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YO U R I N - D E P T H G U I D E

Estate Planning is something people often hear about but many do not understand all that it entails. This guide has been prepared to provide you with detailed information that will be useful in helping you understand what Estate Planning is, recognize your Estate Planning needs and identify your Estate Planning options.

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What is Estate Planning?

Before we can define what an Estate Plan is, we should first identify what an estate is. Your estate consists of all of the property and assets that you have acquired during your lifetime. It includes real property (land and houses); investments (stocks and bonds); money (including cash and bank accounts); retirement accounts (pensions, IRAs and 401ks); life insurance policies; and personal property (including automobiles, jewelry and household goods). An Estate Plan is a formalized set of instructions for the management of your property and assets during your lifetime should you ever become incapacitated, and for the distribution of property and assets upon your death.

Why is Estate Planning Necessary?

Statistically speaking, 100 percent of people born will eventually die. Although we may not enjoy contemplating the reality of our own eventual death, the odds just aren't in our favor, and ignoring it can present serious consequences that our heirs would have to deal with. Because we cannot take our stuff with us when we die an Estate Plan is necessary to provide for the distribution of our property after death. There are four major reasons that every person should have an Estate Plan: First, for those people with minor children an Estate Plan is absolutely necessary for the purpose of naming a guardian for those children. Nothing is more important than making sure that your children are raised by the person of your choosing and in a manner that you would want them raised. By failing to name a guardian for your children you risk having family members fight over your children, or worse, having your children become wards of the state to be raised in foster homes. Unless you state it in a properly prepared Estate Plan, the future of your children is up to the Court to decide what it thinks is best, whether you would agree or not. Second, an Estate Plan is necessary for the purpose of managing your property during your lifetime should you ever become incapacitated. If during your life you were to suffer a stroke, develop a debilitating illness, or in any way be rendered unable to manage your affairs, a properly prepared Estate Plan would provide for the management of your assets by a person of your choosing during the time that you were incapacitated. Third, an Estate Plan enables you to distribute your property and assets, upon your death, to the persons or entities of your choosing. Fourth, a proper Estate Plan can help avoid or minimize estate taxes and post-mortem court costs and attorney's fees.

What Types of Estate Plans are Available?

When looking at available options, there are essentially four types of Estate Plans, some of which can be combined:

1. No plan. While not doing anything may not seem like much of a plan, it is the plan that a majority of American adults currently have. Therefore, it is important to discuss this lowest level for the purpose of understanding the risks involved in not planning. An individual who dies without any type of Estate Plan is referred to as "intestate." Every state has intestacy laws that govern the distribution of property owned by these individuals. These laws do not take into consideration your desires regarding the distribution of your assets, rather they simply dictate to whom your property will go.


© Copyright 2007, Hirschi Law Group, PLLC, all rights reserved.


2. Joint Tenancy. Joint tenancy is a form of property ownership wherein two or more persons own property together. When one of the co-owners dies his or her interest simply dissolves and the remaining owner(s) receive the decedent's share. While this type of planning works well for passing property between husband and wife it is not ideal for distributing property to one's children for several reasons. First, adding your children as joint tenants to your property during your lifetime may constitute a taxable gift. Second, it gives your children an immediate interest in the property, which interest your children could sell to a third party without your permission. Third, it subjects your property to the children's creditors and puts your property at substantial risk. For these reasons it is almost never a good idea to attempt to pass your property to your children through joint tenancy. 3. Beneficiary Deeds & Transfer on Death Accounts. For IRAs, 401ks and most types of bank accounts you can name a Transfer on Death Beneficiary. Upon your death the Transfer on Death Beneficiary needs to present a certified death certificate in order to receive the funds held in the account. Recently the State of Arizona enacted legislation that allows a property owner to execute a Beneficiary Deed. Like the Transfer on Death accounts, a Beneficiary Deed names a Beneficiary who is to receive title to the property upon your death. The Beneficiary needs to record a certified death certificate with the county recorder in order to complete the conveyance. Both Beneficiary deeds and transfer on death accounts can be revoked or changed at any time prior to your death. The named Beneficiary has no vested interest in the property until your death and cannot object to any changes. This type of Estate Plan does not, however, provide for the management of your property should you ever become incapacitated. Furthermore, complications can arise when leaving your estate to multiple parties. Finally, because Beneficiary Deeds are a relatively new concept they have yet to be tested in Court. 4. Will. The Last Will and Testament is the most common form of prepared Estate Plans. A Will is a writing that sets forth how an individual wants his or her property distributed. It must be in writing and it must be signed. In addition, unless the Will is in the handwriting of the Testator, it must be signed by two witnesses. Unlike intestacy, wherein state law determines who receives your property, a Will enables you to leave your assets to anyone you want. It even enables you to specifically disinherit someone if you so choose. Like intestacy a Will must pass through a legal process called Probate in order to transfer ownership of your property Probate

The Probate proceeding is initiated by filing an application for Probate and presenting the Will (if there is one) to the court. If the paperwork is in order and the Will appears to be valid, the court will issue Letters of Personal Representative appointing someone to act on behalf of the estate. This Personal Representative (also known in some other states as an Executor) is authorized to gather the assets of The average Probate the decedent, sell estate property, pay the decedent's debts and distribtakes 12-18 months ute the estate to the decedent's heirs. A Personal Representative is also required to give notice to all potential heirs and creditors that the Probate to complete. process has been initiated. The Personal Representative must then wait no less than four months to allow any creditors to present their claim against the estate. If any claims are made and determined to be valid, the creditors must be satisfied before the estate can be distributed to the heirs. The average Probate takes 12-18 months to complete. Once the Probate is initiated the decedent's Will and all other paperwork filed with the court becomes a public record that anyone can view.


© Copyright 2007, Hirschi Law Group, PLLC, all rights reserved.


One positive aspect of Probate is that it limits the timeframe in which creditors can bring a claim against the estate. Normally a creditor has up to two years after the decedent's death to pursue a claim against the estate. However, when the Personal Representative publishes notice to creditors, the creditors have only four months to respond with their claims. If the creditor fails to bring their claim within that four-month period they are forever barred from pursuing the claim.

Testamentary Trust

Your heirs may inherit under a Will or through intestacy so long as they are over the age of 18. For an heir under the age of 18, his or her inheritance will be received by a conservator until the heir reaches majority. This presents a couple of problems. First, the conservator is a court appointed individual who must provide a regular accounting to the court regarding the management of the assets. While this court supervision can prevent mismanagement of the inheritance it is also costly in terms of court costs and attorney's fees. Second, many people do not want their children to receive their inheritance at the age of 18, particularly if it is a large inheritance. This scenario can be avoided by creating a Testamentary Trust. A Testamentary Trust is a trust created within the decedent's Will. It states that upon the death of the decedent the property for certain heirs, or all heirs, will go to a Trustee to be held in trust for the benefit of those heirs. The terms of the trust are up to the Testator when creating the Will, and are only limited by what is legal. Thus, a Testator can provide that a Trustee is to hold on to the inheritance until the heir turns 21 or some other age. The Testator can provide for the Trustee to distribute portions of the trust at different times and for different purposes. The decedent's Will must still pass through Probate, but the Testator has more control over when his or her heirs will receive their inheritance.

5. Living Trust. The Living Trust is a very effective and popular Estate Planning tool. It has many advantages, not the least of which is avoiding Probate. A Living Trust is another way of holding title to property. It involves three parties: a Trustor, a Trustee and a Beneficiary. The Trustor is the party who creates the trust. The trust is created by stating that it is created and providing instructions regarding its management and disbursements. The terms of the trust as well as the names of successor Trustees and Beneficiaries should be in a writing signed by the Trustor. Upon creating the trust the Trustor then funds it by conveying property to the trust. The Trustee is the party who manages the trust. Thus, when the Trustor conveys property to the trust it is received by the Trustee. The Trustee is authorized to invest and reinvest trust assets, 4

© Copyright 2007, Hirschi Law Group, PLLC, all rights reserved.

E S TAT E P L A N N I N G Y O U R I N - D E P T H G U I D E to pay debts owed by the trust and to disperse trust income and principal to designated Beneficiaries. The Trustee must always manage the trust for the benefit of the trust Beneficiaries. If the Trustee ever engages in self-dealing while managing the trust he will be subject to removal as Trustee and liable for losses the trust incurred under his management. Finally, the Beneficiary, as you may have guessed, is the party that is entitled to receive the benefit of the trust. When you create a Living Trust during your lifetime you will act as all three parties (the Trustor, the Trustee and the Beneficiary) simultaneously. Thus, for all practical purposes, nothing changes with respect to the management of your property. You still pay taxes the same way; you can sell your property and buy new property, close bank accounts and open new ones and so forth. Once the trust has been created it must be funded. This means you must convey ownership of your property from your individual name to the trust. Real property, including houses and land, can be conveyed by executing a Quit Claim Deed and recording that deed with the County Recorder. Bank accounts, stock certificates, mutual funds and bonds can be conveyed by contacting the appropriate representatives or brokers and Funding is a critical filling out necessary paperwork. IRAs and 401ks cannot be owned by a trust, but you can name the trust as a Transfer on Death Beneficiary of step in the formation those accounts. Likewise you can name the trust as the Beneficiary of any of your Living Trust. life insurance policies you own. Funding is a critical step in the formation of your Living Trust. The benefits of having a trust manifest themselves upon your incapacity or death. Should you ever become incapacitated during your lifetime, your successor Trustee, who will be named in the trust document, will assume the management of the trust assets until such time as you recover from the incapacity or die. Upon your death, the successor Trustee will begin managing your assets for the benefit of those successor Beneficiaries named in the trust. There is no need to go through Probate to transfer ownership to your heirs because at your death you did not technically own anything; everything was owned by the trust, which cannot die. By avoiding Probate you avoid the time and expense associated with that process, and the successor Beneficiaries can immediately receive the inheritance without waiting for creditors to present their claims. Other advantages of a trust are that it enables you to specify when you want your heirs to receive their inheritance. Also, a trust document is private; therefore, anyone not named in the trust has no right see it or to know what assets are owned by the trust. A trust can also enable you to avoid or minimize federal estate taxes. The federal estate tax affects large estates. The percentage of the tax starts at 41 percent and quickly rises to 46 percent on all estates over the exemption. For the years 2007 and 2008 that exemption is two million dollars. Thus the first two million in your estate will pass to your heirs without any estate taxes, but every dollar thereafter will be taxed. In 2009 the exemption rises to three million five hundred thousand dollars. In 2010 the estate tax goes away all together; however, it is revived again in 2011 and the exemption drops to one million dollars. By including what are known as AB provisions in their trust, a married couple can effectively double their estate tax exemption. An AB Trust operates as follows: During the joint lifetime of the Trustors the trust operates as a normal revocable Living Trust. Upon the death of the first spouse to die the trust splits into two separate trusts, a marital trust (trust A) and a residuary trust (trust B). The residuary trust vests in the residuary Beneficiaries, but the surviving spouse can continue to access the income and principal as may be needed to provide for her health, maintenance and support (code words for maintaining the lifestyle she was accustomed to prior to her spouse's death). The residuary trust is funded with the maximum amount of the estate tax exemption for that year. Because it did not exceed the exemption there is no estate tax owed. The remaining assets in the trust pass to the marital trust for the benefit of the surviving spouse. There is no estate tax on the marital trust because of the spousal exemption.


© Copyright 2007, Hirschi Law Group, PLLC, all rights reserved.

E S TAT E P L A N N I N G Y O U R I N - D E P T H G U I D E During the lifetime of the surviving spouse she has full access to all the income and principal in the marital trust as well as a power of appointment over who receives that money upon her death. The surviving spouse can also have full access to the income and principal of the residuary trust to the extent necessary to support the lifestyle she was used to. However, the surviving spouse does not have a power of appointment over who receives the money in the residuary trust upon her death. When the surviving spouse does eventually die the successor Beneficiaries receive two trusts, one from the husband and one from the wife, each with a federal estate tax exemption. Therefore, by employing these provisions the couple has doubled their estate tax exemption.

Additional Estate Planning Tools

Aside from the planning options listed above there are additional tools that every Estate Plan should include:

1. General Power of Attorney. A power of attorney is a written authorization for someone else to act on your behalf. They can be short term or long term and they should always be a part of your Estate Plan. For example, if you have a Will and you become incapacitated, your Personal Representative has no authority to act in your name. That authority only exists upon your death. Thus, who manages your affairs while you are alive but unable to do so? By executing a General Power of Attorney you can authorize someone else to do all acts that you could otherwise do yourself, including selling property, accessing bank accounts and so forth. Because you are providing your agent with significant power it should obviously be someone you trust completely. Your general power of attorney should also state that it is "durable." This means that the power of attorney continues to operate after you become incapacitated. Failing to include this durability provision defeats the whole purpose of having a power of attorney, so be sure it is in there. 2. Medical Power of Attorney. Like the general power of attorney, the medical power of attorney authorizes someone else to make decisions on your behalf when you are unable to yourself. Like the name suggests, those decisions are medical decisions. Most hospitals make you sign one when you are admitted but it is always good to have your own made up in advance. Your medical agent can authorize or refuse treatment, have you admitted to the hospital and accept prescription drugs on your behalf. 3. Living Will. The Living Will is a document that sets forth your end of life decisions. A Living Will deals with the instances wherein someone is being kept alive solely by artificial means (such as respirators and feeding tubes). You can, in advance, make a decision and put it in writing regarding the life support treatment you do or do not want to receive. This takes the emotional decision off of the shoulders of your loved ones down the road, and ensures that what you want happens.


© Copyright 2007, Hirschi Law Group, PLLC, all rights reserved.


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