ESTATE
PLANNING:
One
way of introducing estate planning is to answer some questions
clients frequently ask us. We believe that these questions and
answers are important enough to include here, and we hope you find
them informative.
1.
What happens if I die without a will?
If
you fail to plan your estate and die without a will, the laws of the
Commonwealth of Massachusetts will create an estate plan for you.
This is known as “intestate” succession or “descent and
distribution” and is delineated by statute. The law prescribes both
the persons to whom your property will pass and the division of your
estate among those persons. The distributions provided by law are
inflexible and may not satisfy your desires as to distribution of
your estate.
If
you die without a will and you are survived by your spouse and
children, one‑half of your probate assets will pass to your
surviving spouse and the remaining half of your probate assets will
pass to your children. If you die without a will and are survived
by your spouse alone, leaving no children, the statute dictates that
part of your estate will pass to your parents. Again, such a
division of your property may not accurately reflect your wishes.
If you die and are survived by your children alone with no surviving
spouse, then your entire estate will pass to your children. If your
children are minors, a guardianship will be necessary to manage
their property.
2.
What is an Executor or an Administrator?
An
“executor” is appointed by the probate court if you have a will. An
“administrator” is appointed by the court if you do not have a
will. Your executor or administrator serve as the primary
representative of your estate.
3.
What does the Executor or Administrator do?
The
executor or administrator has the responsibility of collecting the
probate property and paying the debts of the estate. The executor
or administrator must file an inventory of the assets with the
probate court including the value of each item. He must also file
estate tax returns, pay any claims against the estate that have been
filed within one year of the decedent’s death, and make
distributions to the heirs or legatees after the claim period has
expired. The final responsibility is to file an accounting with the
probate court showing the income and expenditures of the estate
administration.
4. What is the probate administration?
Probate administration is the process supervised by the
probate court by which a deceased person’s property, or estate, is
passed to his heirs and legatees. To initiate the probate
administration, a petition for probate of the will or administration
of the estate must be filed with the probate court, along with the
will and a certified copy of the death certificate. Notice must be
mailed to all of the decedent’s heirs at law (surviving spouse,
children and children of deceased children), to those named in the
will, and if a charity is involved or there are no heirs at law, to
the Attorney General. A notice must also be published in a local
newspaper. The process usually takes approximately one year.
5. What property is subject to the probate
process?
The probate estate includes all property held in the
decedent’s name. Proceeds from life insurance policies and
retirement benefits, property held jointly, or property placed in
trusts will not be included in the probate process. The non-probate
property, however, is part of the decedent’s taxable estate.
6. Who will raise my minor children after
my death?
If you die leaving minor children, the surviving parent
ordinarily will raise and support them. If the other parent is not
living, your minor children will require a “guardian.” A guardian
is an individual who is appointed by the Court primarily to care for
the person of a minor; the guardian’s power over the minor’s
property is very restricted. In your will you may appoint a
guardian for your children. If you fail to do so, the court will
make the selection of a guardian. We recommend that you assume the
responsibility for this important decision, rather than leaving it
to a judge unfamiliar with your family situation.
You
should consult with the proposed guardian to ensure that the person
is agreeable to assuming this significant responsibility.
If both parents die, your minor children may be left with
substantial property interests that need management and protection.
Because the guardian has only limited power over the minor’s
property, protective proceedings may be initiated in which the court
will appoint a guardian to administer the children’s property and
affairs. In some instances, the guardian may fulfill the duties of
making decisions concerning the child’s medical care and personal
concerns as well. A court appointed guardianship can be a
cumbersome and expensive manner of dealing with the property of the
minors, however, and it should be avoided. The guardianship for
financial affairs can be avoided by proper planning for the use of
trusts or custodianships for minors.
If you have planned your estate properly, the guardian
should not experience financial strain in raising your children. We
usually suggest that upon the death of you and your spouse, a trust
be established for your minor children. The trustee should be
encouraged to make generous distributions to assist the guardian,
and the trustee can be authorized to provide funds to pay for any
necessary expansion of the guardian’s home.
7.
What is a Trust?
A trust relationship is created by the transfer of title
to property by the creator of the trust to a trustee to be managed
by the trustee for the benefit of the beneficiaries designated by
the creator. Distributions from a trust are governed by the terms
of the trust instrument. For example, a trust may require that all
income be distributed to a beneficiary or permit distributions only
for a beneficiary’s health, maintenance, support, or education.
A testamentary trust is a trust created under a will
whereby the trustee named in the will holds property in trust for a
specified purpose and on specified terms. The trustee is appointed
under the will but gains authority to administer the trust by the
probate court. The trustee must follow specific probate court
requirements such as filing inventories and accounts which are
available for public inspection.
A revocable trust is a voluntary trust created under a
written agreement made by the creator or donor with another person
known as a trustee. The terms of the agreement may be altered,
amended, or revoked by the creator. It is a private agreement for
the management and disposition of property both during the creator’s
life and after the creator’s death. This trust is a private
arrangement and not governed by the probate court
8.
What is a trustee?
A trustee is one to whom property is transferred for the
benefit of someone else (the beneficiary). It is the duty of the
trustee to carry out the terms of the trust. A trustee may be one
or more individuals and/or institutions, such as a bank or trust
company.
9. What is a Health Care Proxy?
In Massachusetts, a health care proxy or medical durable
power of attorney, executed according to statutory guidelines,
grants authority to a person designated by you to make health care
decisions for you if you become incapacitated. A health care proxy
many be broad but also specific. We recommend including specific
language authorizing access to a patient’s medical records in
compliance with the Health Insurance Portability and Accountability
Act (“HIPAA”).
The health care proxy comes into effect when you require
medical treatment and are unable to communicate your wishes
regarding your treatment. If you regain the ability to communicate
your wishes at any time, your health care proxy’s authority will
terminate.
10. Who should be appointed as my health care
proxy?
Since your health care proxy will have the authority to
make medical decisions on your behalf in the event you are unable to
do so, it should be a family member or friend that you trust to
follow your wishes.
11. Who should have a copy of my health care proxy?
Your agent should have the original document and your
physician should have a copy with your medical records.
12. What are Advanced Directives (Living
Wills)?
In
Massachusetts, the advanced directives, or living will, is a
secondary document which is a statement that conveys your wishes
regarding your medical care in the event you became medically
incapacitated, terminally ill, or in a persistent vegetative state.
The advance directive may be a broad statement or declaration of
what medical care you would or wouldn’t want if there was no
reasonable expectation of recovery, to allow you to die with dignity
and free from pain. It may also be specific concerning your
instructions for the initiation or termination of life sustaining
treatment. While advanced directives are not legally recognized in
Massachusetts, they are, however, helpful to guide your healthcare
proxy concerning your wishes should you become incapacitated,
terminally ill, or in a persistent vegetative state.
13. What is a durable power of attorney?
A durable power of attorney is a written document in which
you, as the principal, designate someone you trust, such as your
spouse, another family member, a friend or a professional, as “your
attorney in fact” or “agent,” to manage your affairs or perform
certain acts on your behalf. Unless it is a “springing” power of
attorney, the powers you give your attorney in fact will be in
effect when the document is signed and remain in effect if you
subsequently become incapacitated. A springing power of attorney
only takes effect when the event described in the document takes
place. You may give as much or as little power to your attorney in
fact as you desire. For instance, you may authorize your attorney
in fact only to have the power to transfer your assets to a trust
set up for your benefit, or the powers could be very broad and
authorize the attorney in fact to do anything with respect to your
assets, including for example, have access to your safe deposit box,
manage your investments, run your closely held business, sell and
transfer your assets.
14. Who should be the attorney in fact?
In view of the significant authority and discretion
conferred by a general durable power of attorney, the attorney in
fact must be someone in whom you have complete trust and
confidence. If the durable power of attorney is a springing durable
power of attorney (that is, one that is effective only when the
principal becomes disabled or incapacitated) the attorney in fact
should not also be the person who determines the incapacity of the
principal.
15. How will my estate be taxed at my death?
Your estate may be subject to at least two taxes: the
federal estate tax and the Massachusetts sponge tax. In addition, if
you own real estate (or tangible personal property) in another
jurisdiction there may be an additional estate tax due in that
jurisdiction.
The federal estate tax is based on the fair market value
of your “gross estate” at the time of your death. At the option of
your executor, an alternate valuation date of six months from the
date of your death can be used. Your gross estate will includes the
value of all the property in which you own an interest at the time
of your death and may include property that you do not own, but over
which you have retained or received certain rights or powers.
If married, the estate tax scheme provides you with a
“marital deduction” for bequests of property to your surviving
spouse. The marital deduction in effect allows interspousal
transfers to pass tax free because they are deducted from the value
of the gross estate. In order to qualify for the unlimited marital
deduction, property must be transferred to the surviving spouse in a
fashion that satisfies the technical requirements of the Internal
Revenue Code, such as an outright transfer or in certain types of
trusts.
The
availability of the unlimited marital deduction will allow many
estates to pass free of estate tax to the decedent’s surviving
spouse. This is, however, just a deferral of tax until the second
spouse dies.
As of 2006, the first $2,000,000 transferred by an
individual either during his lifetime and/or at death is not subject
to a federal transfer tax. This amount will increase in 2009 to
$3,500,000. In 2010, the estate tax and generation-skipping tax are
scheduled to be repealed, only to be reinstated in 2011 at one
million dollars, although Congress may act in the interim to change
this. Under the law, for Estate and Generation Skipping Transfer
(GST) Taxes only and not for Gift Taxes, the amount that an
individual can pass tax‑free at his death will be as follows:
2004 and 2005
C
$1,500,000.00
2006 thru 2008
C
$2,000,000.00
2009
C
$3,500,000.00
Massachusetts has
repealed its estate tax and replaced it with a sponge tax. For
decedents dying in 2007, for Massachusetts estate tax purposes, if
your gross estate is less than $1,000,000, there is no Massachusetts
estate tax due. Even if there is no tax due, if you own an interest
in real estate an estate tax return must be filed with the
Massachusetts Department of Revenue within nine months of the date
of your death to obtain a release of the lien which is automatically
placed on the real estate of a decedent. If your gross estate
exceeds $1,000,000 you are taxed from the first dollar. The
executor will calculate the amount of the federal estate tax which
is due. A certain amount of that tax, known as the state death tax
credit, will be prorated among Massachusetts, as the state in which
you are domiciled and any other state in which you own real estate
or tangible personal property. No additional Massachusetts estate
tax will be due.
CIRCULAR 230 DISCLOSURE
To
ensure compliance with requirements imposed by the IRS, we inform
you that any U.S. Federal Tax Advice contained in this communication
(including any attachments) is not intended or written to be used,
and cannot be used, for the purpose of (i) avoiding penalties under
the Internal Revenue Code or (ii) promoting, marketing or
recommending to another party any transaction or matter addressed
herein.
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