West Virginia Financial Planners.com : FAQs

WHAT IS ESTATE PLANNING?

Estate planning is a process to consider alternatives for, to think through, and to set up legally effective arrangements that would meet your specific wishes if something happens to you or those you c are about. Good estate planning is more than just a simple Will. Estate planning also typically minimizes potential taxes and fees, and sets up contingency planning to make sure your wishes regarding health care treatment are followed.

On the financial side, a good estate plan coordinates what would happen with your home, your investments, your business, your life insurance, your employee benefits (such as a 401K plan), and other property in the event you became disabled or if you die.

On the personal side, a good estate plan includes directions to carry out your wishes regarding health care matters, so that if you ever are unable to give the directions yourself, someone you select would do that for you, and know when you would want them to authorize heroic measures and when you would prefer they pull the plug.

WHAT ARE SOME TYPICAL ESTATE PLANNING DOCUMENTS?

Several of the following documents are typically used as part of the estate planning process:

(1) A Will, sometimes called a "Last Will and Testament", to transfer property you hold in your name to the person(s) and/or organization(s) you want to have it. A Will also typically names someone you select to be your Personal Representative (or "Executor") to carry out your instructions and names a Guardian if you have minor children. A Will only becomes effective upon your death, and after it is admitted to probate.

(2) A "Durable Power of Attorney for Health Care" or Health Care Proxy appoints a person you designate to make decisions regarding your health care treatment in the event that you are unable to provide "informed consent".

(3) A "Living Will" or "Directive to Physicians" is an advance directive which gives doctors and hospitals your instructions regarding the nature and extent of the care you want should you suffer permanent incapacity, such as an irreversible coma.

(4) A "Durable Power of Attorney for Property" appoints a person you designate to act for you and handle financial matters should you be unable or perhaps unavailable to do so.

(5) A "Living Trust" can be used to hold legal title to and provide a mechanism to manage your property. You can select the person or persons you want -- often even yourself -- as the Trustee(s) to carry out the instructions you want in the Trust and name one or more Successor Trustees to take over if you cannot. Unlike a Will, a Trust usually becomes effective immediately, continues in force during your lifetime even in the event of your incapacity, and continues after your death. Most Trusts are "revocable" which allows the person who creates the Trust to make future changes, modifications and even to terminate it. (If the Trust is "irrevocable", changes, modifications and termination are very difficult (and sometime impossible), although such Trusts often carry some tax benefits.) Trusts also help you avoid or minimize the expenses, delays and publicity of probate.

(6) A "Family Limited Partnership" can be used to own and manage your property, in a similar manner to a Trust, but allowing additional tax planning techniques to be employed. Family Limited Partnerships are typically used for those who have large estates and thus have a need for specialized estate planning in order to minimize federal and state estate/death/inheritance taxes as well as provide elements of asset protection.

WHO SHOULD HAVE AN ESTATE PLAN?

You should have an estate plan if:

(1) you are the parent of minor children

(2) you have property that you care about

(3) you care about your health care treatment.

If you do not have minor children, do not care about your property, and have no concerns about your health care treatment, then you do not need an estate plan. But if you meet any of these categories above, you should have an estate plan.

WHAT IS A CONSERVATORSHIP?

If you suffer from an incurable disease or are involved in a debilitating accident and are unable to manage your own affairs, state law might require someone to go to court to have a conservator appointed by the court. The conservator is given the authority to make financial decisions and handle your financial affairs, under court supervision, when you lack the capacity to manage them on your own.

The conservator has to make periodic reports to the court and petition the court for additional authority under certain circumstances. Typically, the conservator may be paid for services rendered on your behalf and there will be attorney fees as well. In addition, the court will often require your conservator to purchase a "surety bond" which is a type of insurance policy, to protect the conservatorship estate. The costs and expenses of a conservatorship are paid by your estate.

HOW CAN MY ESTATE PLAN LOWER THE FEDERAL TRANSFER TAX LIABILITY?

Everyone gets a credit against Federal estate and gift taxes of $220,550, in 2000 and 2001, which is equivalent to transferring $675,000 tax free to your heirs. (The estate tax exemption amount increases slowly to $3.5 million in 2009; the estate tax is totally eliminated in 2010 and reinstated in 2011 at an exemption level of $1,000,000.) Those with an estate of less than $1,060,000 (in 2001) should have no fear of the generation skipping transfer tax (the GST drops back to $1,000,000 in 2002 and thereafter matches the gradual increases in estate tax exemptions in effect for the calendar year. The GST is repealed in 2010, but reinstated in 2011).

For those who are married, there is an unlimited marital deduction. All estate taxes can be avoided upon the death of the first spouse to die. But the surviving spouse would have to remarry and give his/her entire estate to the new spouse in order to get another unlimited marital deduction. Most people would rather their children or other relatives benefit from the estate, rather than a new spouse and his/her family.

An estate plan can take advantage of certain tax avoidance techniques for those who have accumulated some wealth; this gives more of your property to your intended beneficiaries, instead of giving it to the federal government. Some of these techniques include:

(1) a tax by-pass trust to hold property for your children, while still providing for your surviving spouse during his/her lifetime

(2) distribution of share in a Family Limited Partnership to take advantage of minority and lack of marketability valuation discounts

(3) a gift program to take advantage of the current $11,000 per year per person gift tax exclusion so as to prevent a greater tax in the future in the form of an estate tax

(4) an irrevocable trust to handle and manage property outside of your estate, so that the property is not part of your estate at the time of death.

Tax planning as part of estate planning can, depending on the size of one's estate, save hundreds of thousands to millions dollars - if it is done right.

CAN I LEAVE MY PENSION TO MY SPOUSE OR TO MY CHILD?

In general, if you are married, your spouse is entitled to a portion of your pension if you die first. There is some cost to that, however, that usually serves to reduce the monthly retirement payments you would have received if the benefits were to be paid just during your lifetime. If you and your spouse agree, you can waive this survivor benefit protection, and/or sometimes name some other person(s) (such as a child) as your beneficiary. Consult with your plan administrator and review the plan summary carefully to find out your rights and responsibilities in this area.