Estate Planning
Overview , Part II
By Paul Nicolosi
Your Durable Power of Attorney
For most people, the durable power of attorney is the
most important estate-planning instrument available-even
more useful than a will. A power of attorney allows a
person you appoint – your “attorney
–in-fact “ – to act in your place for
financial purposes when and if you ever become
incapacitated.
In that case, the person you choose will be able to step
in and take care of your financial affairs. Without a
durable power of attorney, no one can represent you
unless a court appoints a conservator or guardian. The
court process takes time, costs money, and the judge may
not choose the person you would prefer. In addition,
under a guardianship or conservator ship, your
representative may have to seek court permission to take
planning steps that she could implement immediately under
a simple durable power of attorney.
A power of attorney may be limited or general. A limited
power of attorney may give someone the right to sign a
deed to property on a day when you are out of town. Or it
may allow someone to sign checks for you. A general power
is comprehensive and gives your attorney-in-fact all the
powers and rights that you have yourself.
A power of attorney may also be either current or
“Springtime”. Most powers of attorney take
effect immediately upon their execution, even if
understanding is that they will not be used until and
unless the grantor becomes incapacitated. However, the
document can also be written so that it does not become
effective until such incapacity occurs. In the power of
attorney be clearly laid out in the document itself.
While you should seriously consider executing a durable
power of attorney, if you do not have someone you trust
to appoint it may be more appropriate to have the probate
court looking over the shoulder of the person who is
handling your affairs through a guardianship or
conservatorship. In that case, you may execute a limited
durable power of attorney simply nominating the person
you want to serve as your conservator or
“guardian”.
Your Medical Directive
Any complete estate plan should include a medical
directive. This term may encompass a number of different
documents, including a durable power of attorney for
health care and a living will. The exact document or
documents will depend on the choices you make. This
document designates someone you choose to make healthcare
decisions for you if you are unable to do so yourself. A
living will, discussed below, instructs your health care
provider to withdraw life support if you are terminally
ill or in a vegetative state.
Power of Attorney for Health Care The statutory power of
attorney for health care, mentioned above, is one example
of a medical directive. The power of attorney is a much
more efficient and powerful tool than the living will,
but the living will has the advantage that it is
self-actuating and needs nothing else but to be available
when needed. The delay in locating the agent under a
health care power of attorney may mean that the health
care provider must act without the limitations expressed
in the power of attorney, at least initially. If you are
traveling when health care is needed, the existence of
the living will may be easier to confirm through your
physician or family members. It should also be noted that
there may be a conflict between the directions in one
document and those contained in the other. In Illinois,
the power of attorney takes precedence over the living
will as long as an agent under the power is available to
act. This issue is important if it is necessary to
withdraw food and hydration, since doing so is prohibited
in living wills in Illinois.
Living Will
Living wills, like many legal documents have certain
strengths and certain weaknesses. It is often an
advantage to have a self-actuating document that will
allow the health care provider to withdraw or not
commence artificial life support measures in the limited
circumstances prescribed by the statutory language of the
living will, especially when the agent named in a power
of attorney for health care is unavailable on an
emergency basis. However, the limitation imposed by the
statutory language, which requires the maintenance of
food and water, may frustrate the intent of the
terminally ill person, and that limitation is not a
factor with an agent under a power of attorney for health
care unless the principal specifically imposes that
restriction.
Mental Capacity Requirements
Proper execution of a legal instrument requires that the
person signing have sufficient mental
“capacity” to understand the implications of
the document. While most people speak of legal
“capacity” or “competence” as a rigid
black line—either the person has it or
doesn’t—in fact it can be quite variable
depending on the person’s abilities and the function
for which capacity is required.
One side of the capacity equation involves the
client’s abilities, which may change from day to day
(or even during the day), depending on the course of the
illness, fatigue and the effects of medication. On the
other side, greater understanding is required for some
legal activities than for others. For instance, the
capacity required for entering into a contract is higher
than that required executing a will.
The standard definition of capacity for wills has been
aptly summed up by one court as follows:
Testamentary capacity requires ability on the part of the
testator to understand and carry in mind, a general way,
the nature and situation of his property and his
relations to those persons who would naturally have some
claim to his remembrance. It requires freedom from
delusion which is the effect of disease or weakness and
which might influence the disposition of his property.
And it requires ability at the time of execution of the
alleged will to comprehend the nature of the act of
making a will.
That is a relatively “low threshold,” meaning
that signing a will does not require a great deal of
capacity. The fact that the next day the testator does
not remember the will signing and is not sufficiently
“with it” to execute a will then does not
invalidate the will if he understood it when he signed
it.
The standard of capacity with respect to durable powers
of attorney varies from jurisdiction to jurisdiction.
Some courts and practitioners argue that this threshold
can be quite low. The client need only know that he
trusts the attorney-in-fact to manage his financial
affairs. Others argue that since the attorney-in-fact
generally has the right to enter into contracts on behalf
of the principal, the principal should have capacity to
enter into contracts as well. The threshold for entering
into the contracts is fairly high. The standards for
entering into a contract are different because the
individual must know not only the nature of her property
and the person with whom she is dealing, but also the
broader context of the market in which she is agreeing to
buy or sell services or property.
One court defined the competency required to
execute a contract as follows:
Competency to enter into a contract presupposes something
more than a transient surge of lucidity. It requires the
ability to comprehend the nature and quality of the
transaction; together with an understanding of what are
“going on”, but an ability to comprehend the
nature and quality of the transaction, together with an
understanding of its significance and consequences.
As a practical matter, in assessing a client’s
capacity to execute a legal document, attorneys generally
ask the question “Is anyone going to challenge this
transaction?” If a client of questionable capacity
executes a will giving her estate to her husband and then
to her children if her husband does not survive her,
it’s unlikely to be challenged. If, on the other
hand, she executes a will giving her estate entirely to
one daughter with nothing passing to her other children,
the attorney must be more certain of being able to prove
the client’s capacity.
While the standards may seem clear, applying them to
particular clients may be difficult. The fact that a
client does not know the year or the name of the
President may mean that she does not have capacity to
enter into a contract, but not necessarily that she
can’t execute a will or durable power of attorney.
The determination mixes medical, psychological and legal
judgments. It must be made by the attorney (or a judge,
in the case of guardianship and conservator ship
determinations) based on information gleaned by the
attorney in interactions with the client, from the other
sources such as family members and social workers, and,
if necessary, from medical personnel. Doctors and
psychiatrist cannot themselves make a determination as to
whether an individual has capacity to undertake a legal
commitment. But they can provide a professional
evaluation of the person that will help an attorney make
this decision.
Because you need a third party to assess capacity and
because you need to be certain that the formal legal
requirements are followed, it can be risky to prepare and
execute legal documents on your own without
representation by an attorney.
Trusts
Trusts have one set of beneficiaries during their lives
and another set – often their children – who
begin to benefit only after the first group has died. The
first are often called “life beneficiaries” and
the second “remaindermen”.
Uses of Trusts
There can be several advantages to establishing a trust,
depending on your situation. Best-known is the advantage
of avoiding probate. In a trust that terminates at the
death of the person who creates it (the
“grantor”), any property in the trust prior to
the grantor’s death passes immediately to the
beneficiaries by the terms of the trust without requiring
probate. Think of a trust much like a legally binding
contract that the trustee must follow. By avoiding
probate, trusts save time and money for the
beneficiaries. Certain trusts can also result in tax
advantages both for the grantor and the beneficiary.
These are often referred to as “credit shelter”
or “life insurance” trusts. Other trusts may be
used to protect property from creditors or to help donor
qualify for Medicaid. Unlike wills, trusts are private
documents and only those individuals with a direct
interest in the trust need know of the trust assets or
then distributions. Provided they are well drafted,
another advantage of trusts is their continuing
effectiveness even if the grantor dies or becomes
incapacitated.
Kinds of Trusts
Trusts fall into two basic categories: testamentary and
inter vivos.
A testamentary trust is one created by your will, and it
does not come into existence until you die. In contrast,
an inter vivos trust starts during your lifetime. You
create it now and it exists during your life.
There are two kinds of inter vivos trusts: revocable and
irrevocable.
Revocable Trust
Revocable trusts are often referred to as
“living” trusts. With a revocable trust, the
grantor maintains complete control over the trust and may
amend, revoke or terminate the trust at any time. This
means that you, the grantor, can take back the funds you
put in the trust or change the trust’s terms. Thus,
the grantor is able to reap the benefits of the trust
arrangement while maintaining the ability to change the
trust at any time prior to death or incapacity.
Revocable trusts are generally used for the following
purposes:
Asset Management. 1. They permit the named trustee to
administer and invest the trust property for the benefit
of one or more beneficiaries.
Probate Avoidance. 2. At the death of the person who
created the trust, the trust property passes to whoever
is named in the trust. It does not come under the
jurisdiction of the probate court and the probate process
need not hold up its distribution or diminish its value
by extra cost. However, the property of a revocable trust
will be included in the grantor’s estate for estate
purposes.
Tax Planning. 3. While the assets of a revocable trust
will be included in the grantor’s taxable estate,
the trust can be drafted so that the assets will not be
included in the estates of the beneficiaries, thus
avoiding taxes when the beneficiaries die.
Irrevocable Trust
An irrevocable trust cannot be changed or amended by the
donor. The trustee as provided for in the trust document
it may only distribute property placed into the trust
according to the trust specific terms. For instance, the
donor may set up a trust under which he or she will
receive income earned on the trust property, but that
bars access to the trust principal. This type of
irrevocable trust is a popular tool for Medicaid planning
and or estate tax planning.
Testamentary Trusts
As noted above, a testamentary trust is a trust created
by a will. Such a trust has no power or effect until the
will of the grantor is probated. Although a testamentary
trust will not avoid the need for probate and will become
a public document, as it is a part of the will, it can be
useful in accomplishing other estate planning goals. For
instance, the testamentary trust can be used to reduce
estate taxes on the death of a spouse or provide the care
of a disabled or minor child.
Supplemental Needs Trusts
The purpose of a supplemental needs trust is to enable
the donor to provide the continuing care of a disabled
spouse, child, relative or friend. The beneficiary of a
well-drafted supplemental needs trust will have access to
the trust assets for purposes other than those provided
by public benefits programs. In this way, the beneficiary
will not lose eligibility for benefits such as
Supplemental Security Income, Medicaid and low-income
housing. A supplemental needs trust can be created by the
donor during life or be part of a will.
Estate Taxation
Under the tax law enacted in 2001, whatever you own is
subject to the federal estate tax upon your death, until
2010. For the year 2010, estates will be entirely free
from federal taxation. However, the law that includes
these provisions expires at the end of 2010. Thus, unless
Congress acts in the interim, the estate tax rules will
then revert to those prevailing in 2001.
For 2001, the tax rate on estates begins at 37 percent
and rises to a maximum of 55 percent. depending on how
much is being passed to your heirs. Between 2002 and
2009, the top tax rate will gradually be lowered to 45
percent (see box below).
That said, not all estates will be taxed while the estate
tax is in effect. First, spouses can leave any amount of
property to their spouses free of federal estate taxes so
long as their spouse is a U.S. citizen. Second, the
federal tax applies only to estates valued at more than
$1,000,000 in 2002. This amount will rise to $1.5 million
in 2004 and then increase incrementally until it reaches
$3.5 million in 2009 (see box). The federal government
allows you this tax credit for gifts made during your
life or for your estate upon your death. Third, gifts to
charities are not taxed.
Illinois has an estate tax. But this is a so-called
“sponge” tax, which ultimately doesn’t
cost your estate. The way this works is that Illinois
takes advantage of a provision in the federal estate tax
permitting a deduction for taxes paid to the state up to
certain limits. Illinois simply takes the full amount of
what you are allowed to deduct off the federal taxes.
Federal Estate Taxes: Top Tax Rate Unified Exemption
Equivalent 2001 55% 675,000 2002 50% 1,000,000 2003 49%
1,000,000 2004 48% 1,500,000 2005 47% 1,500,000 2006 46%
2,000,000 2007 45% 2,000,000 2008 45% 2,000,000 2009 45%
3,500,000 2010 N/A N/A
Making Gifts: The $10,000 Annual Rule
One simple way you can reduce estate taxes or shelter
assets in order to achieve Medicaid eligibility is to
give some or all of your estate to your children (or
anyone else) during their lives in the form of gifts.
Certain rules apply, however. There is no actual limit on
how much you may give during your lifetime. But if you
give any individual more than $10,000 during a calendar
year, you must file a gift tax return reporting the gift
to the IRS. Also the amount above $10,000 will be counted
against the unified exempt equivalent that you may give
tax-free during your life or upon your death.
The $10,000 figure is an exclusion from the gift
tax-reporting requirement. You may give $10,000 to each
of your children, their spouses, and your grandchildren
(or to anyone else you choose) each year without
reporting these gifts to the IRS. In addition, if
you’re married, your spouse can duplicate these
gifts. For example, a married couple with four children
can give away up to $80,000 a year with no gift tax
implications. In addition, the gifts will not count as
taxable income to your children.
Nicolosi &
Associates - Attorneys at Law Since 1948. Skilled in the
law. Experienced in business. http://www.nicolosilaw.com
Article Source: http://EzineArticles.com
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