Estate Planning Definitions

What is estate planning? “I just need a simple will!”

Estate planning is a lifelong process. It is not simply the drafting of a will, trust or any series of documents. The purpose of estate planning is to assist in the accumulation, management, conservation, and disposition of your assets. Therefore, estate planning may also be better called asset planning.

The goal of the estate planning process is providing you and your loved ones with the maximum benefit during your lifetime and after your death. Issues typically addressed include:

• Saving or reducing taxes
• Avoiding probate or reducing its cost,
• Providing for incapacity
• Protecting your assets from creditors
• Assuring that your assets are given to whom you desire
• Empowering your loved ones to control your assets

If you own a business, business planning and estate planning must be coordinated!

What is a will?

A will is a written document, following the formalities of law, that disposes of your estate at your death. Some of the advantages of a will are:

• You direct the distribution of your property at your death, rather than the state of your residence directing the distribution through probate and the courts.
• By naming your executor or executrix, your loved ones, partners, and spouses can be given the control of your estate rather than others (such as undesired family members) by the laws of the state of death.
• You can set up a trust instrument to provide income and principal for the benefit of your family or others after your death.
• It eliminates some of the fighting over your estate that can involve courts and unnecessary legal fees.
• You can name the guardian of your minor children.

What happens if I do not have a will when I die?

If you die without a will, the laws of the state of your last domicile determine who gets your estate through the laws of intestacy. Typically, the estate would be given to children and a spouse, but not necessarily to whom you want. Further, you will not be able to control the disposition by use of a testamentary trust.

What is a testamentary trust?

A testamentary (versus “living”) trust can be part of your will. Unlike a living trust, which takes effect upon execution, a testamentary trust only becomes effective at your death. Such trusts frequently are designed to extend the time for controlling assets given to minor children or grandchildren beyond the age of majority (18 in most states.) They can also be used to protect the disabled and elderly. Sometimes, testamentary trusts can be used as part of a tax savings plan.

What is a living trust?

A living trust, legally known as an inter vivos trust, is effective during your lifetime. Typically, your trustee manages your assets for your benefit during your lifetime, as well as direct the distribution of assets upon your death. Testamentary trusts are frequently used to provide continuing management of your assets in case you become incapacitated. There may also be substantial tax savings.

What is a durable power of attorney?

A power of attorney gives legal authority to a person to act as your agent, or attorney-in-fact during your life and while you are competent. A durable power of attorney continues after you become incapacitated. Typically, your attorney-in-fact has authority over bank accounts and investments and may have the right to sell your property. Because the durable power of attorney is not affected by your incapacity, this may avoid the need for a court appointed guardian. Without a durable power of attorney, your spouse, partner, closest relatives, or companion will have to undergo the expensive and time-consuming task of petitioning a court for a guardianship over your financial affairs if you become incapacitated.

What is guardianship?

A guardianship is where a person is appointed by a court to take control of the assets of an incapacitated person Usually, a well-designed estate plan, with a will, durable power of attorney and living trust avoids the need for a court-appointed guardian.

What is a living will and medical decision power of attorney?

A living will, also called a health care directive, states your wishes about withholding or providing extended medical treatment when you are unable to communicate your wishes. A medical decision power of attorney appoints an individual to make your health care decisions should you become incapacitated. The living will can express your desires, whether to instruct health care providers to withhold life-prolonging treatments or even to reinforce the desire to receive all medical treatment that is available.

How can I help my grandchildren financially for their college educations?

If you want to help your grandchildren through college, there are several options to help pay their expenses and trim your family’s tax bill at the same time. Here are three tax-wise tips to get the maximum bang out of your education buck:

Write a check The tax law lets you give $12,000 in cash a year for 2007 — or $24,000 if your spouse contributes — without having to pay a gift tax (up from $11,000 and $22,000 respectively for 2005). Just write out checks and give them to your grandchildren. If the children still have a few years before college, set up a custodial account at a bank, mutual fund or brokerage firm. The money can be used for tuition or other college-related expenses.

Give stock – If you give appreciated stock or other investments to your college-bound grandkids, your family can slash the capital gains tax bill. Let’s say you’re in the 33 percent tax bracket and you want to sell stock you’ve owned two years to free up some cash for tuition. For stock sold in 2005 or 2006, you’ll wind up paying a 15 percent capital gains tax rate on the profit. But if you give the stock to your 18 year-old teenage grandson, he can sell the assets and pay only 5 percent tax on the gain, assuming he’s in the 10 or 15 percent tax brackets. This saves your family a nice chunk of money that can be applied toward college expenses.

(NOTE: According to theta Increase Prevention and Reconciliation Act signed by President Bush in May 2006 the five percent capital gains rate is effective through 2007. For 2008-2010, the rate will drop to zero. The same preferential treatment will also apply to qualified dividends received through 2010.)

Pay tuition yourself – Under current tax law, unlimited tuition payments can be given directly to a college with no gift-tax implications. The catch is the money cannot pass through the hands of grandchildren (or their parents) first. It must go directly from your account to the university. This might be appealing if you’re worried about the youngsters spending it frivolously.

This tax break applies only to tuition and can’t be used to pay room, board and other college expenses. However, you and your spouse can still each give the child a tax-free cash gift of up to $12,000 in 2007 to cover those other expenses.

Call Ronald J. Cappuccio J.D., LL.M. (Tax) at 856-665-2121 for more information or send us an email.