How to Plan and Settle Estates

By Edmund Fleming

This up-to-date, thorough, and authoritative guide clearly explains all of the complexities of planning and administering an estate. From wills, trusts, and powers of attorney to health-care directives and probate, everything you need to know is presented in an accessible, friendly style. This indispensable tool provides readers with:

A step-by-step planning process
In-depth coverage of Federal tax issues
Helpful checklists
Real-life examples
An extensive glossary of terms
Sample forms and documents

How to Plan and Settle Estates is an invaluable resource for protecting loved ones, saving time and money, and reducing stress for anyone setting up or handling an estate.

Allworth Press, an imprint of Skyhorse Publishing, publishes a broad range of books on the visual and performing arts, with emphasis on the business of art. Our titles cover subjects such as graphic design, theater, branding, fine art, photography, interior design, writing, acting, film, how to start careers, business and legal forms, business practices, and more. While we don't aspire to publish a New York Times bestseller or a national bestseller, we are deeply committed to quality books that help creative professionals succeed and thrive. We often publish in areas overlooked by other publishers and welcome the author whose expertise can help our audience of readers.

• Language: English
• Publisher: Allworth
• Release date: Feb 4, 2014
• ISBN: 9781621533993

Book preview

Praise for How to Plan and Settle Estates

Law attorney and certified public accountant Fleming adds a new title to the arsenal of resources on estate planning. Presenting the process as a series of decisions to be made, he methodically provides the information needed to make them. Fleming covers wills, trusts, income and estate taxes, powers of attorney, and the responsibilities of executors and administrators. Each chapter begins with a ‘points to consider’ section containing practical tips, observations, and numerous checklists to help readers assemble documents and understand processes. The appendixes include sample wills, powers of attorney, living trusts, a glossary, and a directory of information sources … this book is good preparation for a meeting with estate-planning professionals.

—The Library Journal

"Coping with the loss of a loved one is beset with stress and confusion. Grief is a heavy burden, yet most families are further saddled with the responsibility of administering the estate. For those who find themselves in this situation and for those who wish to shield loved ones from it, How to Plan and Settle Estates is a comprehensive guide for making this subject as simple as possible. The book covers the steps to developing an estate plan, tax issues, federal requirements, and sample forms to fill out, and includes checklists and examples. The author is a CPA attorney specializing in real estate and estate planning."

—Working Money

Copyright © 2014 by Edmund T. Fleming, CPA, JD

All rights reserved. Copyright under Berne Copyright Convention, Universal Copyright Convention, and Pan American Copyright Convention. no part of this book may be reproduced, stored in a retrieval system, or transmitted in any form, or by any means, electronic, mechanical, photocopying, recording or otherwise, without the express written consent of the publisher, except in the case of brief excerpts in critical reviews or articles. All inquiries should be addressed to Allworth Press, 307 West 36th Street, 11th Floor, New York, NY 10018.

Allworth Press books may be purchased in bulk at special discounts for sales promotion, corporate gifts, fund-raising, or educational purposes. Special editions can also be created to specifications. For details, contact the Special Sales Department, Allworth Press, 307 West 36th Street, 11th Floor, New York, NY 10018 or [e-mail].

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Published by Allworth Press, an imprint of Skyhorse Publishing, Inc.

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Cover and interior design by Mary Belibasakis

Page composition/typography by SR Desktop Services, Ridge, NY

Library of Congress Cataloging-in-Publication Data is available on file.

ISBN: 978-1-62153-394-8

eISBN: 978-1-62153-399-3

Printed in the United States of America

I would like to dedicate this book to my wife, Fran, who spent countless hours proofreading the manuscript and provided valuable insight and many suggestions for the book. Also, to my three wonderful daughters, Therese, Katie, and Patricia, who think it is kind of cool that their dad wrote a book.

This book is designed to provide a general overview of basic estate-planning principles and the administration of estates for non-lawyers or lawyers who do not practice in this area frequently. References to he or she in this book should be read as pertaining to either gender. The author and publisher have attempted to provide the most accurate and up-to-date information available. The information contained herein cannot be guaranteed and neither the author nor publisher will be held liable for any action at law or in equity based on this book. There are too many exceptions, changes, and gray areas in the laws to cover every issue. The purpose of this book is to provide an awareness of issues and techniques that will allow the reader to ask the right questions of their attorney, accountant, certified financial planner, insurance agent, trustee, or other professional advisor. Neither the author nor publisher is engaged in rendering legal, accounting, tax, financial planning, or other advice.

TABLE OF CONTENTS

The American Tax Relief Act of 2012

Foreword

Key to Sources Cited

CHAPTER 1: HOW TO PLAN AND SETTLE ESTATES

Who Needs Estate Planning?

CHAPTER 2: THE PLANNING PROCESS

Points to Consider

Step 1: Identify Your Property

Step 2: Establish Objectives

Step 3: Select Your Advisors

Step 4: Draft and Implement a Plan

Step 5: Review Your Estate Plan

CHAPTER 3: WILLS

Points to Consider

General Overview of Wills

Revocation and Revival

Partial Invalidity of a Will

Simultaneous Death

Capacity

Will Provisions

Executor’s Duties

Checklist for Wills

CHAPTER 4: TRUSTS

Points to Consider

General Overview of Trusts

Trust Agreements

Abusive Trust Arrangements

Trustee’s Duties

Estate-Planning Trusts

Land Trusts

Checklist for Trusts

CHAPTER 5: LIVING TRUSTS

Points to Consider

General Overview of Living Trusts

Transferring Property to a Living Trust

Advantages of a Living Trust

Disadvantages of a Living Trust

Checklist for Living Trusts

CHAPTER 6: POWER OF ATTORNEY

Points to Consider

General Powers of Attorney

Durable Powers of Attorney for Property

Checklist for Durable Powers of Attorney for Property

Health-Care Power of Attorney

Checklist for Health-Care Power of Attorney

CHAPTER 7: INFORMATION FOR EXECUTORS AND ADMINISTRATORS

Points to Consider

Probate

Advantages to Going through Probate

Disadvantages to Going through Probate

Checklist for Executors

The Accountant

Checklist for Accountants

Checklist for Attorneys (Independent Administration)

CHAPTER 8: FEDERAL INCOME TAX ISSUES

Points to Consider

Primary Residences

Individual Retirement Accounts

Gifts

Distribution from Employer Retirement Plans

Decedent Tax Forms

Income and Deductions in Respect of a Decedent

CHAPTER 9: FEDERAL ESTATE TAX PLANNING

Points to Consider

Techniques to Decrease Estate Taxes

CHAPTER 10: FEDERAL ESTATE AND GIFT TAX

Points to Consider

Generation-Skipping Transfers

Filing Form 706: United States Estate (and Generation Skipping Transfer) Tax Return

CHAPTER 11: GIFT TAXES

Points to Consider

Gift-Tax Return Filing Requirements

Gift-Tax Return Filing Date

Exclusions from the Gift Tax

Present, Terminable, and Future Interests in Property

Tax Basis of Gifts

Reporting Requirements

Stock Options

Split-Dollar Life Insurance Arrangements

CHAPTER 12: MARITAL STATUS, HEALTH, AND YOUR ESTATE

Marriage and Divorce

Nursing Homes

APPENDICES

The American Tax Relief Act of 2012

President Obama signed into law in January, 2013, the American Tax Relief Act of 2012, Public Law 112-240, (ATRA). Without this law, many income and estate tax provisions would have been changed to the detriment of taxpayers. The top Federal estate tax rate would have reverted to 55 percent, with an exclusion amount of $1 million. The ATRA provides for a maximum rate of 40 percent, with an exclusion amount in 2013 of $5,250,000 (indexed for inflation.) The ATRA also made the portability provision permanent, which allows one spouse to use the unused exemption of the deceased spouse. The ATRA also repealed the 5 percent surtax on estates over $10,000,000.

Foreword

I first became interested in the field of estate planning while employed by the Internal Revenue Service. I read various books on estate planning and attended free seminars sponsored by a range of organizations. It seemed most estate planners were concerned with: (1) helping me avoid probate with living trusts; (2) sheltering $1,500,000 in property from estate taxation (which I do not have); or (3) wanting me to become their client and invest in mutual funds and buy insurance. While these are significant issues, they are not the only issues in estate planning.

After leaving the Internal Revenue Service, I began assisting executors and administrators with estates. I found there were few, if any, books that I could recommend to guide them through the process. Similar books are too detailed to comprehend in the short time frame allowed or too general to be of any real assistance.

Although this book often cites Illinois law, many state laws are similar. Since there are variations in each state, and laws are constantly changing, the reader is advised to check with an attorney familiar with her state’s laws prior to drafting an estate plan or administering an estate. Also, while the federal laws discussed in this book are applicable to each state, some federal laws rely upon the property law of that particular state in their calculations and interpretations, especially community property states. For example, the Medicaid laws and regulations, although based on federal law, will vary from state to state, since each state administers the program subject to the federal guidelines.

Each person is advised to seek the advice of a competent estate-planning attorney for his specific needs. (In writing this book, I treat the terms he and she interchangeably.) It is the reader’s responsibility to make sure the facts and laws discussed in this book are applicable to his situation. I hope readers understand that each topic discussed could have its own book. Hopefully, this book will give users a sufficient awareness and general understanding of the issues involved to ask the right questions of their attorneys or other professional advisors.

—EDMUND T. FLEMING

In accordance with IRS Circular 230, any tax advice in this book is not intended or written by the author to be used, and cannot be used, by a person or entity for the purposes of 1) avoiding penalties that may be imposed on a taxpayer, or 2) promoting, marketing, or recommending to another party any matters addressed within this book. This book is intended to provide an awareness of issues that you may wish to discuss with your tax advisor or accountant.

Key to Sources Cited

This text refers to many IRS publications, which you may want to access. Use this key to find out what type of publication is cited and where it can be found. Remember also that IRS information (and forms) can be found at www.irs.gov.

CHAPTER 1

How to Plan and Settle Estates

Estate planning is decision making. The process can be relatively simple or quite complex, depending on many factors. Most of us put off any estate planning until we see friends and close relatives pass away, or read horror stories about someone who lost his life savings through fraud. In general, the process involves: (1) choosing how your future health-care decisions will be made when and if you are unable to make informed decisions; (2) deciding how you want your property distributed upon your death; and (3) reviewing your future income and expenses. With inflation, changes in family structure, and new laws passed each year, you should review your estate plan at least once a year. This book includes steps you may follow in drafting and reviewing your plan.

Estate administration is the process of winding up a person’s affairs at death. It is the executor’s responsibility to ensure that the will provisions are followed. It is the trustee’s responsibility to ensure that the trust agreement provisions are followed. There are factors for executors and trustees to consider, and many pitfalls to avoid. In estates with testamentary trusts, there is usually the question of funding the trusts. The administration of an estate can be simple if the decedent left everything he owned in joint tenancy or living trusts, or complex if there are issues involving probate courts, property located in different states, or the filing of complex tax returns. If a beneficiary contests the interpretation of a will or trust document, this will increase the amount of time it takes to close the estate. This book provides checklists for those involved in the administration of an estate.

Hopefully, by the time you have read (at least skimmed) this book, you will have decided that, as a minimum, you need a will, power of attorney for property, and a health-care directive. If you feel that you don’t have the time or money for estate planning, consider the following situations.

EXAMPLE #1 This past holiday season I met a couple in their early fifties. Recently, the husband became ill and fell into a coma. The wife does not have a power of attorney for her husband and therefore cannot sign his name to checks and bills. If his condition does not improve, she may have to become his court-appointed guardian. Had the couple taken the time to execute durable powers of attorney, they would not be facing expensive attorney fees.

EXAMPLE #2 The wife of a man in his late forties passed away leaving behind two children. The man remarried and then died himself without changing his will. The second wife now owns all of the property and it is doubtful the man’s two children (who are not minors) will receive any of their parent’s property. (The man should have drafted a will with a qualified terminal interest property [QTIP] trust—explained later—which would provide income for his new spouse for her life but leave his property to his children.)

EXAMPLE #3 A friend told me about a case involving a widow who died leaving a will that named a trust as a beneficiary. No one can locate the trust agreement. The attorney fees and litigation concerning the lost agreement will cut significantly into the estate, leaving little, if any, for the beneficiaries. If the widow had followed the checklists contained in this book, she could have either located the trust agreement or made other arrangements to eliminate the future confusion.

EXAMPLE #4 A woman in her eighties who was receiving Medicaid assistance was named beneficiary in her sister’s will. When the sister died, the woman tried to disclaim her inheritance so as not to affect her Medicaid benefits, but was unable to disclaim the inheritance. If proper estate planning had taken place, nieces and nephews would have been named as beneficiaries instead. This lack of estate planning cost her approximately $50,000.

EXAMPLE #5 A mother decided she wanted to avoid probate at all costs and felt the easiest way to do this was to place her son’s name on all of her property, including her home. She knew that property held in joint tenancy goes to the other joint tenants upon the death of a joint tenant. She had to move into an apartment when her son’s creditors forced a sale of the house.

EXAMPLE #6 A decedent executed a living trust agreement in 1990. He then executed a series of amendments to his trust agreement starting in 1991. By mistake, he executed two second amendments to the trust agreement one year apart. The beneficiaries are now in court trying to decide on the correct interpretation of the trust amendments.

Who Needs Estate Planning?

While I admit that one of the above situations is fictional, I hope you see the benefits of estate planning. Individuals who should have an awareness of different aspects of estate planning include just about everyone. If you have minor children, you should be concerned with naming guardians to take care of them, and need to execute a will to nominate guardians. If you have an item of property you would like to leave to a particular person, besides giving it to her immediately or carving her initials on it, you should execute a will or place the item in a trust for her future enjoyment. If you are named as an executor in a will, agent on a power of attorney, or trustee of a trust agreement, you will need an overview of your authority and responsibilities. If you have advanced money to one child so he could buy a house but want your children to inherit equally, you should mention in your will if the loan needs to be repaid; otherwise your children will be left wondering if the advance was really a gift or a loan.

How to Plan and Settle Estates will give you an overview of the issues that you may meet in this many-faceted area. Most importantly, it should provide you with the ability to ask the right questions of your attorney, accountant, certified financial planner, and insurance agent either in planning your own estate or when acting as an executor or trustee.

CHAPTER 2

The Planning Process

Planning your personal and financial affairs is a benefit both to yourself and your family. Estate planning can be relatively simple and straightforward, or complex and time-consuming. Everyone has different goals in life. The same is true for estate planning. Once you have assembled the key documents and reviewed your current financial affairs, you should select the goals or objectives that are most important to you. Prioritize your objectives, so your advisors will know which options are available to you.

Take extra time and use caution when choosing an executor, trustee, or agent on a power of attorney. The individuals best suited for these offices are responsible, mature, have the time to assume the duties, and are trustworthy. You should decide who will make health-care and financial decisions for you if there comes a time when you cannot make your own decisions. In addition, if there are individuals dependent upon you, such as minor children or aged parents, proper planning today may save thousands of dollars in accounting and legal fees at a later date.

Everyone has different priorities and concerns, based on his situation in life and personal beliefs. When reviewing your estate planning, you may find that caring for your parents is your highest priority. Your neighbors, whose parents have passed away, may be more concerned with probate or tax avoidance. A sample of goals to consider include estate-tax avoidance, income-tax issues (including current income-tax issues, income and deductions in respect of a decedent, and future beneficiary income taxes), avoidance of probate, preservation of accumulated wealth, asset protection, long-term health care, the selection of agents on durable powers of attorney, medical directives, guardians for minor children, care for disabled adults, charitable intentions, and business succession.

Points to Consider

Many people put off estate planning because they believe it only involves saving taxes or avoiding probate. Estate planning also involves your future financial and health affairs, guardians for minors, asset protection, and various other issues.

Estate planning is for everyone, not just the wealthy.

Do not be fooled into thinking that a fully funded revocable trust (living trust) will solve all of your estate concerns.

Select attorneys, accountants, and insurance agents who take the time to listen to your needs and charge reasonable