Archive for the ‘Wills (or Not!)’ Category

Coastal Senior is a monthly periodical published in Savannah, Georgia and circulated throughout the Georgia and South Carolina low country. Bob Mason is its legal columnist.

Is your will from another century? Maybe even the first year or two of this century? If so, your older model estate plan may be getting poor mileage . . . and might even be unsafe to drive.

People typically update their wills and trusts for one of three reasons: Something personal has changed (a divorce, a marriage, a child joined Al Qaeda), an estate has changed (mother won the lottery, daddy invested in Enron back in ’01), or the law has changed (constantly).

Most people come to see me for the first two reasons, but very few come to see me because the law has changed. In both law and life in general, however, the only thing that doesn’t change is change. The law relating to estate tax has changed (much) since 2000 and my guess is will remain unsettled until after the next election cycle.

Here is a typical situation. A couple comes to see me with 1990’s “tax planning” wills that divide everything, using some formula, into two parts. One part called a marital or spousal share and one part called a family trust or credit trust. The couple may have had an estate of between $600,000 and $2 million when the will or trust was completed.

Everything in the couple’s life may feel the same and look the same, but things have changed. The law has changed. The surviving spouse may be headed for an unpleasant surprise. Here’s why.

First, you need to understand just a bit about how the estate tax works.

• General rule: All estates are taxable at death unless an exception applies.

• Exceptions:
  • Transfers to a spouse (unlimited in amount)
  • Charitable transfers
  • Transfers that are “sheltered” by what used to be called the “unified credit” and are now called the “applicable exclusion” amount. Those transfers could NOT be used for another type of exclusion. For example, a transfer to a spouse could not also count as a “sheltered transfer” under the unified credit. The “sheltered” transfers historically kept smaller estates from being taxed.

• Sheltered transfers:
  • In 2000 the amount that anyone could shelter was $675,000; it had been going up consistently for a few years before that from $600,000.
  • In 2007 that number is $2,000,000.

How it works/worked: The year is 2000. Alex and Betty, a married couple, each have $750,000 in their own names ($1,500,000 total). Alex had a will that left everything to Betty. Alex died. Because Alex’s will left everything to Betty, there was no tax because of the unlimited nontaxable transfer to the spouse. However, none of Alex’s “credit” or “shelter” amount of $675,000 was used because everything was given to Betty by will. Alex wasted all of his $675,000.

Here’s the problem: While there was no tax when Alex died, Betty now has an estate of $1,500,000 (her $750,000 and the $750,000 she inherited from Alex). Let’s say Betty died later in 2000, when the credit amount was still $675,000. Her will said “leave it all to the kids if Alex has died”. Because Betty also had a $675,000 credit amount, then $825,000 of her estate would be subject to estate tax ($1,500,000 – $675,000). BAD planning. All tax could have been avoided.

How taxes were avoided. Enter the 1990’s “tax planning” will. Alex and Betty would each have wills that directed the executor to divide the estate into two shares. One share equaled whatever the “credit” or “shelter” amount was on the date of death ($675,000 if Alex died in 2000). The other share was the rest of the estate. The first share ($675,000) went to a trust that would NOT be meant to qualify as a marital transfer – that way Alex used his credit amount (usually the trust would allow income and perhaps some principal to be paid to the surviving spouse for her life). The rest ($75,000 in Alex’ case) would go to Betty. No tax.

Now Betty had an estate of $825,000 (her own $750,000 and the $75,000 inherited from Alex). Everything else was in the trust. If Betty died in 2000 she would have a taxable estate of only $150,000 ($825,000 – $675,000). A taxable estate of $150,000 was MUCH better than one of $825,000; and simple planning fixed the problem.

The Problem Is Getting Bigger. So far I’ve talked about $675,000 credit amount in 2000. As I mentioned, it is now at $2,000,000. If someone with an old 1990’s (or even early 2000’s) tax planning will dies in 2007 or 2008, up to $2,000,000 would go into the Credit Shelter trust (that may have all kinds of restrictions) and nothing outright to the surviving spouse. In Betty and Alex’s case, ALL of Alex’s $750,000 would go into trust, and nothing would go to Betty outright.

What made sense a few years ago, makes no sense now. Betty and Alex may want to redraft their wills.

Coastal Senior is a monthly periodical published in Savannah, Georgia and circulated throughout the Georgia and South Carolina low country. Bob Mason is its legal columnist.

Down in the corner next to the obituaries sits the ad. The next day it pops up opposite the Opinions section. FREE SEMINAR! FREE LUNCH! PROTECT YOUR ASSETS! Then the ad goes on to scare the daylights out of you. How on earth could that dunderhead lawyer of yours have not given you such IMPORTANT INFORMATION?

The ad tells you that with a Living Trust you can –

• Avoid Probate!

• Avoid Triple Taxation!

• Maintain Confidentiality!

• Leave Your Estate To Those YOU love (and NOT –gasp- to those the State chooses)!

• Manage Your Affairs If You Become Incapacitated!

Living trusts, revocable trusts, life trust, family protection trust. They come with different names. My favorite slang term is “The $3,000 Notebook”. If you have a black notebook with tabs in it containing a bunch of documents you don’t really understand for which you paid thousands after attending a free seminar – you may be the owner of a $3,000 Notebook.

A living trust is a trust that you set up (maybe jointly with a spouse) usually naming yourself as trustee. The trust says you can freely put assets in and take assets out. There will be provisions that detail how your estate (or whatever you’ve put in the trust) will pass when you do (pass, that is). If you have a big estate (say, north of $2 million) there should be some tax planning provisions in there. Of course, I’ve seen people with modest estates that have bought trusts containing tax provisions that would do Warren Buffet proud.

Look back at the list of commonly advertised claims above. I’ll take them one at a time. First, YES, you can accomplish all of those things with a living trust. But other than avoiding probate and maintaining strict confidentiality, you can also accomplish all of those goals with a will.

Probate is the process available in all states by which a court (in Georgia it is the Probate Court) supervises the collection of estate assets, the payment of creditors and final distribution of assets. It applies to “probate” assets only.

A bank account solely in my name is likely going to be a probate asset when I die. It’ll go to whomever I name in a will, or if I don’t have a will (meaning I’ve died intestate) to whomever the rules say, perhaps split between my wife and child.

On the other hand, a bank account that says “Pay Ann on Bob’s death” will be a nonprobate asset because it doesn’t matter what my will says or what the intestate rules say (Ann will get the bank account even if my will leaves everything to my child). Likewise, a living trust is a nonprobate asset because anything in it will pass without regard to a will or the rules of intestate succession.

Remember: Intestate means “without a will.” Which reminds me of the following encounter with a client. “I’m so sorry about your Daddy, Wanda. Did he die intestate?” “No, Mr. Mason, he died over in South Carolina.” Bad joke. Couldn’t help it.

In some states the probate process is a bit like a head-on collision with an 18-wheeler on I-95. Something you ought to try to avoid if possible. A properly drafted and funded living trust is a good way to avoid that (probate, not the collision).

Georgia, on the other hand, has a user-friendly probate process. By this I mean the probate process is often cheaper and easier than establishing and tending to a living trust. Often it just doesn’t make sense to set up a living trust simply to avoid probate.

Next claim: Avoid triple taxation. If you have an estate worth less than $2 million, you won’t have any estate tax (unless you gifted millions while you were alive). It doesn’t matter whether you have a trust or a will or nothing. If you have a larger estate, a living trust has NO tax advantage over a will. If you are worth more than $2 million why are you at a free-lunch-seminar?

Next claim: Maintain confidentiality. Fair enough. The probate process is public. You can go down to the courthouse and insist on reviewing an estate file if you’re so inclined. Most people don’t care.

Next claim: Leave your estate to those you choose, not to those the state selects. You can do that with a will. In fact, it is simpler with a will. The worst you can do is nothing, however. Remember, if you die without doing anything, the kids will get a cut along with Mama.

Final claim: Manage you affairs if you become incapacitated. True, a living trust can help. But so can a power of attorney at a fraction of the cost.

Last caution: Living trusts do nothing for asset protection. Zero.

All that being said, living trusts or revocable trusts can sometimes be useful. Extremely so, in fact. If your trusted attorney recommends a revocable or living trust and can give you some solid reasons to backup the recommendation, then by all means listen to her. She knows your situation better than someone who fed you a free lunch.

Bob Mason, certified elder law attorney by the National Elder Law Foundation, practices in Savannah, Georgia, and Asheboro, North Carolina. Email Bob at ram@masonlawpc.com or visit www.masonlawpc.com.

Answer:  It Depends

A Will is a document signed by a testator that meets the other formalities specified by North Carolina Law needed to pass probate property in the manner specified in the Will. The process of submitting a Will to the clerk of the superior court and proving to the clerk that the Will is valid and should be given effect is called “probate”. In fact the word “probate” comes from the Latin verb “probare”, which means “to prove”.

The clerk of the superior court, unless serious disputes arise that are taken up to a superior court, supervises the process of administering an estate by requiring the personal representative (either an executor or an administrator) to provide a performance and surety bond to the clerk (unless waived), to give notices to creditors, and to furnish the clerk periodic inventories and accountings of the estate. The clerk’s basic function is to insure that the personal representative satisfies creditors of the deceased and distributes the estate to beneficiaries as required by the terms of the will or by law. The clerk’s jurisdiction generally extends, with some exceptions, to “probate property” – which is property of the deceased that is available to claims of creditors, as opposed to property that passes “outside” the estate as nonprobate property.

Probate Property Defined

Often it is easier to think of what nonprobate property is when attempting to define probate property. Common forms of nonprobate property are: retirement plan benefits (they pass according to the beneficiary designation form), insurance proceeds (again, they pass according to the beneficiary designation form), life estates (sometimes called “lifetime rights”), joint tenancy with rights of survivorship property (which will pass automatically to the other joint tenant), and annuities (beneficiary designation). Keep in mind, however, that nonprobate property can become probate property if the property passes to the personal representative (for example, an insurance policy may name as a beneficiary “my estate” and the insurance company will pay the proceeds to the personal representative). As will be explained below, compared to many other states North Carolina has a relatively “friendly” and inexpensive probate system.

One other important type of nonprobate property are assets that are held by a trust with beneficiaries other than the estate at the time of the grantor’s death. These are often called “living trusts” and are the sorts of instruments that are often advertised as a way to avoid probate. They avoid probate because they are nonprobate property as described above. Trusts enable the grantor to determine who receives the money, when they receive it, and what conditions must be met. While a living trust is set up during the grantor’s life, a testamentary trust takes effect upon the grantor’s death and is often contained within the terms of the Will.

Revocable vs. Irrevocable Trusts

Living, or inter vivos (more Latin meaning “between the living”), trusts come in two basic categories: Revocable and irrevocable. Revocable “living trusts” are perhaps the more common because the grantor can revoke it or amend it at anytime before his death and the proceeds remain nonprobate property. A living trust has no estate tax advantage at all over assets passed by will. The property in a revocable living trust generally will be included in the grantor’s estate. To avoid estate taxation of trust property, the trust must be irrevocable and meet a host of other technical requirements. We constantly work with these requirements in planning for our clients.

Living Trust Advantages

The most-touted advantage of a irrevocable living trust are substantial estate tax (and occasionally income tax) benefits to the grantor. Depending on trust design, assets placed in an irrevocable living trust are not attributable to the grantor, although the trust itself may be taxed. Estate taxes also may be avoided.

Other advantages cover both revocable and irrevocable living trusts. If a living trust covers all of the grantor’s assets, then he or she may not even need a will. Many people wish to spare their relatives from going through probate, and, as explained above, living trust assets are not subject to probate. Because there is no probate, survivors do not have to reveal the extent of the living trust’s assets through a public filing as happens with probate. If the grantor holds real estate in more than one state, a living trust covering that property may allow survivors to avoid probate in those states.

Aside from the advantages for the survivors, a living trust can help a grantor manage his or her financial affairs because a trustee takes over the administration of the trust’s assets if the grantor becomes incapacitated. Some people are particularly concerned about how their finances will be managed if they should fall ill. A living trust may provide peace of mind because a trustee can continue to manage the trust’s funds in the event the grantor becomes mentally or physically incapacitated. On the other hand, a property drafted power of attorney can usually address these concerns.

Living Trust Disadvantages

The main disadvantage of a living trust is that the grantor loses some flexibility and control over his or her property and funds. Because a living trust becomes effective upon creation instead of at the grantor’s death, the assets covered by the trust start to be administered by the trustee at that time. If the trust is a revocable trust, usually the grantor can elect to serve as long as he is able and control is not much of an issue (other than, perhaps, a slight accounting headache). If the trust is irrevocable, the grantor loses much control that he or she might otherwise have had. If an individual prefers to have unrestricted control over his or her assets, or feels that he or she may want to modify an estate plan, a testamentary trust or will provides the flexibility to change terms for as long as the grantor is able.

A living trust often costs more to establish than a will. In many states the costs of probate may be so high that the extra cost involved in establishing a living trust may be justified. In North Carolina, however, probate is generally a simpler process and often the costs of establishing a living trust are not justifiable solely to avoid probate. The question of whether to use a revocable living trust in lieu of a will must always be answered on a case-by-case basis.

So . . .

A “one size fits all” approach is not wise. Unfortunately, there are many “trust mills” that advertise the “wonderful advantages” of living trusts, hold seminars to tout those advantages (often with a free lunch!) and often “cold call” prospective clients at home. Unfortunately, this approach often furnishes the client a mass-produced (and very expensive) document that does little to address a client’s real needs. For more on this marketing topic, read Bob’s article The $99 Legal Special!

Nevertheless, we often design and use irrevocable living trusts to achieve certain gift and estate tax advantages and accomplish other important family goals. Life insurance trusts and qualified personal residence trusts are very common examples of these sorts of trusts. Unlike revocable trusts, these trusts are seldom, if ever, designed to hold all of the grantor’s assets.

The major advantage of a Will and a testamentary trust contained in the Will is that the grantor retains absolute control over his or her assets. Because a testamentary trust becomes effective only upon the grantor’s death, the grantor may make changes to its terms any time before death. For many people, retaining control of their property is an important goal that testamentary trusts help them achieve. Retaining control can have its disadvantages, though. If the grantor becomes incapacitated prior to death, the trustee cannot take charge of the trust assets in order to manage the grantor’s finances during that time. A guardianship may be required for such incapacitated grantors if adequate provision has not been made through powers of attorney. Guardianship issues, however, are easily avoidable through proper planning, usually through the use of a property drafted power of attorney.