Estate Planning

As Christians it is incumbent upon us to be good stewards with the various assets and blessings (especially children) God has entrusted into our care. In essence, an Estate Plan represents a final act of good stewardship that will ensure that the desired people or institutions receive the assets we want them to receive and that the desired individual becomes the guardian of our children. A typical Estate Plan will include a Will, a Trust (a Testamentary Trust and/or Living Trust, depending upon the specific needs or circumstances), an Advanced Directive for Health Care (also known as a Living Will), a Durable General Power of Attorney (to authorize someone you trust to make financial, legal, and property decisions for you if you become incapacitated), and a Durable Health Care Power of Attorney (to authorize someone you trust to make health care decisions if you become incapacitated).

Do I need a will?

Many think Estate Planning applies only to very wealthy people. Nothing is further from the truth. Unless you want state law, and perhaps a judge, deciding what happens to your assets and your children, it is imperative that you have a Will. A Will can help avoid disputes among heirs and give you peace of mind. Regardless of how little property you own, you should plan ahead to make sure the desired individuals or institutions receive your property after your death, and, if both parents are deceased, the desired individual who will be guardian of your children.

A Will is an important legal document and the cornerstone of most Estate Plans. In a Will you name a personal representative (commonly referred to as the Executor) to administer your Estate and direct how your property is to be distributed. The Executor collects the Estate assets, pays the Estate debts and Inheritance Taxes, and makes distributions to the beneficiaries you have designated in your Will. In addition, if your children are still minors upon your death (and there is not a surviving parent), only a Will can designate a guardian for them. The Executor will make sure that your children are placed in the care of the designated guardian and that a Trust (which should be expressly set forth in your Will) is established to administer your assets for the benefit of your minor children. If you do not prepare a Will that designates a guardian for your minor children and establishes a Trust to administer your assets for the benefit of those minor children, these issues will be left to the Court system to resolve. Although the Court will attempt to always do what it considers to be in the best interest of the child, the Court’s decision as to who will be the guardian and who will administer the Trust may not be the same individual or individuals you would have chosen.

With regard to the guardian, the Court will usually appoint the “closest blood relative” (e.g., grandparent, uncle, aunt) who is willing and able to raise the minor child/children. As a result, the Court may appoint a non-believer as the guardian. The only way to be certain this does not occur is to make a Will and designate a believer as the guardian and alternate guardian. In addition, a Court can only order your child’s “inheritance” to be placed in a Trust until the age of adulthood (depending upon the state, a child is legally an adult at age 18 or 21). When your child reaches the age of adulthood, then the Court imposed Trust is “dissolved” with regard to the administration of their inheritance and the 18 or 21 year old child receives the entire inheritance at that time – which often leads to disastrous consequences (see the story of the Prodigal Son).

Probate vs. non-probate property

Your Will only transfers ownership or distributes “probate” property which is defined as property you own in only your name. Jointly owned property or assets that can pass directly to a named beneficiary is known as “non-probate” property and passes “outside” your Will. Being classified as non-probate property does not mean the property is automatically “non-taxable” to your Estate. In addition, you need to be aware that jointly held property, accounts held “in trust for” another person, life insurance policies, annuities, IRAs, and many retirement accounts do not pass according to the provisions of your Will. Rather, these items pass by law to the survivor listed on the Deed or on the account or to the properly designated beneficiaries. Therefore, it is imperative that jointly held properties and accounts and beneficiary designation forms be carefully reviewed and the tax ramifications of your non-probate property be thoroughly discussed with your lawyer when developing your Estate Plan.

Joint property

There are several ways of owning property jointly with another person: “Tenants by the Entireties” (with your spouse), “Joint Tenants with Right of Survivorship,” and “Tenants in Common.” People often transfer their property into joint names with family members or friends, with the mistaken belief that this will reduce estate administration costs, avoid probate, avoid inheritance and/or estate taxes, and generally “make things easier.” While joint ownership may be appropriate in some situations, it often results in unexpected taxes and outcomes. When you transfer your property so that you own it with another, you are exposing your property to the creditors of that other person. There also may be income tax, federal estate and gift tax, and state inheritance and/or estate tax issues. You should not transfer your property into joint names without obtaining legal advice from an attorney who is able to explain the tax and other legal consequences.

Putting your home in joint names with your children is sometimes appropriate, but the risks and costs often outweigh the benefits. Adding your children to the Deed is considered a gift, which may prevent you from receiving Medicaid benefits if you must enter a nursing home within a few years after the gift. Once the property is in joint names, you lose control over the future sale or mortgage of the property and the property is vulnerable to claims by your children’s creditors. Transferring property to your children through a lifetime gift instead, and not after your death, can also have adverse income tax consequences for the children, which far exceed possible savings in state inheritance and/or estate taxes. Hence you should consult with an attorney and give careful thought before putting your home in joint names with your children.

Titling bank accounts, CDs, Mutual Funds, and Stocks in joint names are easy to do, but these also could be a mistake. Personnel at banks and other financial institutions may provide forms to accomplish the change in title but usually do not (and should not) give advice as to the ramifications of the title change. If you want certain property to go to a certain person after your passing, you should discuss with your lawyer whether this should be done by putting the property in joint names, passing it through your Will, or making some other arrangements in your Estate Plan. – To be continued

NOTE: This article is for informational purposes only and should not be construed as offering advice or making recommendations on any issue. It must be underscored that each state has its own laws, rules, and regulations that govern the subjects discussed in this article and those specifics laws, rules, and regulations (or an appropriate lawyer licensed to practice law in the relevant state) should be consulted.