Las Vegas Probate Estate Lawyer

Little else causes us more stress, time, money, and grief than when our health, or the health of a close family member or friend, is seriously threatened. It is something we do not like to think about and hope never happens to us. Unfortunately, it is very possible that either us or a loved one will, at sometime or another, become incapacitated whether it be through an accident, old age, or some other means. When this does happen, we do not want to be unprepared or unable to handle important health care decisions. With a Durable Power of Attorney for Health Care (DPOA HC), this does not have to be the case.

Putting it simply, a Durable Power of Attorney for Health Care is a document that allows individuals to authorize another person(s) to make health care decisions for them in the event  they become incapacitated or otherwise unable to make health care decisions for themselves . It makes dealing with health issues less stressful, less time consuming, and less costly.

Picture a scenario where a man is involved in an accident and only remains alive after being hooked up to life support. Although he knows how he wants his health care decisions made, his loved ones do not and he does not have a DPOA HC that legally validates his desire. Now, under the distress of the tragedy, his loved ones begin to worry and are unsure who is authorized to make the decision to keep him on life support or not and how his medical expenses will be handled, among other things. Again, the man knows how he wants this handled, he just does not have the document to validate it. This puts unneccesary burdens on everyone, and this is only a basic example.

There are many important aspects that go into drawing up a DPOA HC. Some important things to know are first, you should have one if you do not and second, you should appoint only person(s) who you completely trust and feel comfortable with making these decisions for you. You will understand everything else when you come in to create or update your DPOA HC.

The idea of your loved ones having to deal with your incapacity is difficult enough already; you do not want to risk additional, unneeded stress and complications by failing to get your health care affairs in order.

General George S. Patton once said “…one does not plan and then try to make circumstances fit those plans. One tries to make plans fit the circumstances.” A simple interpretation of this quote is that it often takes more than one initial plan in order for the intended result of that plan to come to fruition. This is because the initial circumstances of that plan will change along the way, which ultimately requires us to revisit our plan and adapt it to the present circumstances. This was true for General Patton during times of war, and it is also true for each of us with our estate planning.

Estate planning is more of a process of planning, not just a plan. Initially, your plan will detail how you want your assets managed from that point forward. However, changing circumstances will require you to revisit that plan to ensure that it reflects those changes. Here are some examples of when it is a good idea to revisit your estate planning:

Change is always certain. It is vital to continually review your estate plan to make sure it is up to date. After all, a good plan today might be insufficient tomorrow, depending on the circumstances.

Studies have consistently shown that over 1/2 of Americans do not have a will.* Considering that a will is a pivotal component for an adequate estate plan, it is likely that over 1/2 of Americans lack other important aspects of an estate plan, such as a living trust or durable power of attorney. The fact that so many are lacking in estate planning is unfortunate, but perhaps even more so are the reasons why.

Last Will and Testament

Studies have also shown that the most popular reasons for not having an estate plan are that people do not want to think about dying or becoming incapable of making decisions, they do not know who to talk to about it, they feel that they do not have enough assets to justify setting up an estate plan, or they do not feel they can afford it with the current economic conditions.* In reality, these are not good reasons to avoid setting up an estate plan.

There can be detrimental consequences for those who fail to protect their assets and get their affairs in order in the event that they die or become incapacitated. Those who fail to do these things risk having their assets distributed in a way contrary to what they actually want. Not only does this negatively affect the individual, but it also affects the people and organizations who end up, or should end up, as beneficiaries of their estate. This is putting it simply.

Living Trust

Contrary to what some people may think, estate planning is for everyone. It remains certain that 1) Every person will at one point pass away and/or become incapacitated, and 2) The assets of each person will be distributed in some way. When it comes to having a will, durable power of attorney, living trust, or any other component of an estate plan, it is not the quantity or worth of assets that is most important, but the simple fact that you have assets that need to be managed and protected.Who and to whom those assets are distributed is up to you to decide. You can either set up estate planning and have the process be as efficient and effective as possible, or you can leave it up to the probate courts and potentially pass on unneeded stress and expense to your loved ones.

We spend our lives working to acquire and accumulate various kinds of assets for various reasons. Does it not make sense then that we should invest in protecting our life’s work?

Sources:

1) Lawyers.com Wills and Estate Planning Survey (2007). Performed by Harris Interactive. Retrieved from LexisNexis, http://www.lexisnexis.com/about/releases/0966.asp

2) Lawyers.com Wills and Estate Planning Survey (2009). Performed by Harris Interactive. Retrieved from LexisNexis, http://www.lexisnexis.com/media/press-release.aspx?id=1268676534119836

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 has opened a window of opportunity to avoid significant estate and gift taxes for 2011 and 2012. The Act, signed on December 17, 2010, has significantly increased the exemptions and decreased the maximum tax rates for estate, gift, and generation-skipping transfer (GST) taxes. The changes are only effective through 2012 and will reset again at the start of 2013.

President Obama signs the law into effect as members of Congress look on

For 2011 and 2012:

• Estate, gift, and GST tax exemptions are each $5 million ($10 million per couple)
• Maximum tax rate is 35%

Starting 2013:

• Estate, gift, and GST tax exemptions are each $1 million
• Maximum tax rate is 55%

These changes to the estate and gift taxes allow for many to better protect their assets and save considerable amounts on estate and gift taxes, specifically for assets and gifts in excess of $1 million. A $5 million dollar gift now could save you up to $2.2 million dollars in taxes compared to making the same gift after 2012. The same holds true for assets you want to designate to a beneficiary upon your death. Now is an opportune time to consider making gifts and changes to your estate planning. Not doing so could be very costly.

Sources:

1.) Photo. White House Photographer. December 17, 2010. President Obama Signs the Act.

We have all heard the adage, “It’s not always what you say, but how you say it.” In estate planning, this principle can reworded as, “It’s not always what you give, but how you give it.” As you consider the assets you will give to others and who will be the beneficiaries of those assets, it is important to keep in mind the timing of the gift. The step-up in basis principle is one example of this.

A simple way to understand what a step-up in basis means is to use an example. Let’s say a man purchased some land years ago for the amount of $100,000 and recently decided to give it to his son. He can either give it to his son while he (the father) is still alive, or he can leave it to his son upon his (the father’s) death. To make it simple, we will say that the fair market value (the value the land can be sold at presently) is $200,000 in both scenarios. If the man gives the land to his son while he is still alive, the son automatically has to assume the cost basis of the land at $100,000, the same amount that it originally cost his father to purchase it. If the man leaves the land to his son upon his death, the son would assume a step-up in basis of the land at its fair market value of $200,000. This is what it means to have a step-up in the basis of an asset-to assume an asset’s value at its higher fair market value compared to its original cost. But why is this relevant and what implications does this principle have?

The tax implications are significant when dealing with the step-up in basis of an asset. To continue our example, after receiving the land from his father the son decides he wants to sell it for $200,000. If the land was given to him while his father was still alive, the son would have to pay taxes on the amount of $100,000, the difference between the fair market value and original cost, or the gain on the sale of the land. Now if the son received the land upon the death of his father, he does not have to pay any taxes because he would be selling it for the same amount that it is worth at the fair market value. In other words, the difference between the selling price and fair market value of the land is $0, therefore no taxes need be paid on the sale.

Using this example, it is evident that in many cases it may be wise to leave an appreciated asset upon one’s death rather than give that asset to a beneficiary while the donor is still alive. This will minimize the taxes to be paid, which can be very costly, in the event that he or she sells the asset during his or her lifetime.

Some people feel that giving assets away during their life will help avoid the time and expense of dealing with probate upon their death. However, people that choose to do this forfeit the beneficiary’s advantage of the step-up in basis principle. There are ways to both avoid probate and still allow for the beneficiaries to receive a step-up in basis of an asset. One such way is through creating a trust. In doing so, the assets placed within the trust pass on to the beneficiaries without the cost of probate and still give the beneficiaries the step-up in basis.

On Friday March 18, 2011, the IRS released the final version of Form 709 for 2010. The latest form accounts for some changes made by the Tax Relief, Unemployment Reinsurance Authorization, and Job Creation Act of 2010, which was enacted on December 17, 2010. The Act, in addition to gift tax, made changes to estate and other tax provisions.

Here are some of the notable changes:

• Increased annual exclusion for gifts made to spouses that are not U.S. citizens to $134,000
• Generation-skipping transfer (GST) tax rate of 0% for the year 2010
• The unified credit for estate and gift tax is now $330,800

The form is due by April 18, 2011 for all gifts made during 2010. If the gift donor has since passed away, the executor for the donor must file the form by the earlier of the due date of the donor’s estate tax return, or April 18, 2011 (or the extension date of the gift tax return).

See the following sources for more information and for links to the form:

1. Accounting Today – IRS Finalizes Gift Tax Return Form. http://www.accountingtoday.com/news/IRS-Finalizes-Gift-Tax-Return-Form-57718-1.html
2. Journal of Accountancy – IRS Releases 2010 Gift Tax Return. http://www.journalofaccountancy.com/Web/20113955.htm

INTRODUCTION

The purpose of probate is to establish clear title or ownership to assets after death. Probate is the legal way to take a name off title of an asset and put another name on it after death. Probate is a method of transferring assets as provided in a will (testate), or, if a person dies without a will (intestate), in accordance with state law.

IS PROBATE ALWAYS NEEDED?

The size of the estate determines whether it will be probated. If the value of the assets in probate are $20,000 or less, a simple affidavit of entitlement may be used instead of a lengthy and costly probate. If the value of the assets, less encumbrances is between $20,000 and $100,000 a set aside proceeding may be used. This is an expedited form of probate, that does not require the publication of a notice to creditors. For estates between $100,000 to $200,000 a “summary administration” may be used. For estates in excess of $200,000 a full administration will be required.

DO ALL ASSETS GO THROUGH PROBATE?

Not everything in a person’s estate automatically goes through probate. For example, assets held in a living trust avoid probate. Also, a jointly owned asset, such as a bank account, that transfers to the surviving spouse will generally avoid probate while the surviving spouse is alive. However, after the second spouse’s death the asset may have to go through the probate process. Also, assets with valid named beneficiaries such as insurance policies, IRA’s and annuities, avoid probate as long as the beneficiary is alive.

Assets in the deceased’s name alone must be probated to transfer title. The deceased’s share of assets owned as tenant in common must be probated, as well as, life insurance, annuities and retirement assets without beneficiary designations or if the named beneficiaries are deceased, and no continent beneficiary is named.

WHAT HAPPENS IN PROBATE?

The process depends on whether or not the deceased left a will. If there is a will (testate), and it names someone to be appointed as executor, then that person, usually with the assistance of an attorney, files with the court to be appointed executor and to admit the will to probate. Notice must be given to persons named in the will, all known creditors of the deceased, and the deceased’s natural heirs. If the deceased left no will (intestate), the court appoints an administrator to over see the probate process.

The executor or administrator must collect the assets of the estate that are subject to probate, pay debts and death taxes, and request court approval to transfer assets to the decedent’s heirs or the persons named in the will. The executor or administrator will prepare an inventory and appraisal, file tax returns, settle creditor’s claims and distribute the estate.

HOW LONG DOES IT TAKE TO PROBATE AN ESATE?

For most estates, probate of an estate takes nine months to two years. The size and complexity of the estate determines the duration of the probate process. If there is a conflict between the heirs or the beneficiaries, the process can take longer.

WHAT IS THE COST OF A PROBATE?

There are two kinds of fees that are paid by the estate; statutory and extraordinary fees. Statutory fees are established by the state legislature and are calculated as a percentage of the gross value of probate assets, plus income receipts and net gains on sale of assets during the probate administration. The personal representative is entitled to statutory fees: 4% of the first $15,000, 3% of everything above $85,000 and 2% of the assets above $100,000 of the Attorney’s fees must be approved by the probate court. Attorney’s fees may be hourly or a set fee, but said fees generally may not exceed 5% of the estate.

WHAT ARE THE ADVANTAGES OF A PROBATE PROCEEDING?

The advantages of a probate proceeding are that the heirs and beneficiaries are protected by the court. A probate proceeding cuts off the claims of creditors and clears title to property. In addition, questions and disputes are settled under the jurisdiction of the court.

WHAT ARE THE DISADVANTAGES OF A PROBATE PROCEEDING?

The disadvantages of a probate proceeding are that it is costly, time-consuming and lengthy. Probate proceedings, as court proceedings, are inherently inflexible because the court controls the process. All probate transactions are a matter of public record; therefore, there is a lack of privacy.

IS THERE AN ALTERNATIVE TO PROBATE?

The expense and duration of probate is the reason many people execute living trusts. A living trust is a way to protect ones heirs and beneficiaries form the cost, stress and time lost in probate court. Most people want to consider ways to avoid probate, and yet ensure that their assets are protected for their family and beneficiaries by creating a trust. Administering a trust should be done with the help of an attorney to make sure all the estate assets are transferred into the trust properly and that the intent of the trustor is carried out.

INTRODUCTION

The popularity of living trusts has exploded in recent years, supplanting the will as the estate planning tool of choice for estate management and distribution. A living trust often reduces the cost, hassle, and time involved in post-death administration. A living trust accomplishes these goals because, if properly drafted and funded, it avoids probate. Living trust, therefore, make good sense and we recommend them for the majority of our clients.

Unfortunately, the living trust phenomenon has given rise to a new industry. Many states have become overrun by “trust mills”—companies that mass market living trusts by traveling from town to town holding seminars and promoting living trusts like time shares or diet programs. Trust mills have been especially prevalent for two reasons: (1) real estate prices—and hence probate fees, which are calculated as a percentage of the estate—are high; and (2) overburdened local district attorneys offices either do not have the time to prosecute the unauthorized practice of law or view this as a victimless crime.

While the quality of the “cookie cutter,” “one size-fits-all” documents produced by the trust mills varies, the vast number of drafting errors and ambiguities we have found in documents sent to us for review has been discouraging. Unfortunately, most errors are not discovered until after the trustor has died, when remedial action can be taken only through expensive court proceedings, if at all. Equally disturbing is the practice of some trust mills that use the preparation of living trusts as a front to peddle annuities and other financial products.

The fact is most people can obtain competent estate planning assistance from local attorneys for about the same cost as the trust mills charge. Moreover, the local estate planning attorney is far more likely to meet with you personally, customize your trust to your particular situation, be around to answer questions over the years, and be there at death or the onset of incapacity when legal advice and planning becomes critical.

WHAT IS A TRUST?

A trust is a legal relationship in which assets are transferred to a trustee to be used for the benefit of one or more beneficiaries. The person who establishes the trust is called the settlor, grantor, creator, or trustor. Upon accepting the assets as trustee, the trustee undertakes the obligation to use the trust assets in accordance with the trustor’s directions.

WHAT IS A LIVING TRUST?

A living trust is the name given to trusts created during the trustor’s lifetime. A living trust may also be referred to as an inter-vivos trust. A living trust is usually created for the trustor’s benefit during his or her life. After the trustor’s death, the trust assets are distributed or managed for the benefit of the trust beneficiaries, per the instructions in the trust document.

CAN A LIVING TRUST BE CHANGED?

Your living trust may be revocable or irrevocable depending on your objectives as conditions in your life change; you can alter or terminate a revocable trust at any time during your lifetime. A living trust that you create for your own benefit is usually revocable, contains safeguards in the event of illness or incapacity, and may continue after your death for the benefit of others. After your death, the trust becomes irrevocable.

A trust can also be irrevocable, meaning that it cannot be changed or revoked once it has been established. Unlike revocable trusts, one advantage of an irrevocable trust is that it can be arranged so that trust assets are not subject to estate taxes at the trustor’s death. Because of this, life insurance is often placed in an irrevocable trust in a manner that will remove the policy proceeds from the insured’s taxable estate.

CAN I SERVE AS TRUSTEE OF MY LIVING TRUST?

Usually, the trustor (you) will serve as the trustee of the trust while he or she is alive and competent. The trustor names a successor trustee to serve in the event of the incompetence or death of the trustor.

ADVANGTAGES OF A LIVING TRUST

* PROBATE AVOIDANCE

Probate is the process by which title to assets owned in your name alone are transferred after you death. Probate may be expensive and time-consuming depending on the value and type of assets in your estate.

* TAX PLANNING ON FIRST DEATH

In a properly drafted trust, on the first death the assets are split into various sub-trusts depending on the size of the estate. This allows the survivor to do a great deal of tax planning involving the discounting of various assets. For example, if a piece of real property was owned in the trust, on the first death a portion of the property could be funded into various sub-trusts in order to take advantage of fractional ownership discounts, and thus potentially lower estate tax liability.

In the situation of a three trust subdivision (survivor’s trust, marital trust, and credit trust), such a discount can only be taken when assets are funded between the survivor’s trust and the marital trust if the trust instrument is properly drafted by making the marital trust a QTIP trust. Discounting is always available if the asset was funded partially into the credit trust and partially into the survivor’s trust.

* PRIVACY

When your estate goes through probate, your will and other documents become public record. A living trust provides you with a greater degree of privacy because the trust provisions and the assets in your estate are not subject to public disclosure. However, with a living trust that becomes irrevocable at death, Nevada law states that all heirs and beneficiaries are entitled to a copy of the trust.

* EXPIDITES ASSET DISTRIBUTION

As a trust administration is not overseen by court, asset distribution to beneficiaries, or to sub-trusts in a married situation, is often much faster than asset distribution in a probate.

* PROPER MANAGEMENT OF ASSETS

A living trust may reduce the risk of inexperienced and unskilled management of property by allowing you to select a successor trustee to act in the future. Should you die or become incapacitated, the successor trustee takes over management of assets. In addition, the trust assets can be maintained in the trust after your death instead of being distributed outright to beneficiaries who may be unable to handle the management of assets themselves due to their age or other factors.

PLACING ASSETS IN THE LIVING TRUST

To achieve full benefit from a living trust, it is important that appropriate action be taken to transfer assets into trustee ownership. This process is often referred to as “funding” the trust. Funding a trust consists of retitling your bank accounts, bonds, stocks, real estate, and other assets so that the trustee of the living trust is the owner of the assets. Only assets that are funded into the trust will avoid probate.

SELECTING A TRUSTEE

The trustee is responsible for ensuring that the trust is administered pursuant to the trust. A trustee, particularly one who acts after your death or incapacity, should be available to handle all aspects of managing your assets and be willing to act for an extended period of time.

A family member, friend, professional, or bank can serve as a trustee during your life or after your death or incapacity. A trustee is usually not subject to court supervision, and a bond is only rarely required. Because of the varied challenges associated with this duty and the tremendous power a trustee is given, choosing a trustee requires careful consideration.

THE LIVING TRUST MYTH

All the talk and excitement about living trusts has given rise to certain misconceptions about living trusts. We will refer to these myths collectively as “The Living Trust Myth.”

Myth 1: “Living trusts eliminate costs, administration chores, and lawyers.”

This is the number one myth of living trusts. At one time, many estate planning attorneys, including ourselves subscribed to this myth. But then the clients for whom we had prepared living trusts over the years started dying. From our experience in handling hundreds of living trusts after death, we soon learned the truth: there is work to be done and there are costs and expenses involved. Does it cost as much, take as much time, and require as much work as a probate? In most cases, the answer is no. But a living trust does not waive a magic wand over your estate making all your administration troubles disappear.

What has fueled popularity of living trusts is the public’s fear of probate in particular, and its even more pervasive fear and distrust of attorneys and the court system. All too often, the trust mills and other non-attorney trust promoters exaggerate these fears to entice unsuspecting consumers into buying their living trust packages. Thus, to understand the allure of living trusts, one must first understand what probate is and why everyone is so afraid of it.

Probate is simply a court procedure whereby a court-appointed personal representative performs three distinct functions: (1) inventory and appraise the decedent’s assets; (2) pay the decedent’s debts and taxes; and (3) distribute the remaining assets to the decedent’s beneficiaries. People often wonder, “Why do we need probate?” Imagine for a moment the chaos that would result if upon death a person’s relatives, creditors, and the taxing authorities all started grabbing assets and fighting over who gets what, with no civilized system in place to resolve these issues. Probate is the system that developed in England in the Middle Ages to handle the disposition of a person’s assets at death Since our laws derived from the law of England, the probate system has been passed down to us and is still used today.

Living trusts avoid probate because, unlike a will, the trust does not have to be proved in court and the successor trustee need not be appointed by the court in order to take charge of a decedent’s affairs. In the typical case, the administration baton is simply passed at death from the trustor-trustee to a named successor trustee with no court involvement. The successor trustee then assumes the job of carrying out the trustor’s instructions as set forth in the trust instrument.

What functions does the successor trustee perform after the death of the trustor? There are three: (1) inventory and appraise the decedent’s assets; (2) pay the decedent’s debts and taxes; and (3) distribute the remaining assets to the decedent’s beneficiaries. Do these functions look familiar? They should. These are exactly the same three functions that must be done in probate!

In reality, the only difference between probate and post-death administration of a living trust is that probate is supervised by the court. There is a structured, formal system with rules for handling estate administration. Living trust administration is not supervised by the court. There are few, if any, rules. It is this informality that makes living trust administration cheaper, faster, and easier. It is also this informality that can result in confusion, mismanagement, lawsuits, and potential liability for the successor trustee.

To avoid these problems, the successor trustee must be knowledgeable about the operation of trusts or be willing to learn. He or she must also be well organized and committed to carrying out his or her fiduciary responsibilities in strict accordance with the terms of the trust and the Trust Law. Finally, the successor trustee must work closely with qualified professionals, an estate attorney and CPA, who will prepare required documents and tax forms and who will advise the trustee concerning the complex legal and tax issues that arise at death.

Myth 2: “Living trusts save estate taxes”

There is also a common misconception that living trusts save estate taxes. In the case of an unmarried individual, no estate tax savings result from a revocable living trust because the Internal Revenue code requires the inclusion of the trust’s assets in the trustor’s taxable estate.

Even for the married couple, living trusts do not save a penny in taxes. The estate tax savings that are so often touted by the trust mills can also be obtained through a well-drafted will designed to create a Tax Savings Trust (“bypass trust”) at death. The only difference between the two plans is that the Tax Savings Trust created by will requires a probate at the death of the first spouse to die, whereas the Tax Savings Trust creating under a living trust document does not require a probate. In other words, tax savings is not an additional advantage of living trusts. Rather, it is the same probate-avoidance advantage already discussed above. Thus, to market the living trust as a tax savings device is misleading.

Myth: 3 “Living Trusts Avoid Conservatorships”

Another common myth is that living trusts avoid conservatorships. A conservatorships is a court-supervised procedure, similar to a probate, except for a living person who has become incapacitated (the “conservatee”), rather than for someone who is deceased. It is true that no conservatorship will be needed for assets in a living trust because the successor trustee takes over without court appointment or supervision. However, by law, a trust established on or after July 1, 1987 is subject to mandatory accounting requirements. If the trust trustor is incompetent, to whom will the trustee account? Arguably, a conservator must be appointed by the court to review the trustee’s financial reports on behalf of the incompetent trust trustor. If the trust instrument is carefully drafted, this potential problem may be avoided. Unfortunately, many trust documents simply ignore this issue.

Myth 4: “Living trusts are private and avoid all court proceedings”

A living trust is essentially a contract. A contract signed under duress or as the result of fraud or undue influence, is subject to challenge. Although the law relating to challenges to living trusts is not as well developed as the law relating to will contests, living trusts are not beyond legal challenge by a disgruntled heir.

There may be other instances where court supervision or intervention is sought by the trustee or a beneficiary. The trustee may seek the court’s stamp of approval on accountings or certain proposed actions, such as the sale of a business, especially where there is a hostile beneficiary. As mentioned above, where a trust instrument is ambiguous or improperly drafted, a trustee or beneficiary may petition the court for interpretation of the trust instrument or to reform it. A trust beneficiary may also ask for court intervention where the trustee has refused to make an accounting or where the trustee has acted in violation of the trustee’s fiduciary duties. In fact, suits against trustees of living trusts for mismanagement and breach of trust may be the growth industry of the next decade for law firms who handle probate and trust litigation.

CONCLUSION

On balance, living trusts remain the estate planning tool of choice for disposition of assets after death and for effective estate tax planning. We believe in living trusts and prepare hundreds of such documents each year for a large number of our clients. However, we also believe in educating our clients about the dangers of the Living Trust Myth. We want our clients to make an informed decision about their estate plan based on fact rather than marketing hype.

If you are wondering whether a living trust is right for you, please call us for an initial consultation. If you, or a friend or relative, had a living trust prepared by a trust mill, paralegal, or other non-attorney source, we would be happy to review it. We look forward to hearing from you.

INTRODUCTION

Life insurance often plays a key role in estate planning. It is frequently useful in providing liquidity and flexibility, as well as to achieve overall estate planning goals.

WHAT IS LIFE INSURANCE?

Life insurance is a contractual agreement between the owner of a policy and the insurance company. The insurance company agrees to pay a certain dollar amount upon the death of the insured in exchange for the payment of premiums. There are primarily three types of life insurance, “term life,” “whole life,” and “universal life” although there are an infinite number of variations on these three types.

Term life insurance is an insurance policy covering a person’s life for a specified number of years. It is often offered with a guaranteed premium for a particular number of years. Term life does not have accumulated cash value. Accumulated cash value generally is the distinction between term life insurance and whole life or universal life insurance. Cash value policies are initially much more expensive than term life insurance policies for the same amount of coverage.

Whole life insurance provides coverage for an individual’s whole life, rather than a specified term. A savings component called cash value or loan value, builds over time and can be used for wealth accumulation. Whole life is the most basic form of cash value life insurance. The insurance company essentially makes all of the decisions regarding the policy. Regular premiums both pay insurance costs and cause equity to accrue in a savings account. A fixed death benefit is paid to the beneficiary along with the balance of the savings account. Premiums are fixed through the life of the policy even though the breakdown between insurance and saving swings toward the insurance over time. Management fees also eat up a portion of the premiums. The insurance company will invest money primarily in fixed-income securities, meaning that the savings investment will be subject to interest rate and inflation risk.

A common variation on these themes is “universal life insurance,” which is a flexible premium life insurance policy that acts as a hybrid between a term life and whole life policy. This type of policy permits variations in the payment of premiums, and typically the insured (rather than the insurance company) controls the investment of policy funds.

IRREVOCABLE LIFE INSURANCE TRUSTS (ILIT)

An irrevocable life insurance trust (ILIT) is a trust designed to cause life insurance proceeds to be excluded from the grantor’s estate for estate tax purposes. This type of trust is often useful to provide liquidity, so that cash may be used to pay estate taxes attributable to assets that remain in the taxable estate. For example, suppose that an estate with no liquid assets owes $500,000 in estate taxes. This may require that the estate sell property in order to pay the government. An ILIT can help to avoid this result. The ILIT can receive $500,000 in life insurance payable on the death of the settler, which can then be used to purchase property from the settlor’s estate. The estate then uses cash to pay estate taxes, and the beneficiaries of the ILIT receive the assets that were purchased from the estate.

There are certain specific requirements that must be met in order for the insurance to be excluded from the settlor’s estate. In summary the settlor must give up control over the trust and the life insurance policy following its formation. An ILIT is irrevocable. While the settlor can decide upon the terms of the trust initially, it generally cannot be changed after its formation. In addition, the settlor cannot retain “incidents of ownership” over the life insurance policy. This requires the appointment of a neutral third party to act as trustee, who may then control the life insurance policy.

In order for premium payments to be eligible for the $13,000 annual gift tax exclusion, notice must be given to the beneficiaries of their right to withdraw the contribution to the trust. This withdrawal right is called a “Crummey power” (which is named after a case in which the taxpayer was named Crummey). Essentially, the settlor is giving the beneficiaries money which is then used to purchase life insurance on the life of the settlor. As a practical matter, this withdrawal right is almost never exercised because the beneficiaries stand to gain more in the long run by waiting until the life insurance is paid upon the death of the settlor.

LIFE INSURANCE FOR BUSINESS

Life insurance is often useful in designing a buy-sell agreement triggered by the death of an owner of a business entity. The type of insurance policies required will depend upon the structure of the buy-sell agreement. It may be necessary for each of the owners to obtain a policy on the life of other owners if the agreement is between the owners directly, although one survivor joint-life policy may sometimes be used to accomplish the same purpose. By contrast, a redemption agreement causes a buyout at the entity level, rather than by the individual owners. This type of agreement typically requires the entity to purchase a joint life policy or separate policies on the life of each member.

The specific type of buy-sell agreement that is appropriate under a given set of circumstances requires careful planning and analysis. In many cases, life insurance may provide the liquidity necessary to make a buy-sell agreement practicable. This is but one example of the fact that estate planning and business planning needs frequently coincide.

ESTATE PLANNING IN BLENDED FAMILIES

Many estate plans provide that assets are to be held in trust for the benefit of a surviving spouse, and then distributed to the settlor’s children when the surviving spouse dies. This does not always reflect the best plan of distribution.

Suppose that a fifty-five year old settlor is married to a forty year old, and has a thirty year old child by a prior relationship. In other words, the settlor’s new spouse is only ten years older than the child. The child will be waiting a long time to receive their inheritance if assets will be held in trust for the lifetime of the surviving spouse. Life insurance may be used to provide the child an immediate inheritance upon the death of the settlor, and the surviving spouse may receive the other assets outright.

LIFE INSURANCE IN NON-TAXABLE ESTATES

Even where it is not anticipated that the estate will be subject to estate taxes, life insurance is often an important estate planning tool. (Currently estate taxes are only imposed on estates exceeding $3.5 million.)

Life insurance is often useful to buy out the share of a beneficiary. For example, suppose that a settlor with three children owns a property with a value of $200,000, and that only two of the children are interested in inheriting the property. The settlor may leave the property to two of the children, and purchase a $100,000 life insurance policy payable to the third child, so that each child receives $100,000 in value.

For a younger person with a modest estate, life insurance is often an affordable method to protect loved ones against the possibility of an untimely death. This is particularly appropriate where the person has young children, who will have a need for funds for many years until they reach adulthood.

CONCLUSION

Life insurance is often a useful tool to achieve estate planning goals. The particular type and amount of insurance can vary greatly from case to case. Please consult with your attorney to learn more about the use of life insurance in your estate plan.

INTRODUCTION

Generally, if a decedent owned an Individual Retirement Account (“IRA”) during his or her lifetime, upon death, a myriad of rules exist governing the distribution of the IRA based on the beneficiary designations chosen. This article gives the basics of some issues involved with IRA distribution during estate administration, and serves to highlight the importance of involvement of legal counsel during this process.

REQUIRED BEGINNING DATE

The Required Beginning Date (“RBD”) is the date at which a person is required to take distributions from an IRA. The RBD is April 1 of the year after the owner of the IRA reaches 70 ½ years old. If the decedent had reached his or her RBD as of the date of death, it is imperative that any remaining minimum distribution (not already taken by the decedent), for the year of the decedent’s death is taken by December 31of the year of decedent’s death in order to avoid any penalties. This must be taken by the beneficiary of the account and not by the estate, unless the estate is the beneficiary.

If the decedent had not yet reached his or her RBD at the time of death, the decedent’s minimum distribution (based on his or her life expectancy in the year of his or her death) must be taken by December 31 in the year after his or her death to avoid any penalties.

SINGLE BENEFICIARIES

If a single individual is the named beneficiary of the IRA, the beneficiary may receive distributions based on his or her life expectancy as determined by the Single Life Table discussed in the United States Treasury Regulations.

MULTIPLE BENEFICIARIES

If multiple individuals are named the beneficiaries of the IRA, they all must use the oldest beneficiary’s life expectancy to calculate the required distributions. However, if the IRA benefit is split into “separate accounts” for the benefit of each individual beneficiary, the beneficiary of each separate account can receive his or her distributions based on his or her individual life expectancy, as determined by the Single Life Table. These separate accounts must be established by December 31 in the year following the decedent’s death. The IRA plan administrator will need to be contacted for more information regarding the establishment of “separate accounts” if this is applicable.

TRUST AS NAMED BENEFICIARY

Generally, if a trust is a beneficiary of the IRA, the benefits must be entirely distributed out of the plan within five years of the decedent’s death if he or she died before reaching 70 ½, or over the decedent’s remaining single life expectancy in the year of his or her death if he or she died after reaching 70 ½. However, if the beneficiary is a qualifying trust (as more particularly described below), the distribution rules differ. To be a qualifying trust, the trust must comply with Treasury Regulations Section 1.401 (a) (9)-4, A-5. These Regulations allow one to “look through” the trust instrument and treat the trust beneficiaries as though they had been directly named as beneficiaries in the IRA.

Therefore, if only one person is named the beneficiary of a qualifying trust, the benefits can be distributed over the life expectancy of that individual beneficiary, even though the trust is named as the beneficiary of the IRA.

If multiple individuals are named as the beneficiaries of a qualifying trust, the benefits can be distributed to each individual beneficiary over the life expectancy of the oldest beneficiary of the trust, even though the trust is named as the beneficiary of the IRA.

However, some IRA plan administrators allow one to completely “look through” a qualifying trust with multiple individual beneficiaries. In these cases, the plan administrators allow “separate accounts” to be set up for each individual beneficiary. This allows each individual beneficiary to take his/her benefits over his/her life expectancy, even though the trust was the IRA plan administrator to obtain more information on this possibility, if applicable.

While some plan administrators allow one to completely “look through” a qualifying trust with multiple beneficiaries, we do not believe this is the correct interpretation. Regulations Section 1.401(9)-4, A-5 (c) states that the separate account rules are not available to beneficiaries of a trust. Therefore, the two previous distribution options stated above generally must be followed.

QUALIFYING TRUST

A qualifying trust must meet the following requirements of Regulation Section 1.401(a)(9)-4, A-5 in order to allow one to “look through” the trust instrument and treat the trust beneficiaries as though they had been directly named as beneficiaries in the IRA.

1. The trust must be valid under state law.

2. The trust is irrevocable.

3. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable from the trust instrument.

4. Certain documentation must be provided to the plan administrator. If a “designated beneficiary” trust is named as beneficiary of the IRA, a list of the beneficiaries as well as a copy of the trust instrument must be sent by October 31 in the year after death.

5. All beneficiaries of the trust must be individuals.

SPOUSE AS SOLE BENEFICIARY

The Spouse is the sole beneficiary if the spouse, alone, will inherit all of the benefits if he or she survives the IRA owner. The fact that other beneficiaries are named as contingent beneficiaries (who will take is Spouse does not survive the IRA owner, or does not survive the IRA owner for some specified period of time) does not impair his or her status as “sole” beneficiary.

If the IRA is to be divided into “separate accounts” payable to different beneficiaries, then the test of whether the Spouse is the “sole beneficiary” is applied only to the separate account of which Spouse is the beneficiary.

For purposes of post-death minimum distribution rules, it is not essential that Spouse be the sole beneficiary at the time of the decedent’s death, only that Spouse is “a” beneficiary on the date of death, only that she is the sole beneficiary on September 30 of the year after the year in which the IRA owner died is called the “Designation Date.”

The Spouse can elect to treat the deceased spouse’s IRA as the Spouse’s own IRA as long as the election is made at any time after the IRA owner’s death, provided that the Spouse is the sole beneficiary at the Designation Date.

REQUIRED COMMENCEMENT DATE FOR SPOUSAL DISTRIBUTIONS

If the IRA owner dies on or after his or her RBD, the required commencement date for distributions to Spouse is December 31 of the year after the year of the IRA owner’s death.

If the IRA owner dies prior to his or her RBD, and the Spouse is the sole designated beneficiary, the annual distributions to Spouse over his or her life expectancy do not have to begin until the end of the later of: the year following the year in which the IRA owner died, or the year in which the IRA owner would have reached age 70 ½. In contrast, non-spouse beneficiaries must always commence the minimum required distributions by the end of the year after the IRA owner’s death.

DISTRIBUTIONS TO SPOUSE AS SOLE BENEFICIARY

During the Spouse’s lifetime, Spouse must take distributions over his or her life expectancy, recalculated annually; beginning in whatever year he or she is required to begin distributions (see above). The Spouse’s life expectancy is determined by using the single life expectancy table based on the Spouse’s age on his or her birthday in each year for which a distribution is required.