amount of the estate tax exemption in effect at the time of your death ($5.34 million in 2014). 

If your spouse chooses not to disclaim, all of your property will pass to him/her.  Your spouse and your estate will then have the option of electing to port your unused estate tax exemption to him/her or not.

Example 5: Disclaimer to Create Bypass Trust.  You and your spouse each own $4 million of property ($8 million combined).  You die first. 

Your spouse will evaluate the situation.  Your spouse will see that if he/she does not disclaim anything, he/she will receive your $4 million of property and will wind up owning it plus his/her own $4 million of property.  At his/her death his/her estate will include this $8 million of property, plus all future appreciation in this property up to his/her death. 

Using Exemption Porting, he/she can be allocated your full $5.34 million of unused exemption.  If his/her own exemption is $5.34 million, he/she will have a total combined exemption of $10.68 million. 

Your spouse’s estate thus will be exempt from estate tax unless it grows from $8 million to more than $10.68 million. 

With this $2.68 million “cushion” in the amount of future appreciation which can occur before your spouse’s estate will be subject to estate tax, he/she may be comfortable deciding not to disclaim anything and relying on Exemption Porting to eliminate tax in his/her estate by doubling his/her estate tax exemption.  Note that if he/she does this, it will be critical to make sure that your estate files an estate tax return and makes the election to have your exemption be allocated to him/her. 

But, as noted above, there are reasons why your spouse might prefer instead to disclaim your $4 million of property, so that it will pass into your Bypass Trust.  For example:

·  You spouse might be concerned that his/her estate will appreciate by more than $2.68 million.  If so, by disclaiming your $4 million and having it pass into your Bypass Trust, all future appreciation on this $4 million of property will escape estate tax in his/her estate.

·  Your spouse might be concerned about what will happen if he/she remarries.  In that event, he/she will lose the amount of your exemption which was allocated to him/her if he/she remarries and outlives his/her new spouse.  Also, he/she might be concerned about what marital rights his/her new spouse will have in the property he/she received from you.  These concerns can be eliminated by him/her disclaiming your property and having it pass into your Bypass Trust.

·  Your spouse might be concerned about his/her future creditors trying to reach this property.  If so, it would be better for him/her to disclaim and have this property pass to your Bypass Trust rather than it passing to and being owned by him/her.  This will cut off creditor’s claims against this property which arise after his/her disclaimer.


Note: The goal here is to make sure that the amount of property owned by your spouse at his/her death does not exceed his/her exemption amount (including any exemption allocated to him/her by your estate). 
As a part of the estate planning process, we will review with you all of these options and help you decide which one is best for you.

Powers of Attorney and Living Wills

It is extremely important that you prepare for the possibility of incapacity, both physical and mental.
You should have a Financial Power of Attorney, which names someone who can act on your behalf regarding your financial matters should you become physically and/or mentally incapacitated. 

Another extremely important document you should have is a Health Care Power of Attorney, which names a person who will make health care decisions for you in the event you are unable to make or communicate them for yourself. 

If you have not executed a Financial Power of Attorney and a Health Care Power of Attorney and you become incapacitated, your spouse or some other person will have to petition the Court to have you declared incompetent judicially, have a guardian appointed, post a bond, and file annual reports detailing all receipts to and payments from the Guardianship for as long as your are incapacitated or until your death.  A Guardianship of this type can be very expensive, unpleasant, cumbersome, and time consuming, and all of your financial affairs become a matter of public record.

Powers of Attorney avoid all of that, and allow the persons you have named to step in immediately after a doctor has certified your incapacity, without having to deal with the Courts.

In addition to Powers of Attorney, you may choose to have a Living Will, which expresses your wishes about whether you wish to be kept alive by extraordinary means (such as ventilators and artificial hydration and nutrition) if your are permanently unconscious, suffer advanced and irreversible dementia, or suffer an incurable and irreversible condition which will soon result in your death.  Note that you can always revoke your Living Will if you are able to express your wish to do so, even if there is doubt as to your competency.

Conclusion

The foregoing is just a starting place.  There are numerous other possibilities for estate planning which are available depending on you specific needs.

An old axiom states that the better a person understands something, the simpler he or she can make it seem to others.  That certainly is true with estate planning.

At Milam & Idol, our goal is to cut through the complication, to review with you the best options available to meet your needs and goals, and to make sure that you understand the estate plan you ultimately choose.

We appreciate the opportunity to be of service, and look forward to serving your estate planning needs.