Taking the Mystery out of Estate Planning

By Stephen L. Smith

Thinking about your death isnt easy, but its even harder to consider the consequences of not thinking about it. Failing to execute a will or set up a trust could burden your heirs beyond just grief at your passing, leaving them to deal with your incomplete affairs as well.

Stephen L. Smith, a longtime attorney with thirty-five years of experience in estate planning, seeks to take the mystery out of what can often be an intimidating process. Using this guide, you can learn how to

understand the differences between wills and trusts; evaluate attorneys and tax advisers; empower yourself to direct the planning process; and maximize the money and assets that get passed to others.

Whether you have a large estate or a modest one, its important to engage in estate planning to make your wishes known. Take control of the process by arming yourself with the knowledge in Taking the Mystery out of Estate Planning.

• Language: English
• Publisher: iUniverse
• Release date: Nov 1, 2013
• ISBN: 9781491708897

Book preview

Copyright © 2013 Stephen L. Smith.

All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews.

iUniverse books may be ordered through booksellers or by contacting:

iUniverse LLC

1663 Liberty Drive

Bloomington, IN 47403

www.iuniverse.com

1-800-Authors (1-800-288-4677)

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

Any people depicted in stock imagery provided by Thinkstock are models, and such images are being used for illustrative purposes only.

Certain stock imagery © Thinkstock.

ISBN: 978-1-4917-0888-0 (sc)

ISBN: 978-1-4917-0890-3 (hc)

ISBN: 978-1-4917-0889-7 (e)

Library of Congress Control Number: 2013917468

iUniverse rev. date: 10/29/2013

Table of Contents

Acknowledgments

Warning and Disclaimer

About The Author

Introduction Why I am Writing This Book

Chapter 1 Anatomy of a Typical Will

Chapter 2 Anatomy of a Typical Revocable Trust Agreement

Chapter 3 Anatomy of a Typical General or Financial Power of Attorney

Chapter 4 Health Care Directives And Health Care Powers of Attorney

Chapter 5 What is Probate?

Chapter 6 Why Use a Revocable Trust?

Chapter 7 Other Will Thoughts

Chapter 8 Codicils and Trust Amendments (Including Trust Restatements)

Chapter 9 Intestacy

Chapter 10 Information Regarding Title to Your Assets

Chapter 11 Follow-Up to Your Estate Planning

Chapter 12 Retirement Plans Such as IRAs and 401(k)s

Chapter 13 Planning Under the Current Estate Tax Law

Chapter 14 More Sophisticated Estate Planning Techniques

Chapter 15 Impact of Divorce or Threat of Divorce on Estate Planning

Chapter 16 The Fiduciaries

Conclusion

Glossary

Conclusion

ACKNOWLEDGMENTS

I want to thank the many people who have worked with me over the years allowing me to formulate the ideas that are set forth in this book. I also want to thank my wife, Debra, for persevering through the many hours while I worked on this book. I particularly want to thank my current secretary, Brooks Sibley, for keeping a good disposition through the many edits of this book. I also want to thank the many secretaries who have worked with me over the years in formulating estate plans. Lastly, I want to thank Ann Pilkington, Esq. for reading over this book and pointing out some places where I needed to make some changes.

WARNING AND DISCLAIMER

There are many rules related to estate planning. Some of these are state substantive rules and some are rules related to the federal or state death taxes. By substantive rules, I mean rules such as what it takes to have a valid will and power of attorney and the probate process and the like. This complex set of different rules makes it difficult to make broad statements in the estate planning area.

This book is intended to provide general information regarding the gift and death taxes and other laws applicable to the estate planning area generally. It is not intended as a substitute for the practitioner’s own research, or for the advice of a qualified specialist. The author and publisher will have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this book.

ABOUT THE AUTHOR

Stephen L. Smith has more than 30 years of experience in tax planning. He combines a strong academic background with practical application of this knowledge to individual circumstances. He earned his bachelor’s degree from UNC Chapel Hill, where he graduated Phi Beta Kappa. He attended the University of Virginia Law School where he was inducted into the prestigious Order of the Coif. He has addressed numerous business and industry groups on tax subjects specifically applicable to their unique circumstances.

The largest part of his day to day practice is working with people in the area of tax advantaged real estate transactions such as like-kind exchanges, real estate investments by IRAs and qualified plans and related areas, and estate planning. Steve practices law with the law firm of Horack, Talley, Pharr & Lowndes, P.A. where he has been a partner for over 25 years. He has written extensively in the areas of the taxation of IRAs, 401(k)s and other retirement plans investing in real estate and estate planning, and has been involved in seminars to other professionals on the subject of investing IRAs, 401(k)s and other self-directed plans in real estate investments and estate planning. Steve has been involved in various real estate investments personally, including through his IRA and firmly believes in the value of real estate investment as a means of building wealth.

INTRODUCTION

WHY I AM WRITING THIS BOOK

BACKGROUND

I have been involved for over 35 years working with people doing their estate plans. Estate planning to me seems a rather pretentious term. It encompasses everything from (i) a simple will between husband and wife to (ii) a will with trusts for children to (iii) tax planning usually involving a separate revocable trust agreement.

What I mean by a simple will is one between a husband and wife where they leave everything to each other. Typically, the husband and wife do not have children at this point. A simple will could also cover the unmarried person who just wants to make sure that their assets end up where they want them.

Obviously, even the simple will is very important to the people involved, and the term simple will may not do justice to the importance of such a will.

OTHER BOOK

I have already written and published one book entitled IRA and 401(k) Investment in Real Estate for Syndicators, Other Real Estate Professionals and the Rest of Us. The thrust of that book is how you can create wealth using your IRA and 401(k) plan account funds. Once you have created that wealth, you will be interested in ensuring that that wealth reaches younger generations or other beneficiaries in accordance with your wishes. The purpose of this book is to assist you in making sure that the wealth is passed down to your descendants or other designated beneficiaries in accordance with your wishes.

Even if you do not have a great deal of wealth, you should be concerned about passing down what you have to younger generation beneficiaries.

SINGLE VOLUME

I realize that this volume has grown considerably over time, and for that reason, I considered splitting the book into two volumes. However, the reactions I got from other people seemed to indicate that I ought to keep it together as a single volume. I hope you will agree. Rather than being intimated by the length of this volume, you can just pick out the chapters that you are interested in and look at these now. You can always look at the other chapters later.

AVOIDING INTIMIDATION

In my experience, people are too often intimidated by the whole idea of going to see an attorney (or an accountant or other advisor working with an attorney) and doing estate planning. When I make reference to another advisor, I am thinking of an advisor who is familiar with estate planning issues. Dealing with one’s mortality is difficult enough without there being a further layer of mystery and intimidation involved in the whole estate planning process and going to see the estate planning attorney (or accountant or other advisor working with the attorney).

As intimidating as the thought of going to the attorney’s office might be, the alternative of not doing any sort of planning should be even more intimidating to you. If you do not make the trip to the attorney’s office to do any sort of planning, you’re probably leaving your estate and your heirs in a real mess.

If you do not do some sort of estate planning and at least do a will, your property may end up in the hands of people that you do not intend to receive your property. The thought of doing this should be far more intimidating to you than the trip to the attorney’s office.

For a fuller discussion of the consequences of dying without a will, see chapter 9 of this book entitled Intestacy. As you will see from reading that chapter, dying without a will is not something you want to do. By not having a will, you leave it up to the statutes and the state to determine who gets your property.

I have mentioned going to see an accountant or other advisor a number of times in this introduction. The reason for this is you may have a higher comfort level or more experience dealing with your local accountant or other advisor. Accountants or other advisors often can help in the estate planning process by actually meeting with you and going over your estate planning options if you are more comfortable talking to the accountant or other advisor. However, they will eventually turn to an attorney to actually do the drafting of the documents.

I hope this understanding of the roles of the accountant or other advisor and the attorney may be of help to you in moving forward. The most efficient way of dealing with all of this may be a joint meeting with both the accountant or other advisor and the estate planning attorney. This may save you the expense of multiple meetings with different people.

Moreover, you should not be intimidated by the thought of talking to an estate planning attorney or accountant or other advisor. Estate planning attorneys are humans just like the rest of us and do not necessarily know any more than you do. They simply have some experience in a specialized area.

I recognize this in myself. In other words, I recognize the fact that I don’t know anything more than my clients. I simply have some experience in a very narrow area of expertise. Some estate planning attorneys may have big egos which cause them to not be responsive to their clients, but you should be able to figure that out fairly early on and deal with an attorney that you feel comfortable with.

I do think it is important that you work with an attorney or accountant or other advisor rather than trying to do estate planning on your own. There are a great many considerations, many of which would probably never occur to you but would occur to someone like an estate planning attorney or accountant or other advisor who does this sort of work every day and has a great deal of experience in the area. Moreover, by asking one question, the estate planning attorney or accountant or other advisor may with his/her experience lead you off into an area of further questions that you might not ever have considered on your own.

Rather than estate planning being something intimidating, think of it as organizing your affairs so your heirs do not face significant problems at your death. The grief involved with a death is enough of a burden without the further burden of having to deal with the decedent’s incomplete affairs.

If the decedent has done estate planning, then the administration of the decedent’s estate should not be a problem. If the decedent has not done any planning, then the administration of the estate may be a challenge to say the least.

Again, for a fuller discussion of the consequences of dying without a will, see the chapter of chapter 9 of this book entitled Intestacy. As stated above, if you die without a will then you are leaving it up to the state and the state statutes (statutes of the state in which you are a resident at the time of your death) to determine who will receive your property.

As discussed in further detail in chapter 9 on intestacy, if you die intestate your property may well end up in the hands of someone you do not wish to receive your property. Moreover, the person receiving the property may not want your property and you will not being doing them any favors.

TAKING OUT THE MYSTERY—SAMPLE DOCUMENTS

Another main purpose of this book is to take some of the mystery out of the estate planning process by familiarizing you with the sort of provisions which usually appear in the typical estate planning documents you will face. The typical documents in my experience include wills, revocable trust agreements and financial (or general) and health care powers of attorney. You may also have a codicil or trust amendment as what you set forth in your original will or trust agreement needs to be changed.

All of these documents are discussed in the various chapters of this book. Moreover, samples of typical documents are provided for your review so you will be familiar with what the typical documents look like and what provisions are included in the typical documents.

However, you should not try to copy these documents and use them in your own situation. You stand a good chance of messing things up by trying to use form documents that are intended only as samples. Again, the forms are intended as samples only of the typical provisions you will be encountering. The sample documents are samples only and are highly unlikely to fit your particular situation.

SOURCE OF FORMS

The forms attached to the end of various chapters of this book are ones that I use in my practice and they may originally have been based on the BB&T Wealth Management/Estate Planning Forms Manual dated 1998. As indicated elsewhere in this book, the forms are based on the wills manual dated 1998. As also indicated elsewhere in this book, I have changed the forms over time to suit my own needs. I have reviewed the 2011 version of the BB&T Wealth Management/Estate Planning Forms Manual and some of the drafts have been enhanced over time. I think however we can use the 1998 version because it works for illustration purposes. However, while Branch Bank & Trust Company is pleased to allow the use of certain of the forms in this book, all of the opinions expressed in this chapter are those of the author and not those of Branch Bank & Trust Company.

TAKING OUT THE MYSTERY—TERMINOLOGY

This book also covers terminology you may encounter (such as probate, for example) so that you will understand the whole estate planning process. Attorneys throw out terms like probate because they are aware of what they mean. You are probably not aware of what some of these terms mean, and for that reason the whole estate planning process can seem even more mysterious or intimidating to you.

A great many estate planning terms are discussed in the subsequent chapters of this book and I will include a glossary of common terms so that you can look back at these if any of the terms come up in conversation with your estate planning professional. The definitions provided may not be all encompassing, but they should provide you at least a basis for further discussions with the estate planning professional.

PROVIDING UNDERSTANDING

It is my hope that if you understand what the documents typically look like and you understand some of the terminology, then the whole process won’t be such a mystery or so intimidating to you.

It is my firm belief that the best estate plans are created when the clients or persons doing the planning feel comfortable enough to participate fully and fully describe what it is they are trying to accomplish.

Moreover, remember that your estate plan is truly yours so you should feel comfortable talking to the person preparing your wills or trusts or powers of attorney so that they understand fully what it is you are trying to accomplish. If you do not explain what you are trying to accomplish clearly to the estate planning attorney, then you cannot hope for the estate planning attorney to produce documents that reflect what you really want.

Hopefully this book will help in that process.

MYTHS ABOUT ESTATE PLANNING BEING DEAD

There are several myths circulating to the effect that you no longer need to be concerned about estate planning. These are clearly wrong. I will deal with several of these myths below.

The first myth is that because of the changes in the estate tax law at the end of 2010 that people no longer need to be concerned about federal estate taxes. While in 2013 there is a $5 million exemption available to each of two spouses (so that if used properly, and the proper elections are made, this can result in a $10 million exemption on property passing to children or other beneficiaries) which should eliminate many people from needing to do tax planning, these changes in the tax law may be further revised at any time. Congress did pass the American Taxpayer Relief Act of 2012 on January 1, 2013 (I will leave it up to you as to how taxpayer friendly the Act is) which retained the $5 million exemption and portability. Congress only took action on this bill on January 1, 2013. If they had failed to take action then we would have been back to $1 million and portability would have been eliminated. These beneficial provisions may be further revised at any time. Although Congress did retain the $5 million exemption and portability, it did increase the top marginal rates on large estates to 40%, up from 35%.

Given all this uncertainty, you may want to go ahead and do estate planning at least in the form of a disclaimer plan. See the further discussion of the disclaimer plan in chapter 13 of this book entitled Planning Under the Current Estate Tax Law.

As discussed above, the favorable aspects of the estate tax law were retained (although the top rate has been increased). The favorable provisions may be changed at any time. In addition, even if the tax law remains fairly beneficial, your estate likely will grow to the point where estate taxes do become an issue and you need to be conscious of this.

Moreover, the North Carolina estate tax was restored for a time and might come into play depending on a particular estate situation. However, it has been eliminated again. There is no telling with this legislature whether it might be restored again.

For a fuller discussion of all these issues, see chapter 13 of this book entitled Planning Under the Current Estate Tax Law.

The second myth is that the upheaval in the global economic system and the stock market and real estate market have so reduced many people’s assets that they no longer need to be concerned about estate planning. I would submit that during these uncertain times it is more important than ever that you protect what you do have and make sure it passes to the people and in the ways that you want it to.

Moreover, you need to take a longer term view regarding your estate planning and as to what your estate may look like as conditions improve around the world and the value of your assets increases in the future. There are indications of a recovery taking place in the stock market as well as the real estate market, so you need to plan accordingly.

The third myth is that if you do not have a taxable estate, you do not need to be concerned about estate planning. Even if the estate tax issues are not of current concern to you, there are still lots of other items that are important. Among these are powers of attorney (both general or financial and health care) as well as possibly trusts for minor children. These are all discussed at greater length in later chapters of this book.

As discussed in chapter 1 of this book entitled Anatomy of a Typical Will, the choices regarding a trust for minor children are very important and there are a great many choices available to you. Even if you are not currently concerned about the federal estate tax law, you should be concerned about what happens at your death to your minor children if your spouse does not survive you. Moreover, you should be concerned about who is appointed as the trustee of any trust for minor children as well as who is appointed as guardian. All of these matters will be discussed in chapter 16 of this book entitled The Fiduciaries and in the sections of that chapter entitled The Guardian(s) and The Trustee(s), respectively.

Reading chapter 9 of this book on intestacy should convince you that you need to at least prepare a will. Also, reading chapter 16 of this book entitled The Fiduciaries and the sections of that chapter entitled The Trustee(s) and The Guardian(s) will give you some background on naming the trustees and guardians for your minor children.

Moreover, as you will learn in the chapters on general or financial powers of attorney and health care powers of attorney, the failure to have a financial or health care power of attorney may cause even more problems than a lack of tax planning.

CERTAIN TERMINOLOGY

For the sake of convenience and to make this book more readable, the word testator will be used to mean both testator and testatrix. Likewise, the word executor will mean both executor and executrix. Also the term administrator will mean both administrator and administratrix. In each of these cases there are male and female versions of the various terms which basically mean the same thing except that different terms are used for males and for females.

For example, the word testator is used in the case of man while the word testatrix is used in the case of a woman. I did a draft of the book using both terms but it was very cumbersome. Therefore, we have elected to make it more readable. We hope you agree with our choices. Hopefully this will help you have a smoother read and in no way is it intended to be sexist.

Moreover, in many cases in this book I have used the term he for he/she and himself for himself/herself. Again, all of this is just intended to ease your reading of the book. I may also not have been consistent at some points. You will have to excuse the reference to he and she both.

NO GHOSTWRITING

I understand that it is common in many law firms for associates to write things and then have the partners claim the credit for what is written. I want to assure you that I have written every word of this book and that it contains my thoughts alone and not of any associate in this law firm.

THE STORY OF JOHN AND MARY DOE

In a number of places in this book I will make reference to a hypothetical couple, John Doe and Mary Doe. John and Mary are spouses and I will use these fictitious names just for purposes of this book. For ease of reference in this book, I will assume that John dies first and that Mary survives him. Actuarially, if John and Mary are the same age, John will die first. I hope you are not offended by this but I think it will make it easier to read if we just assume that the wife survives the husband which again would be actuarially the case in many circumstances (i.e., spouses the same age).

CONCLUSION

I hope these thoughts are of help to you in understanding what I am trying to accomplish in this book.

NEXT CHAPTER

The first chapter in this book, chapter 1, will deal with wills and the typical provisions found in a will. Regardless of the complexity of a person’s estate plan, all estate plans involve a will. Even when most of the important provisions are contained in a separate revocable trust agreement, there is still what is called a pour-over will which works in conjunction with the revocable trust agreement.

Samples of several different types of wills are included at the end of the next chapter.

Once you have read the next chapter, hopefully you will be comfortable with what a will typically looks like.

CHAPTER 1

ANATOMY OF A TYPICAL WILL

INTRODUCTION

A will is the centerpiece of every person’s estate plan, even in the case of those who also have a revocable trust agreement which contains many of the dispositive provisions (i.e., the provisions dealing with where the person’s assets are to go at his death after the payment of debts, expenses and taxes). The revocable trust agreement will be discussed at greater length in chapter 2 of this book.

Those persons who have a revocable trust agreement would still have what is called a pour-over will which leaves all of their property (with the possible exception of their tangible personal property and other specified items [specific bequests] as discussed below) to the trustee(s) acting under the revocable trust agreement.

My goal is to make the will less intimidating to you so that when you review your own will you are familiar with what is likely contained in the typical will. I find that too often people are intimidated by their estate planning documents. Therefore, many people don’t feel they are in a position to ask questions about the documents. I feel very strongly that everyone should be familiar with what the documents generally look like so that they will not be intimidated by their own will.

I also feel very strongly that you should not be afraid to ask questions about what provisions of your will mean. Don’t be intimidated by the fact that the document was prepared by an estate planning attorney. The attorney’s work is not foolproof. Attorneys are, after all, only human.

Moreover, in my experience there sometimes is miscommunication between the client and the attorney, so you want to make sure the final product is what you want. The final product is, after all, your will so do not be afraid to insist upon it