Estate Planning And The Importance Of Making Decisions Your Own

The importance of having an up-to-date estate plan in place cannot be overstated. Unfortunately for many, the decision to put an estate plan in place often never materializes until the experience of a life altering event, such as marriage or the birth of a child. All too often, people fail to put an estate plan in place leaving extremely important and personal decisions about the distribution of estate assets, guardianship for minor children and decisions affecting life sustaining medical treatment to others who may have little or no knowledge about the personal affairs. The decisions mentioned above could certainly be considered the most important and personal decisions in your life. This may be especially true when we are talking about decisions affecting a minor child and who may ultimately be responsible for that child’s continued personal and financial well-being.

Anyone that paid attention to the news last year was exposed to the heart-wrenching situation involving an incapacitated Terri Schiavo. The fight over whether she should persist in a vegetative state or be allowed to die naturally, should have provided an appreciation or the importance of estate planning. The evening news displayed countless images of Mrs. Schiavo and the nightmare that her family endured as a result of her failing to provide instructions to her physician, or her family, regarding the medical treatment she would want administered, or forgone, in the event of a terminal or irreversible condition. The legal document that Terri’s estate plan was missing was a living will. Also referred to as an “advanced directive,” a living will would have instructed Terri’s physician as to whether or not she wanted life sustaining treatment (as well as nourishment) administered or withheld, in the event that she were ever in a critical or irreversible condition. Instead, Terri’s spouse and other immediatefamily endured an immeasurable amount of pain and suffering in their fight over a decision that Terri should have been able to make for herself; not to mention the immense legal fees and other expenses that were incurred in resolving this matter through the courts. Of course, Terri Schiavo may never have envisioned that she would need such a document and unfortunately, once she became incapacitated it was too late.

Although a Living Will makes up only one small part of a good estate plan, the Schiavo case illustrates just how important it is to ensure that every aspect of your estate plan is up-to date and complete. It should illustrate that all your wishes, whether they relate to medical decisions, financial decisions or the administration and distribution of your assets upon incapacity or death, are carried out exactly as you desire. This means that you should not only have an estate plan in place, but you should review it frequently. An estate plan should be reviewed at least annually, or upon the occurrence of any life-altering event (marriage, divorce, birth of a child, death of a family member, etc.).

When steps are not taken to prepare or update an estate plan, one thing is probably certain–that the most important decisions that you may ever have to make, could very well end up being made by an individual you would have never entrusted with such responsibilities, including the local probate court.

Although many factors go into the development of a good estate plan, certainly the following documents should generally be part of that plan.

Last Will and Testament – A Last Will and Testament is a document that takes effect at your death and provides instructions regarding the administration of your estate along with the ultimate distribution of your property after death. Of course, it does more than simply provide instructions for the distribution of your estate. Your Will should also provide for the appointment of an Executor to oversee the administration of the estate, as well as the appointment of a Guardian for any minor children. The Will can also be used to provide for, or waive, the requirement of a bond for the Executor.

Durable Power of Attorney for Property – When you establish a Durable Power of Attorney for Property, you appoint a person to act on your behalf with respect to financial and property decisions in the event you are ever unable to act for yourself. Here, the agent you appoint would have the ability to make decisions related to your property and finances and enter into or execute financial or property transactions on your behalf. A Power of Attorney can be made effective immediately upon execution or, alternatively, can be made effective only upon the determination of incapacity by a physician (sometimes referred to as a “springing” power of attorney).

The latter scenario means that the Agent named in your Power of Attorney will have no authority to act on your behalf unless and until a determination is made by a licensed medical professional that you are incapacitated. This has the advantage of assuring that your agent is not acting on your behalf while you still have the ability to do so for yourself. On the other hand, there could very well be a delay while a determination of incapacity is made. And, of course, medical professionals could disagree on this issue, further complicating and delaying the process. Nonetheless, many practitioners prefer the use of a ” springing” power of attorney because it preserves an individual’s right to make such decisions solely for themselves until such time that it is clear they cannot.

Durable Power of Attorney for Health Care – This document is very similar to the Power of Attorney for Property with the exception, of course, that the power granted under the document relates to decisions affecting administration of medical treatment or medications.

Living Will – As noted above, a Living Will is very different from a Last Will and Testament. A Living Will instructs your physician as to whether you want to receive life-sustaining treatment if you have a terminal illness or are in a permanent vegetative state. Many states have now combined the Durable Power of Attorney for Health Care and the Living Will into one document that allows you to provide specific instructions regarding a wide range of medical treatments, including end-of-life treatments.

One additional estate planning document that should be considered when designing an effective estate plan is a Revocable Living Trust. A Revocable Living Trust is a document that provides for the management of assets both while an individual is living and for the administration and disposition of trust assets after the individual’s death. In essence, after death the Revocable Living Trust becomes irrevocable and serves as a Will replacement (although a relatively simple Will document, known as a “Pour-Over Will” is used in conjunction with the trust).

A Revocable Living Trust can be an attractive alternative to a standard Will plan because a Revocable Living Trust can provide several advantages over the use of a Will. One primary advantage of a Trust is that, if properly funded and managed, the process known as “probate” can be avoided through the use of a Living Trust. Probate is the process by which a state court becomes involved in the administration of the affairs of your estate after death. Generally speaking, this process may not only be expensive, but time-consuming and public, as probate in most states requires the filing of what may be very personal information, such as an inventory of the estate, listing all of the decedent’s assets. These court filings are often available to the general public.

The first benefit mentioned above, probate avoidance, can be of particular importance for a closely-held business owner. For most closely-held business owners, the investment in their business makes up a significant portion of their personal wealth. As a result, our clients’ most precious asset, their business, could be tied up in the probate process for an extended period of time. In fact, where an estate tax return is due for the estate, it would not be unusual for the probate estate to be open for as long as 15 to 18 months, or more. This is an extremely long period of time to have your business under the management of an executor who may or may not be subject to extensive court supervision.

In addition to the non-tax benefits of a good estate plan noted above, one cannot overlook the importance of including tax planning in your estate plan. With the top estate tax rate currently at 46%, a tremendous amount of wealth can be unnecessarily lost when the proper level of tax planning is not incorporated into your Will or Trust document. Proper tax planning within your estate must consider a number of concepts, including gift tax, estate tax, basis step-up at death, and the unified estate and gift tax credit, as well as the proper use of that credit.

Presently, every individual is entitled to an exemption from the estate tax of $2 million. Intuitively, one would then presume that a married couple should be able to shield $4 million from the estate tax in 2006 without doing anything. Without the proper level of tax planning, however, a married couple can forfeit one of their exclusions, resulting in approximately $920,000 in estate tax that could have easily been avoided through the use of a relatively simple estate planning technique involving the use of a “credit shelter trust’ within their Will or Trust plan.

It is important to note that while the federal exclusion amount has been increasing over the past several years, and will increase again in 2009, these increases have cost many states a tremendous amount of revenue. This is because the estate tax system has been linked to the federal system in many states. Now, faced with what amounts to an increasing loss of state revenues, many states have decided that they will no longer follow the scheduled federal exclusion increases and have “decoupled” their state estate tax system from the federal system. Although this is a more complicated area than can adequately address in a few sentences, it is worth noting that even where an estate appears to fall below the federal exemption amount, depending on their state of residence, that person could still incur a significant estate tax at the state level. For example, an individual that resides in the state of Minnesota with an estate of $1.9 million would incur no federal estate tax if he were to die in 2006; but, because the Minnesota exclusion amount is only $1,000,000, a significant estate tax could be due to the State of Minnesota.

One of the most important things you can do for yourself and your family is to have your estate plan reviewed by an experienced estate planning attorney. Many of the benefits associated with a good estate plan cannot be quantified in terms of tax savings, or return on investment. Many of the benefits noted herein are often overlooked, or at a minimum postponed, until something significant happens. Obviously, overlooking or postponing the implementation of a good estate plan can have tremendous negative implications for your estate tax situation as well as your family situation.

In short, estate planning is an extremely important matter for everyone and has benefits that reach far beyond the quantifiable estate tax savings. All business owners, regardless of their size, net worth or level of complexity, can benefit from a review of their existing estate plan. You may also find probate avoidance to be an extremely important concern, not to mention the peace of mind that comes with the knowledge that your estate plan is in place and current, and that your family will not have to contend with some of the extremely difficult issues that can arise when such matters are not properly tended to.