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(I) Estate Planning
1.) Probate V. Not-Probate
A. What is the difference?
B. Should I Avoid Probate?
C. Important Note
D. What are some Different Types of Non-Probate Property?
(a) What is Joint with Right of Survivorship?
(b) What are POD Accounts?
(c) How can Trusts be useful?
(d) What about Annuities and Retirement Benefits?
(e) What can you tell me about Life Insurance?
2.) Wills
A. What is a Will?
B. What happens if I die without a Will?
3.) Trusts
A. What are Revocable Living Trusts? What do they do?
B. What are some types of Irrevocable Trusts?
(a) What are Irrevocable Life Insurance Trusts?
(b) What are Special Needs Trusts?
(c) What are Charitable Remainder Trusts?
(d) What are Charitable Lead Trusts?
(II) Estate Administration
1.) What are the Basics?
2.) Who appoints the Personal Representative?
3.) What do I need to know about Marshalling Assets and Paying the Representative?
4.) What happens to my Tax Obligations?
5.) Conclusions (III) Powers of Attorney (IV) What is a Health Care Directive? What does it entail? (V) Do you have a list of Relevant Vocabulary? (VI) What other Helpful Tools do you Recommend? (*Please Note: The purpose of this outline is to give you an overview of the estate planning and administration process. Both estate planning and administration can be complex and confusing. This information is designed to take some of the mystery out of the process. Moreover, because of the myriad of details associated with an estate, its administration may appear to be a task of overwhelming complexity. In the past, our clients have found it useful to keep the entire process in focus. Therefore, we have developed this brief outline. If you are looking for more detailed information, you may find our Asset and Estate Planning section helpful.)
(I) Estate Planning
Estate Planning is a process that allows you to plan for your lifetime goals and objectives and to provide for the transmittal of assets at your death. Having a solid estate plan ensures that your property and wealth will pass smoothly to your beneficiaries at the time of death and according to your wishes. Estate Planning includes the transfer of property at death along with an assortment of other personal matters that may or may not include tax planning.
Estate planning consists of several parts, including: a will, power of attorney, a living will or healthcare proxy, and sometimes a trust. Because estate planning is strongly effected by frequently complex federal and state laws, it is important to consult a lawyer knowledgeable in estate and trust laws for creative solutions and suggestions. Feel free to contact us for a consultation.
1.) Probate vs. Non-Probate
A. What is the difference?
The easiest way to differentiate between probate and non-probate property is to determine what document or, in the absence of a document, what law, determines the distribution of assets at your death. If your Will or the rules of intestacy dictate the disbursement of assets, those assets are probate assets. If a bank document, trust, deed or beneficiary designation determines the disposition of assets at your death, those assets are non-probate assets. With rare, but notable, exceptions all assets under your control at your death—whether probate or non-probate—are subject to estate tax.
B. Should I avoid probate?
There has been a great deal of hoopla in recent years urging you to avoid probate. There are valid reasons to move your assets out of the probate arena into the non-probate arena—but this is not appropriate for all situations.
Valid reasons to elect a transfer of assets to the non-probate arena may include:
*Privacy: In Maryland, the value and non-probate beneficiary assets are not reported to the Register of Wills unless distributions to the beneficiaries are subject to inheritance tax.
*Probate Fee: In some jurisdictions, the cost of probating a will is onerous. Maryland does not tend to be such a jurisdiction
*Time Saving: In certain situations, disbursements to beneficiaries may occur soon after death.
*Disability Planning: Living or revocable trusts are often used as a tool for disability planning.
*Asset Protection: Some non-probate assets are good asset protection mechanisms (i.e. entireties property, retirement accounts).
C. Important Note:
**It is ESSENTIAL to understand that all estate assets are potentially subject to estate tax and that non-probate assets may be subject to creditor’s claims. If the estate is large enough to trigger an estate tax liability, the IRS holds a “secret lien” on all probate and non-probate assets until an estate tax closing letter is received.**
D. What are some Different Types of Non-Probate Property?
(a) What is Joint with Right of Survivorship?
Property owned with others as joint tenants with right of survivorship (not as tenants in common) will pass to the survivor or survivors and will not be part of your probate estate. Sometimes these accounts are created for convenience, to give the other tenant access in order to pay bills. It is important to pay close attention to survivorship provisions when establishing bank accounts, as disputes often arise over whether the account was created as a convenience (and should be included on the estate and governed by the Will) or whether a gift was intended. Maryland law presumes that a joint account is meant to pass the property to the joint owner at death and not be a convenience account.
(b) What are POD Accounts?
Pay on Death (POD) accounts pass to the designated survivor. Savings bonds often are POD accounts. In these accounts, the property is transferred directly to the beneficiary at the time of death and is free of probate.
(c) How can Trusts be useful?
Trusts, whether created by you or by someone else, often have beneficiary designations and provisions that cause them to pass outside of probate. Trusts can be a helpful tool for people in a variety of circumstances. Many parents create trusts specifically delegating assets to children at a specific age.
(d) What about Annuities and Retirement Benefits?
If you have an IRA or other retirement benefit program, you have probably already designated beneficiaries for those plans. On your death, they will generally pass to those beneficiaries. Federal laws require spousal benefits for qualified retirement plans, however, unless waived by the spouse in writing.
(e.) What can you tell me about Life Insurance?
If you have designated beneficiaries on your life insurance, the proceeds will pass to those beneficiaries. If you have no beneficiary designation, or if you have designated your estate to receive the proceeds, the distribution will be as part of your probate estate. (See Life Insurance Trusts.)
2.) Wills
A. What is a Will?
A Will is a legal document that provides for the distribution of property owned solely by you at the time of your death in any manner you choose—subject (in Maryland and many other states) to laws that prevent disinheriting a spouse. A Will does not govern assets that pass outside of probate—jointly owned property, life insurance, or IRAs, for example—that have survivorship provisions or beneficiary designations, if the designations are not to your estate.
Wills can be drafted to accomplish a wide range of tax objectives and provisions for family members. A simple Will generally provides for outright distribution to beneficiaries. A Will also can be used to establish testamentary trusts to provide property management, creditor protection, or tax planning for surviving spouses, children, or other beneficiaries. A Will can be used to tailor bequests to charities. A Pour-Over Will is used in conjunction with a Revocable Living Trust.
A Will is the best place to designate a guardian for a minor child (if the other parent does not survive you), exercise powers of appointment, authorize the payment of funeral expenses above the statutory limit, name your Personal Representative (Executor), and eliminate the need for a bond.
B. What happens if I die without a Will?
If you die without a Will (intestate), the state’s laws of descent and distribution will determine who receives your property. In Maryland, the distribution would probably be to your spouse and children or, if no spouse or children survive you, to other family members. If you are married without children, a portion of your estate goes to your spouse and a portion to your parents. If there are no family members, property escheats to the local Board of Education. A Will allows you to alter the state’s default plan to suit your preferences.
3.) Trusts
A. What are Revocable Living Trusts? What do they do?
A Revocable Living Trust is a trust created during your lifetime to hold property that you transfer to it. It has a currently-serving trustee (who may be you) who manages the property for your benefit. It can be revoked or amended during your lifetime. On your death, the Trust may direct that the property be continued in trust or distributed outright to beneficiaries.
A Revocable Living Trust is a very good tool for preparing for disability. In a Revocable Trust, you can name a successor or co-trustee who can manage the property for your benefit if you become incapacitated.
A Revocable Living Trust also avoids probate. Much has been written about this advantage of such a trust. Probate laws vary from state to state. If “avoiding probate” is the primary reason for setting up a Revocable Living Trust, the actual costs and benefits of a Will and a Trust in each specific situation should be compared. Good estate planning is not a “one size fits all” proposition. The goal is to design the most cost-effective estate planning tool for each client.
A Revocable Trust alone hardly ever totally avoids probate—a Pour-Over Will should be executed at the same time as the Living Trust to direct any assets not transferred to the Trust before death to the Trust.
A Revocable Trust does not avoid estate or inheritance tax or the tax on any income earned by the trust before distribution. A properly drafted Will can often be as effective in reducing the time and expense and administration.
**For a more comprehensive discussion of these issues, see Revocable Trusts.**
B.) What are some types of Irrevocable Trusts?
Irrevocable Trusts may be created for a number of purposes. Some examples are Irrevocable Life Insurance Trusts, Special Needs Trusts, Charitable Remainder Trusts, and Charitable Lead Trusts.
(a) What are Irrevocable Life Insurance Trusts?
The Irrevocable Life Insurance Trust is a device to “move” a life insurance policy out of the insured’s federally taxable estate. An existing insurance policy can be transferred to the trust, or the trust may purchase insurance to achieve this result. (See the page on Life Insurance Trusts.)
(b) What are Special Needs Trusts?
A Special Needs Trust is used to hold the assets of a disabled person. A properly drafted Special Needs Trust can provide for distributions to enhance the life of a disabled person and at the same time protect the assets in the trust from being considered a “resource” (which would disqualify the disabled person for state or federal benefits). Depending on the type of Special Needs Trust, on death, the state may need to be reimbursed for benefits on behalf of the disabled person.
(c) What are Charitable Remainder Trusts?
A Charitable Remainder Trust is created to pay income from the assets in the trust to the Grantor (or other beneficiary) and distribute the remainder to a charity. The Grantor receives an income tax deduction for the value of the remainder interest at the time of making the gift to the trust.
(d) What are Charitable Lead Trusts?
A Charitable Lead Trust is created to pay income from the assets in the trust to a charity and have the remainder return to the Grantor or to beneficiaries designated by him or her. The Grantor receives an income tax deduction for the value of the income interest at the time of making the gift to the trust.
(II) Estate Administration
1.) What are the Basics?
Reduced to its simplest elements, the administration of an estate is the gathering of a decedent's assets, the paying of his or her debts, and the distribution of the remaining estate. Perhaps the initial obligation of someone charged with the administration process is the preservation of the assets.
It is important that a decedent's home and possessions are secure. Even before the formal appointment of a personal representative, mail should be collected and held for future handling. Records should be kept so all expenses incurred for the funeral and burial so that the persons who pay these expenses may be reimbursed properly. None of the decedent's papers should be thrown away, as very uninteresting papers often are quite useful in the administration of the estate. Also, the decedent's property should be kept intact pending the formal appointment of someone to take charge of the estate.
2.) Who appoints the Personal Representative?
In the strict sense, the Court appoints the Personal Representative. If there is a Will appointing a Personal Representative, such person is usually appointed by the Court. If no Will exists, Maryland law provides for a specific order of preferred individual to be appointed: the surviving spouse, if any, and a decedent's children. A Petition is filed with the Register's office or with the Orphans' Court to secure appointment. Therefore, the first formal act is the filing of this Petition.
3.) What do I need to know about Marshalling Assets and Paying the Representative?
After appointment by the Court, the personal Representative has the power to act on behalf of the estate. Thus, after appointment, the Personal Representative can begin to marshal assets and pay debts.
The Register of Wills office or the Orphans' Court monitors this process by requiring that the Personal Representative file Inventories of assets and accountings of estate financial activity. Although the actual requirements vary from county to county, the Personal Representative must stand ready to establish the value of all assets and show that all lawful debts have been paid. The Personal Representative must also file information about assets passing outside of the formal estate (for example, as joint tenants).
4.) What happens to my Tax Obligations?
The Maryland inheritance tax obligation is generally established by the accounting process. Because of recent legislation, however, most categories of beneficiaries are exempt from tax: spouses, children, grandchildren, and siblings. Strictly speaking, the formal accounts are also inheritance tax returns. If there is a Will, it may provide that the estate will pay these taxes. Otherwise, the heirs bear the tax. In any event, the personal Representative collects and pays the state tax before distributing property to the heirs.
If the estate is large enough to be a taxable estate for federal tax purposes, the Personal Representative files a federal tax return and makes arrangements for the payment of whatever tax is due. This tax return is due nine months from the date of death.
If the estate assets earn interest or other income during the period of administration, a federal income tax return may also be required. Also, the decedent's final income tax return may need to be filed.
5.) Conclusion
This is a brief overview of the estate administration process. It is not meant to be comprehensive, but simply to give general guidelines to what is involved in the process. As the process moves forward, you may (and probably will) have specific questions and concerns about aspects of the administration of the estate and you can either ask questions of the Register of Wills or engage counsel.
(III) Powers of Attorney
Powers of Attorney can be limited (restricted to certain tasks or transactions) or general (broad, allowing the Agent to do anything in your best interest). A Durable Power of Attorney allows your Agent to act for you if you become incapacitated. A Power of Attorney is often preferable to adding joint owners to accounts for the convenience of the owner, as to avoid later disputes on ownership. The Agent should be carefully chosen, as the powers are broad.
(IV) What is a Health Care Directive? What does it entail?
Each state allows an individual to express his/her wishes of treatment in certain medical situations—life-threatening or other injuries—and to appoint a health care agent to speak on his/her behalf if he/she is unable. These documents are referred to as “health care directives”, “living wills” or “health care proxies”, varying state to state. Living Wills are declarations that provide for the avoidance of extraordinary measures if you are in a permanent vegetative state, end-stage condition or terminal condition.
Health care decisions may be delegated to an Agent who may make those medical decisions in accordance with a “best interest” standard. Some things you may want to consider when choosing your healthcare agent: Can he/she understand important medical information in regards to your treatment? Can he/she handle the stress of making difficult decisions? Can he/she keep your interests and wishes in mind while making those decisions?
(V) Do you have a list of Relevant Vocabulary?
YES! Here it is:
Beneficiary: An individual or organization who receives property or wealth from a will or trust when the owner dies.
Common Disaster Clause: A clause in a Will that establishes what should happen if both devisees die in the same accident.
Decedent: The individual who died.
Devisee: An individual who receives property through a Will.
Durable Power of Attorney: This document allows the Agent to act if the individual becomes incapacitated. Estate Planning: The process that allows an individual to plan lifetime goals and objectives through a Will, power of attorney, a living will or healthcare proxy, and sometimes a trust.
Estate Tax: This is the tax imposed on the taxable estate of an individual when he/she dies.
Executor: The person or organization who is responsible for carrying out the Will.
Fiduciary: An individual or organization assigned to manage the estate.
Healthcare directive: The instructions given by an individual regarding what should happen if the individual becomes incapacitated. (This often includes appointing an Agent to act on one’s behalf.)
Healthcare proxy: This is also known as a living Will. The document that appoints an Agent to act on an individual’s behalf if he/she becomes incapacitated.
Intestate: Dying without a legal Will.
Irrevocable Trust: A trust that cannot be changed or altered after it is implemented.
Litigation: The process that accompanies a lawsuit.
Living Will: This is also known as a healthcare proxy. The document that appoints an agent to act on an individual’s behalf if he/she becomes incapacitated.
Non-Probate Property: This includes anything that did not go through the probate process, and includes specific types of property. (See Non-Probate Property.)
Pay on Death (POD): This is a type of property that transfers directly to the beneficiary, without passing through probate.
Per stirpes: This is a way of dividing up an estate in which it is divided equally for each branch of the family. (“Per stirpes” means “per branch” in Latin.)
Probate: The process that validates the Will and assesses the decedent’s debts and property.
Revocable Trust: A trust that may be changed or altered during the trustor’s lifetime.
Spendthrift Trust: A trust overseen by a trustee for an individual that may be considered irresponsible with his/her spending.
Trust: A document that gives fiduciary control of property to an individual or organization.
Will: A document that designates where and to whom property and wealth are directed at the time of death. This is also called a Testament.
(VI) What other Helpful Tools do you Recommend?
This is an extremely basic overview of Estate Planning topics and should act only as a jumping off point for you. Please note that fredfranke.com has a number of resources available for your use. Our Asset and Estate Planning section provides a more in-depth look at specific estate planning topics; General Estate Planning Topics gives more general or basic information; and Maryland Law of Estate and Trust includes an overview of the law of Maryland developed from Mr. Franke’s lecture notes which he used while teaching a course at the Law School of the University of Baltimore. See our Resources page for external tools.
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