It is wise for everyone, irrespective of age or wealth, to complete an estate plan. Estate planning is just another form of financial planning. The purpose of estate planning is either to save money or to avoid unnecessary expenses. If a person consults a professional, whether that professional is an attorney or a non-attorney, the fee charged by the person assisting with the estate plan should be less than the amount of savings realized from the planning process. Estate planning is more important today than it has ever been because the average person has more assets now than in the past and people are living longer now than previously. Therefore the risks of depletion of a person’s estate are more significant either from the possibility of estate taxes for those who are quite wealthy or from the possibility of high medical bills in later years, especially the possibility of extended stays in a nursing home.

Our office has the capacity to properly advise people to do planning to help avoid probate, protect their estate from estate taxes, and protect their estate from the high costs of medical care in later years to the extent our state and federal laws allow this to be done. Upon completion of an estate planning session, the attorney you are working with will make a recommendation to you as to what should be done and why it should be done. This includes helping the client avoid the need to go through probate. We include below brochures this office makes available to our clients and prospective clients and an estate planning questionnaire which you may fill out and bring with you  to us if you wish to have us assist you with developing your estate plan. To see the type of information we need if we meet with you, you can open our intake sheet for estate planning.  You may call our office toll free to set up a time for an appointment at 1-800-450-6112.

Table of Contents

1. Estate Taxes

2. Life Estate Reservations

3. Power of Attorney

4. Estate Planning Sheet  (This will open a new window so you can print it out)

5. My Estate - Instructions to the Personal Representative   (This will open a new window so
   you can print it out)
   

Estate Taxes

A Trap for those who do not plan!

     The United States Congress liberalized the federal estate tax laws on January 1, 1980, and again liberalized them effective December 31, 1997.  In each instance, Congress provided for an increase in the size of an estate below which there would be no federal estate tax.  The most recent changes are phased  in until January 1, 2006, according to the following schedule.  There will be no tax on estates of $650,00 or less in 1999; no tax on estates of less than $675,00 in 2000 and 2001; no tax on estates of $700,000 in 2002 and 2003; no tax on estates of less than $850,00 in 2004; no tax on estates of less than $950,000 in 2005 and no tax on estates of $1,000,000 in 2006 and thereafter.

     Since January 1, 1980, Congress has provided for an unlimited marital exemption.  This means that any assets in a deceased person's estate which go to the surviving spouse will not have any federal estate tax owed no matter what the size of the estate.

 The practical implications of the federal estate tax laws as they now exist are as follows:
First, there is no estate tax on any estate to the extent that the estate goes to a surviving spouse.
Second, if an estate is over the exemption amounts listed above and the estate does not go to a surviving spouse, the estate tax rates start at about one-third of any amount over the exemption, and escalate to increasingly higher percentages thereafter.  This means that the government will normally tax estates when property passes from one generation to the next generation.  If a husband and wife own everything in joint tenancy, because of the unlimited marital exemption, when one spouse dies, everything will go to the surviving spouse and there will be no tax.  However, when the surviving spouse dies, the federal government will tax at a beginning rate of approximately one-third, everything over the exemption amount.  Fortunately, with reasonable estate planning, it is possible to pass the amount of the exempt estate for each of the spouses to the next generation without paying any estate taxes.  In addition, it is also possible to make lifetime gifts which will further reduce estate tax obligations.

     The most common method of estate planning to avoid estate taxes is based on a very simple concept.  Every person can transfer property at their death to anyone other than a spouse up to the level for that year below which there will be no federal estate tax.  Th8is means that both a husband and a wife each have a federal exemption.  If a husband and wife have a combined net worth of $2,000,000, and instead of owning those assets in joint tenancy, the husband and wife divide them so each spouse owns $1,000,000 of assets, each spouse can then make a simple will saying that when either of them dies, none of their estate will go the spouse but it will all go to their children.  If each of the spouses die after 2006, since each spouse has $1,000,000 of exemptions, when both spouses die a total of $2,000,000 will have been transferred to their children without any estate taxes being paid.  The same $2,000,000 going first to a surviving spouse and then to the children would result in a federal estate tax of $368,600.

     The problem with simply dividing a husband's and wife's assets in half and having each spouse make a simple will providing that each spouse's assets will go to the children is that most couples feel they have earned the equity in their estate by their joint efforts and they wish to ensure that the surviving spouse will have the benefits of all of the assets of both spouses want to give priority to a surviving spouse rather than have half of their combined estate go to their children immediately when one spouse dies leaving a surviving spouse.  Fortunately,  federal tax laws provide that a trust can be created either during a person's lifetime or by will upon their death so that when one spouse dies leaving a surviving spouse, whatever is in that spouse's estate can go to the children but be held in trust with all of the income paid over to the surviving spouse during his or her lifetime.  The surviving spouse can also have almost complete control over how the deceased spouse's assets are invested.

     Estate planning to avoid estate taxes can be very cost effective because investing a small amount of money to do the planning and prepare the appropriate documents is very small compared to the amount of federal estate taxes that can be saved.  However, you should not that estate planning to avoid estate taxes requires a longer term outlook because it is necessary for the parents to invest money during their lifetime to create an estate plan which will not save the parents any money but will save substantial amounts of money for their children.  It has been my experience that most Americans, even those who are very patriotic, do not wish to pay any more taxes than are essential, even if those taxes might be paid after their death.  Estate planning to avoid estate taxes should be seriously explored by any husband and wife who have an estate over the estate exemption amount for that year and wish to organize their estate in such a way as to minimize the estate taxes that their children will otherwise have to pay.  The cost of planning and implementing a plan to avoid estate taxes is very small in comparison to the estate taxes that can be saved.

     There are other estate planning techniques which are available to anyone having more than the current estate exemption amount of net worth.  Estate planning is simply another form of financial planning.  For those people who planned well enough to have accumulated an estate above the estate exemption amount, it is no less important to do estate planning to avoid estate taxes when your estate transfers to your children.  If you have a net worth in excess of the federal estate tax exemption amount, you should contact a person experienced in estate planning so that you can become fully aware of the estate tax liability your children will have and also be fully aware of what the options are to minimize or eliminate those estate taxes.  Since the most common method of avoiding estate taxes is to cumulate the federal exemption that every person has under federal estate tax laws, is is essential for a family that this planning be done by both spouses during their lifetimes.  If one spouse dies and no planning has been done, one federal exemption amount will have already been wasted.  Nothing is so easy as putting off reasonable estate planning.  However for those who have an estate over the federal exemption amount, putting off the planning process runs a substantial risk.  Once one spouse dies, the surviving spouse has far less flexibility in avoiding estate taxes.

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Life Estate Reservations

2.         If any of your children have a judgment or tax lien it will attach to their remainder interest.  This will usually mean that it must be satisfied before the property can be sold or mortgaged, resulting in a loss to your child.  If a child later develops financial problems and files bankruptcy, he or she will lose their remainder interest.  In the event your child needs to apply for medical assistance, the child's remainder interest will have to be sold or transferred before the child will be eligible for medical assistance.

 3.         If any of your children have marital problems which end in divorce, their remainder interest will figure in your child's property settlement and may pose a problem.

 4.         In the event of a sale of the property before your death, if there is a taxable gain, your children may have to pay capital gains income tax on a portion of the gain.

 5.         In the event of a sale of the property during your lifetime, your children will receive part of the sale proceeds and they will have no legal obligation to return their portion of it to you.

 6.         If upon entering a nursing home, the property is sold, it will be necessary to use a portion of the sale proceeds to pay for your nursing care expense.  The percentage is determined by actuarial tables used by the Minnesota Department of Human Services.

 7.         If the deed conveys your property to your children as tenants in common and any of your children die before you, it will be necessary to probate that child's estate.  Usually, a remainder interest owned by a deceased child will go to his or her spouse, if they are married. If you have conveyed the property to your children as joint tenants and one of your children dies, that deceased child's share will go to your surviving children as surviving joint tenants.  This will not require a probate proceeding.

 8.         The property will be included in your taxable estate for estate tax purposes.

 9          When you create a life estate, a gift is automatically made to your children.  The gift is known as the "remainder interest".  This gift disqualifies you for medical assistance (help with nursing home bills) for a period of time up to 36 months.  Sufficient cash assets must be reserved to pay for nursing care during that time.

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Power of Attorney

Advantages
  A power of attorney can be an informal substitute for Guardianship or a Conservatorship.  Creating a Guardianship or a conservatorship, assuming it is uncontested (that is, assuming everyone agrees it is necessary) usually costs between $1,000 to $2,000 and costs between $500 and $1,000 a year to maintain because there are annual accounts presented to the court and a bond premium required.  A properly drawn power of attorney can avoid these expenses.

  A properly drawn power of attorney can allow a person the flexibility to transfer assets even if a person is incompetent to make a person eligible for Medical Assistance benefits sooner than would otherwise be possible under a Guardianship or Conservatorship.  Generally, a person should be able under current law to preserve approximately one-half of their estate by making gifts to other family members while at the same time paying a nursing home bill.  This will usually allow a person to become eligible for medical assistance in about half of the time that would usually be required.

Disadvantages
  Power of Attorney documents are broad and sweeping and would allow the person or persons appointed to take control of your assets and do anything they wanted with the assets, including using them for themselves.  A power of attorney can, however, be revoked at any time for any reason or for no reason at all.  It is frequently recommended that possession of the power of attorney documents be retained by the person giving the power until such time as it is necessary to exercise the power.  It is also frequently recommended that a spouse be given the power to revoke the authority of a child to act under a power of attorney.

  A power of attorney authorizes someone else to act but does not require anyone to act.  The person given the power may refuse to exercise the power.

  A person who acts under a power of attorney acts at his or her own risk.  Under a Guardianship or Conservatorship a judge supervises what is done and any action authorized by the judge protects the guardian or conservator.  This same protection is not available to a person acting under a power of attorney.

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Copyright © 2001  [Randolph T. Brown]. All rights reserved.
Revised: November 02, 2004 .