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Guiding You to Family Harmony in Estate Planning
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Frequently Asked Questions
 What is estate planning? back to top |
| The primary goal of estate planning is to assure the transfer of an individual´s property at death to the beneficiaries of his or her choice in the most efficient manner. This involves planning to minimize taxes and administrative costs as well as to preserve family harmony. An effective estate plan is accomplished through the preparation of certain documents, including wills, revocable trusts, powers of attorney and advance medical directives.
| | What is a will? back to top | A will is a legal document that provides for the settlement of an individual´s debts and obligations, and the orderly transfer of the remaining property to designated beneficiaries. A valid will avoids the application of Virginia´s intestacy laws which can result in the distribution of the estate to unintended beneficiaries. The will appoints an executor who is responsible for paying estate expenses and marshalling the estate´s assets. Further, a will can reduce estate administration costs by relieving the executor of the necessity of obtaining a costly surety bond, and may provide for the appointment of guardians for minor children.
The provisions of a will only affect the disposition of the individual´s probate estate. Many assets are transferred at death outside of the probate estate and without regard to the terms of the will. Assets owned jointly with right of survivorship by two or more individuals will automatically be owned by the surviving individual(s) at the death of one owner. Bank accounts and certificates of deposit may be designated "POD" (payable on death) to a specified beneficiary. Similarly, investment accounts may include a "TOD" (transfer on death) direction. Life insurance and annuity policies provide for named beneficiaries, as do all manner of retirement accounts (pension and profit-sharing accounts, 401(k)s and IRAs).
An effective estate plan coordinates the disposition of all of an individual´s property and financial resources. In most instances this requires more than just the preparation of a valid will.
| | What is a revocable trust? back to top | A revocable trust is a document created by an individual (the "grantor") for the purpose of managing the grantor´s assets. The trust appoints a trustee who holds title to the trust property and performs the day-to-day management of the trust. The grantor, alone or with the spouse, typically serves as trustee of the trust as long as he or she is competent to do so. The grantor can change any of the trust terms or revoke the trust during his or her lifetime.
At the grantor's death or in the event of the grantor´s incapacity, the trust becomes irrevocable. If the grantor was serving alone as trustee, a successor trustee is appointed according to the terms of the trust document. The successor trustee then is responsible for distributing the trust assets, or retaining the assets in further trust, as directed by the document.
The assets that are held or received by the trust can remain in trust indefinitely. This allows the grantor to keep a trust in place for a spouse, children, grandchildren or even great-grandchildren.
The expenses to administer ongoing trusts for the benefit of the grantor´s family or other beneficiaries are lower than the expenses incurred for testamentary trusts created by a will. For example, trusts created under a revocable trust document are not subject to an annual review by the court or required to file annual accountings with the Commissioner of Accounts. Appointment of additional or successor trustees are also handled privately without the need for a court order.
| | What are the advantages of a living trust? back to top | When a grantor transfers assets to the revocable trust during lifetime, it is often referred to as a "living trust". There are several benefits to a living trust.
First, if the grantor becomes unable to serve as trustee for health or other reasons, a successor trustee steps in to manage the trust for the grantor´s benefit. The trustee invests the assets prudently, and pays the grantor´s debts and living expenses. The living trust is generally safer than a general power of attorney for purposes of managing the grantor's property in the event of his or her incapacity.
Second, assets held in the trust during the grantor´s lifetime, or paid to the trust at the grantor´s death by appropriate beneficiary designation, are not part of the grantor´s probate estate. This usually results in reducing the expenses of estate settlement. Virginia probate taxes, assessed by the state and locality (about $1.30 in tax per $1,000 in assets), only apply to probate assets. The executor´s commission and fees paid to the Commissioner of Accounts are similarly reduced.
Unlike a will, which is recorded as a public document, a revocable trust remains private. The value of the assets held in the trust at death, and the disposition of those assets, are only revealed to those who have an interest in the trust.
| | Who should I name as my executor and trustee? back to top | The first consideration in choosing an executor and trustee is determining whether the position should be filled by a family member or other individual, or by a professional fiduciary. Clients often prefer family members as the primary choice for these positions. In planning for married couples, we usually suggest that one spouse serve as executor and trustee for the other. If a family member has the abilities and experience to serve in these roles, this selection can be less expensive than naming a professional. The downside to naming a family member or other individual is that the person may be unable to serve when the times comes or, once serving, may need to step down. This is frequently the case when long term trusts for children are planned. While we always recommend naming a successor executor and trustee in the documents, the same problem can arise if the named successor is also an individual.
In Virginia only certain business entities can serve as an executor or trustee. These include banks, trust companies and law firms. Professional fiduciaries are generally knowledgeable and experienced in administering estates and trusts, and especially mindful of the requirements for investing prudently. However, naming a professional fiduciary may be more expensive in some cases than naming a family member who retains professional assistance. Professional fiduciaries usually charge commissions as executors and trustees based on their published fee schedules. Commissions are generally based on the size of the estate or trust.
If the estate or trust is complicated to administer or if estate taxes are likely to be owed, a professional fiduciary, serving alone or with a family representative, may be the best choice. In other cases an appropriate solution is to name an individual as the initial executor and trustee, with a professional fiduciary as the successor. All the available alternatives, with their advantages and disadvantages, are considered in greater detail in the estate planning process.
| | What is a durable general power of attorney? back to top | A power of attorney is a document created by the "principal" naming an "agent" to act for him or her with respect to management of the principal's property and financial affairs. A "general" power of attorney is written very broadly to permit the agent to do almost anything that the principal could do himself or herself. A "durable" power of attorney remains effective in the event of the principal´s disability or incapacity. A power of attorney can be revoked by the principal at any time, and ceases to be effective at the principal's death.
| | What is an advance medical directive? back to top | Virginia law expressly validates advance medical directives and provides a suggested form for implementation. The advance medical directive is actually a combination of three documents: (1) a "living will", (2) a health care power of attorney, and (3) an anatomical gift authorization.
The living will instructs your physician to withhold certain artificial life support measures if you are in a terminable condition and your death is imminent, or if you are diagnosed to be in a persistent vegetative state.
The health care power of attorney appoints an agent and alternate agent(s) to make other health care decisions on your behalf if you are not competent to make those decisions yourself. The agent may decide whether to approve surgery, treatment, nursing care, hospital admission and the like.
The anatomical gift authorization allows you to make anatomical donations for organ transplant or research upon your death, and appoints an agent and alternate agent(s) to implement that authorization.
For additional information, please refer to the memorandum on the use of advance medical directives that we have prepared.
| | I have minor children, are there any special issues that I need to consider? back to top | Clients with minor children have special estate planning issues to address. First, the clients should name a guardian or guardians for the custody of their children until they reach majority (age 18). The guardians are typically nominated in the will. The actual appointment of the guardian(s) is made by court order, but the nomination of the guardian(s) by the parent or parents is usually followed. The guardian makes the day-to-day decisions that the parents would otherwise make if alive, for example, where the children will live, the schools they will attend, etc.
Second, the estate plan should create appropriate trusts for the benefit of the children. Trusts ensure that the children´s inheritance will be properly managed and applied until the children have the financial experience and maturity to manage the assets themselves. If the client has more than one dependent child, we usually recommend a two-stage approach. In the first stage, all the family´s assets are retained in a single trust which provides for the support, health and education needs of all the children. The use of a single trust provides the flexibility to address differing needs at different ages, as the parents would do if living. In the second stage, each child´s inheritance is held in a separate trust. The trust is designed to gradually give the child more benefit from and responsibility for the trust assets over time. This approach minimizes the risks that a single financial mistake by the child will result in the loss of his or her inheritance.
Occasionally, clients may have a child with special needs stemming from a mental or physical handicap. Often the clients would like to provide some financial benefit for the child, but want the child to remain eligible for certain state and federal support. This requires the use of a certain type of trust that contributes to the child´s quality of life while keeping the child eligible for government assistance.
| | I am concerned about paying estate tax. What tax planning opportunities are available? back to top |
| Under current law, each person has a credit that can be used to offset federal estate tax at death. The available credit for 2006 allows a person to leave $2,000,000 free of estate tax. This is known as the "exemption amount" and is scheduled to increase in future years. There is also an unlimited amount that can be left to a person's spouse free of tax. However, if a person simply leaves all the assets to his or her spouse, the benefit of the $2,000,000 exemption is forfeited.
The initial tax planning objective for a married couple is ensure that they receive the benefit of two exemption amounts. This is usually accomplished by creating a Family Trust (also referred to as a bypass trust, exemption trust or credit shelter trust) which becomes effective at the death of the first spouse. Implementation of the plan requires that the couple's financial and investment assets are appropriately titled in order to fund the Family Trust.
Once planning for the exemption amount has been completed, other tax planning options may be considered. These include annual gifts, irrevocable insurance trusts, qualified personal residence trusts, charitable trusts, grantor annuity trusts and family limited liability companies. The attorneys of Virginia Wills, Trusts & Estates PLC have considerable experience in these and other estate planning techniques.
| | I have recently moved to Virginia. Do I need to revise my estate documents? back to top | Probably. Although federal tax laws remain the same, there are substantial differences from state to state in the laws applicable to wills, estates, trusts and state death taxes. Unanticipated expenses and unintended consequences often result when estate planning documents created for one jurisdiction are used in another. For more information, please review our memo entitled: "Moving to Virginia - Will my Estate Planning Documents Survive the Trip?"
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