Estate Planning FAQ
DO I NEED A WILL?
A Will is a really good idea if:
- you have particular ideas about whom you would like to get certain assets.
- you have minor children.
- you want to control how your assets are used by your beneficiaries.
- you are in a second marriage with stepchildren.
- you have a disabled child.
- you want to prevent a close relative from inheriting your assets.
WHAT DOES A WILL DO?
A Will is a legal document that allows you to direct how your affairs will be handled after your death. A Will allows you to list to whom you would like to give your assets. A Will allows you to appoint the person (called a Personal Representative) that you want to administer your estate. You can appoint a guardian for your minor children in your Will. Your Will can create a trust to hold your assets and distribute them over time in what ever manner you decide upon. Some Wills include wishes for burial, memorial services, or other matters. Port City Legal prepares simple Wills as well as Wills with multiple trusts and complex provisions. Our Will preparation is based on a flat fee, which includes an initial meeting about estate planning generally, drafting and revising documents, and a final meeting to sign the documents. Having Port City Legal prepare your Will also means that it will be easy to change your Will in the future if your circumstances change. **Please note that Wills only direct the distribution of probate assets. Take a look at "WHAT ARE PROBATE ASSETS AND WHY DOES IT MATTER?" below.
WHAT IS A POWER OF ATTORNEY?
A Power of Attorney is a legal document that gives someone else the legal authority to act for you. This person is known as an agent. Port City Legal usually recommends a Durable Power of Attorney that is effective upon signing and gives your agent broad authority to act on your behalf in regards to your financial affairs. The thinking behind this is that if you become incapacitated, it is helpful to have something in place immediately to take whatever actions are necessary. But a Power of Attorney can limit your named agent to only doing certain tasks, can be limited by time, or can take effective only upon your incapacity. Needless to say, an agent should be someone you trust and who is capable of managing your finances. We also recommend naming an alternate agent.
Please note that once a person passes away, that person’s Power of Attorney is no longer valid. A Personal Representative must be appointed by the probate court in order to have legal authority over a deceased person’s assets.
WHAT IS AN ADVANCE HEALTH CARE DIRECTIVE?
Also known as a Health Care Power of Attorney and Living Will, an Advance Health Care Directive is a legal document that spells out your wishes regarding your health care during any incapacity and at the end of your life. A primary function of an Advance Health Care Directive is to name an agent to make health care decisions for you if you are not able to do so. You can leave all decisions to your agent, or you can include preferences such as whether you want nutrition if you are in a vegetative state or wish to remain at home rather than be hospitalized at the end of your life. Advance Health Care Directives also can include organ donation choices. Port City Legal recommends giving copies of your Advance Health Care Directive to your primary care physician as well as to your named agents so that your preferences are clear and easy to find if needed.
Please note that an Advance Health Care Directive is not a Do Not Resuscitate Order [DNR]. A DNR instructs medical providers not to attempt to revive you (i.e., perform CPR) if your heart stops or you stop breathing.
WHAT IS A LIVING WILL?
A Living Will is another name for an Advance Health Care Directive, which is described above. A Living Will is not a Will. A Living Will is not the same thing as a Living Trust. Trusts are defined below.
WHAT IS A PERSONAL MEMORANDUM?
Maine probate law allows you to make a list, separate from your Will, to provide for whom you would like to give your personal property such as collectibles, jewelry, art, tools, furnishings, etc. Port City Legal Wills include instructions to your Personal Representative to follow any Personal Memorandum that you write. We also have templates for your use, although no certain form required. A Personal Memorandum needs to be in your handwriting or signed by you to be valid.
DO I NEED A TRUST?
Maybe not. Here are some circumstances for which Port City Legal recommend trusts:
I Want Control – If you want to set some limits or terms for the distribution of your assets, a trust allows you to do this.
I Want Privacy – Wills filed with the probate court are public documents. Trusts usually do not have to be filed with the court and so can be kept private.
I Want to Avoid Probate – In some circumstances, it can be less expensive to establish a trust and transfer your assets into the trust than to convey your assets by means of a Will, which requires probate. However – probate in Maine is relatively inexpensive and easy, so probate avoidance is not usually a big motivator here. In other states, where probate is expensive and cumbersome probate, trusts make sense for the purpose of probate avoidance. If you own real estate in another state or are not a Maine resident, it may be worth forming a trust to avoid probate. Another factor to consider when deciding whether to form a trust is that, to avoid probate, the trust must be funded with all of your assets before you pass away. This requires you to transfer all of your assets into the trust, which can be a hassle and expense. Finally, consider that you will be paying for the trust and transferring assets into it now in order to avoid your estate’s having to pay for and undergo probate later. You won’t be around to see the benefit, and probate costs are paid by your estate not you.
I Have Real Estate that I Want to Stay in the Family – A trust can own family property and set forth the terms of its future use and management. At Port City Legal, we often recommend Limited Liability Companies instead of a trust for this purpose. Either way, an entity to hold a family camp, for example, offers you the ability to set guidelines for how the property will be used and shared into the future.
I’m in a Second Marriage and Want to Ensure My Children Get Assets – If you want to provide for your current spouse for their lifetime but thereafter have assets go to your children from a prior relationship, a trust can do this for you. You can set the terms of how and when funds go to your spouse and your kids.
I Have a Special Needs Beneficiary – Special Needs Trusts hold assets for the benefit of a special needs beneficiary while allowing the beneficiary to continue to receive any income or asset based governmental assistance. These trusts are very helpful in providing support to such beneficiaries beyond when you are able to provide help yourself.
I Want to Avoid Taxes – Estate taxes kick in at $5.45 million. If your assets are worth more than this, Port City Legal can help you avoid estate taxes by forming a tax shelter trust for your spouse.
. . . . . If none of the above apply to you, Port City Legal is happy to talk to you about trusts but chances are that you do not need one.
HOW CAN I PREVENT A RELATIVE FROM RECEIVING ANY OF MY ASSETS?
The best way to guarantee that someone will not receive your assets is to state this explicitly in your Will. You do not have to give a reason or leave them some token amount to have this take effective. Your Will can simply state “I intentionally omit my brother, Richard, from my Will.”
CAN IF PREVENT SOMEONE FROM CONTESTING MY WILL?
Not completely. We all have the right to file actions with the court. A No Contest Clause in a Will is helpful, however. A No Contest Clause states that any Will challenge will result in the challenger’s not receiving any inheritance at all, unless their claim is valid and they prevail in court. That last part is required by law and prevents scoundrels from rewriting Wills and then preventing challenges.
WHAT ARE PROBATE ASSETS AND WHY DOES IT MATTER?
Probate assets are controlled by Will or the law of intestacy.This is different for non-probate assets, which go automatically to the surviving joint owner(s) or named beneficiary/beneficiaries.
Probate Assets: assets owned solely by you. Some examples are:
- Land in your name alone, or owned as a “tenant in common”.
- Accounts in your name only.
- Life insurance policies or retirement funds that name your estate as the beneficiary.
Nonprobate Assets: assets owned jointly with others or that have beneficiary designations. Some examples are:
- Land owned with one or more people as “joint tenants”.
- Joint accounts.
- Accounts with pay-on-death designations.
- Life insurance policies that names anyone other than your estate as a beneficiary.
- Retirement fund with named beneficiaries.
- Assets owned by a trust.
WHO SHOULD I NAME AS BENEFICIARY FOR MY RETIREMENT FUND?
It is easier to tell you who not to name: we generally recommend that you do not name your estate or a trust, unless the trust was specifically written for this purpose. People generally receive more tax benefits when they are named as retirement beneficiaries than entities, such as estates or trusts. A surviving spouse is the most common beneficiary. Children are a good choice because they are younger and so can stretch out the tax benefits for a longer time. Charities also a good choice – payouts to charities from IRAs are not subject to tax. Port City Legal recommends naming contingent (alternate) beneficiaries as well, and reminds recently divorced clients to change their beneficiary designation from their former spouse unless they would like their ex to receive their retirement funds.
WHO SHOULD I NAME AS BENEFICIARY FOR MY LIFE INSURANCE POLICY?
Unless you are required to name a former spouse due to a divorce order, this question is wide open. Naming your estate is fine, in which case your Will would determine who receives these funds ultimately. The exception to this rule is if you have lots of debt, in which case you would not want this money going into your estate where creditors might have priority over your beneficiaries.
Port City Legal recommends naming alternate beneficiaries as well, and reminds those people who have divorced to change their beneficiary designation from their former spouse unless they would like their ex to receive their policy payout.
SHOULD I GIFT ASSETS TO MY CHILDREN WHILE I’LL STILL LIVING TO AVOID THE STATE GETTING THEM?
This is a tough question, and one we hear often. There a lot of consequences to giving assets away, especially real estate. One of the biggest ones is loss of control. Once you are no longer the owner of your property, you have no ability to stop the sale of the property, its mortgage, its transfer to another person, its mismanagement, even its destruction. You also do no longer have the ability to sell or mortgage the property yourself, even if you find yourself in need of cash in the future. If you transfer the asset to your child and that child is sued, has creditors or gets divorced, he or she could lose the property. There also is the psychological impact of no longer owning your property to consider, especially if it is your home.
Gifting also has consequences if you foresee applying for MaineCare nursing home benefits. Upon application, MaineCare will look back five years to see if you transferred any assets. If you did, you will be ineligible for that value of benefits. If you contemplate needing MaineCare, we suggest meeting with Port City Legal before making gifts.
Gift tax avoidance is not a reason to refrain from giving gifts in most instances. If the gift is worth more than $14,000, you will need to file a gift tax return although no tax will be due, as explained below.
Tax-wise, gifts are not taxed but the recipients do not receive the step-up in tax basis that heirs receive. To explain further, if you give someone property as a gift, the recipient’s tax basis in the property is the same as yours – the price you paid for it plus any capital investments. If you leave property to someone in your Will, the recipient’s tax basis is “stepped up” to the fair market value of the property at your date of death. This step-up in basis can result in significant capital tax gain savings when the property is sold.
WHAT IS THE DEAL WITH GIFT TAX?
Gift tax is a federal tax imposed upon the givers of gifts. Recipients do not pay gift tax. Moreover, gift tax only kicks in when a person has given more than $5.45 million in gifts during their lifetime. Gift tax is not an issue for most people.
Certain gifts must be reported to the IRS. The reporting allows the IRS to monitor gifts so that, if you’re lucky enough to give away $5.45 million, the IRS can start taxing you. If you give any one person more than $14,000 a year, whether in cash, real estate, stocks, etc., you need to file a gift return with the IRS. You won’t pay any tax, but you have to report the gift. If you’re given real estate or personal property, you will need to include an appraisal of its value. If you’re giving gifts as a couple, you can give $28,000 ($14,000 per person) to each recipient without needing to file a gift tax return. Port City Legal is happy to discuss the benefits of gifting various assets and to file gift tax returns on your behalf.