Estate Planning

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Planning to Transfer Property at Death

Generally speaking, property can be transferred at a person's death by will, joint tenancy or state intestacy laws. Life insurance, annuities and retirement proceeds may be paid directly to beneficiaries outside of a decedent's will, depending on the form of beneficiary designation. A will is an instrument by which a person makes a disposition of his or her real and personal property, to take effect after his or her death, and which by its own nature is changeable and revocable during that person's lifetime. Wills should generally include provisions that: revoke prior wills; provide for payment of debts and administration expenses; establish residuary devise; provide for source of payment of death taxes; and appoint fiduciaries, including guardians for minor children.

Property held in joint tenancy with right of survivorship passes to the survivor outright. Confirming the survivor's title is normally easy to accomplish. Nevertheless, the creation or continuation of a joint tenancy may jeopardize the best use of the marital deduction and have potential adverse tax consequences for the donor or survivor, as discussed below.

Contractual arrangements for transferring benefits at death include life insurance policies, annuities, deferred compensation contracts, individual retirement accounts, pensions and other employer retirement arrangements, payable on death bank accounts, and accounts in the name of the decedent as trustee for another. Assuming the designated beneficiary survives the decedent, all such death benefits passed to the designated beneficiary without the necessity for a will or probate. These assets, as well as property held in joint tenancy with right of survivorship, are commonly referred to as "nonprobate assets."

Absent a will, a decedent's property, other than the nonprobate assets described above, normally passes to the decedent's heirs under the state's law on intestacy. Indiana's laws of intestacy divide the decedent's assets among the spouse and children, with a provision made for grandchildren, parents, siblings, nieces and nephews, and more distant relatives, should one or more of the spouse and children fail to survive. While state intestacy statutes are designed to reflect the average decedent's probable intent, the apportionment formula applied may not be the one you would have chosen. For example, you may not want anything to go to your children until after the surviving spouse's death, or you might wish to provide for a person outside of your immediate family, such as a grandchild or a favorite niece. Additionally, relying on state intestacy laws also means that the decedent has forgone the choice of a personal representative of the estate and the right to waive the personal representative's bond. Instead, the court will select the personal representative and may require an expensive and unnecessary bond, regardless of the identity of the beneficiary. For parents who have minor children, the failure to make a will also means that the parents lose the opportunity to nominate a guardian to care for their children and an opportunity to create a trust to avoid guardianship of a minor's estate. The guardian instead will be selected by the court and the children will receive their intestate shares outright when they attain the age of majority.

Techniques for reducing or avoiding the federal estate tax should be considered by all individuals and married couples with total estates that approach or exceed approximately $1,000,000 in value. For a married couple, the principal device for reducing and deferring the federal estate tax is the optimum use of the marital deduction. Substantial savings can also be achieved by both single individuals and married couples through the creative and timely use of charitable gifts, both during life and at death.

Living Trust

A revocable trust, also known as a living trust, may be used both to avoid probate and to manage a person's property in the event of incapacity. A revocable trust is a written agreement indicating how a person wants his or her property that has been placed in the trust to be managed and distributed in the future. One who furnishes the assets for the creation of a trust is called the "settlor." A living trust is created by the settlor's reservation of the right to revoke the trust. The settlor also frequently reserves for life all of the beneficial interests in the trust. The settlor may designate himself or herself as trustee, and, if so, should make provision for the appointment of a successor upon his or her death or earlier incapacity. Upon the settlor's death, the trust becomes irrevocable and the assets will be distributed accordingly to the trust's terms. Assuming that the settlor has been able to convey all of his or her assets into the trust, neither a will nor probate is necessary because the trustee, not the decedent, holds legal title to the property. Assets not transferred to the trust or by some other nonprobate devise will be subject to probate.

Probate is the court procedure by which a will is proved to be valid or invalid and generally refers to the legal process wherein the estate of a decedent is administered. Generally, the probate process involves collecting a decedent's assets, liquidating liabilities, paying necessary taxes and distributing property to heirs. These activities are carried out by the executor or administrator of the estate, usually under the supervision of the probate court. Avoidance of probate can be a major benefit of the living trust. By statute in most jurisdictions, including Indiana, both the attorney and the executor receive fees based on the percentage of the gross value of the estate. Additionally, the probate process can be time consuming. The probate process typically takes a minimum of six (6) to nine (9) months. Multi-year estate administration proceedings are not unheard of. However, unless a living trust arrangement encounters unexpected challenges from disgruntled family members or difficulties with federal and state taxing authorities, fully funded trusts can generally be distributed to beneficiaries within three (3) to four (4) months.

While living trusts offer many advantages to persons planning for their estate, they are not the most appropriate estate planning tool for all circumstances. While privacy is a major benefit of a living trust, the dark said of privacy can be inaction, abuse or malfeasance by a trustee. A successor trustee has complete access to trust assets. As such, a dishonest or misdirected individual can convert trust assets to his or her own use with relative ease. Also, when an ill or mentally incapacitated elder no longer serves as his own trustee, a child or other family member will often accept responsibility to serve as trustee. That trustee may discover monetary bequests in the living trust that surprise or upset him or her. Simply stated, this trustee may ignore the wishes of the settlor. The probate process makes such conduct difficult. Additionally, the tax benefit offered by a living trust arrangement depends on prompt and attentive action by the trustee. For example, the successor trustee must generally properly fund the credit shelter trust so as to obtain maximum protection from federal estate taxes. Finally, the cost of creating a living trust is typically greater than the cost of creating a will, or even two wills for a married couple. Additionally, all or most assets must be transferred into the living trust if benefits, such as ongoing management and probate avoidance, are to be obtained. Depending on the nature and size of the property to be transferred, this can be a time-consuming effort.

Advance Directives

In addition to planning for the disposition of your property at the time of your death, I recommend that you also consider making advance directives. Advances in medical technology and in the control of acute life-threatening illness have made it necessary for persons to consider their desires regarding future medical care, particularly if that person should become mentally incapacitated. If a patient is incapacitated and cannot make his or her own decisions, legal authority rests with a surrogate who acts according to the patient's previously expressed wishes (e.g., in a living will or a durable power of attorney), or who uses substituted judgment to interpret what the patient would likely want, or who decides according to his or her own judgment about what is in the patient's best interests.

A "Living Will" is an instrument which states your desire regarding whether or not your life should be artificially prolonged if you have a terminal condition and you are expected to die within a short period of time. In executing a living will, you are simply communicating your wishes with regard to whether you wish to receive artificially supplied nutrition and hydration, even if the efforts to sustain life are futile or excessively burdensome to you.  The "Appointment of Healthcare Representative" is an instrument which designates healthcare representatives to make medical decisions on your behalf if you are unable to do so. The Appointment of Healthcare Representative cannot be used by your healthcare representative to make these decisions unless you are deemed incapacitated by a physician.

Finally, the "Durable Power of Attorney" is an instrument which designates representatives, also known as attorneys-in-fact, to handle all of your financial and property affairs in the event of your incapacity. This type of document may also be used to allow a designated attorney-in-fact to make certain healthcare decisions for an incapacitated person.

Please contact our office to schedule an appointment to discuss your specific estate planning needs.