QUESTIONS FREQUENTLY ASKED ABOUT 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.

Question:  What happens if I die without a will?

Answer:  If you fail to plan your estate and die without a will, the law will create an estate plan for you. The entire system of "intestate" succession or "descent and distribution" is set forth by statute and is too complex for a detailed discussion here.

Briefly stated, however, adverse results can occur if you die without a will. 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. Under Massachusetts law, if you die without a will and leave a spouse and kindred but no children, your spouse will receive your entire estate if its value is less than $50,000. If the value of your estate is greater than $50,000, your spouse will receive $50,000 and half of the remaining Real and Personal Property; if you die leaving children, your spouse will take half of your Real and Personal Property; The residue will then be divided equally between your children; If you die without leaving children or kindred, your spouse takes the whole of your estate; If you die without a spouse, children, or kindred, your entire estate passes to the commonwealth.

Question:  What is a personal representative?

Answer:  Your personal representative is the person who will serve as the primary representative of your estate. You may be more familiar with the terms "executor" or "administrator" for such an individual.

Question:  What is "administration" of my estate?

Answer:  Administration of an estate involves the collection of assets, payment of liabilities, and distribution of properties to the beneficiaries or heirs. Administration of an estate is conducted under some degree of court authority and supervision, but different procedures are available. The three basic types of procedures available are called "informal," "formal," and "supervised." Generally, the "informal" proceedings for the probate of a will are administrative (rather than judicial) in nature. An informal proceeding may administer the estate without continual court involvement and will mature into a final settlement of the estate after the passage of a specific length of time. "Formal" proceedings are initiated by a petition to a court, and a formal proceeding becomes effective only after notice to interested persons, a hearing, and an order of court. "Supervised" administration is a single continuous proceeding requiring formal procedures and frequent court involvement.

Some of the factors that we will consider in determining which procedures or devices to use are: (1) the value of your estate subject to administration; (2) the applicable statute of limitations; (3) the degree of trust, co-operation, and agreement among the beneficiaries and creditors of your estate; (4) your express wishes regarding administration, as stated in your will; (5) the complexities of the administration; (6) the degree of protection from liability needed by the successors or by the personal representative or both; and (7) proof of title to property requirements.

Wherever possible and appropriate, we try to use informal administration that to a large extent operates independently of court supervision. Informal administration is less cumbersome and time consuming, and therefore is less expensive.

Question:  What is a trustee?

Answer:  A trustee is one to whom property is transferred for the benefit of someone else (the beneficiary).

We find that our new estate planning clients frequently misunderstand trusts. Many of our clients have heard a horror story about a trust, and the story often involves an impoverished widow-beneficiary who cannot extract enough money from the well-funded trust to maintain herself.

Under present law, a trust that contains well-drafted trustee powers and which uses a professional trustee can solve most problems, and it can assist in creating a suitable estate plan. A trust can be designed to produce almost any result desired by the client if the client gives the trustee sufficient funds with which to work. We usually recommend that trustees be given very broad and adaptable powers to provide flexibility for future events. The trustee should be empowered to do what is best for the beneficiary, without being curbed by inappropriate restrictions.

If a trust appears suitable for your estate plan, you will need to exercise care in the selection of a trustee. The family member who comes to mind as a logical first choice may prefer not to deal with the management of your properties. If a corporate trustee appears appropriate, we will suggest that you have a conference with the representative of your bank's trust department. Further, you should consider giving someone, such as your spouse or your professional advisors, the power to change trustees.

Question:  Is a handwritten will legally effective?

Answer:  A handwritten will may be a valid holographic will if the signature and material provisions are in the handwriting of the testator, and it is witnesses by at least two disinterested individuals. The holographic will may be adequate, but such wills are a fruitful source of litigation, often because they have been composed by someone with no legal training.

Question:  Why should my will be more than one page long?

Answer:  Your will could be drafted to be no longer than one page. Indeed, any lawyer could produce an abbreviated will for a relatively small fee. The problem, however, is that such a will may not accomplish your objectives for your beneficiaries. We prefer to draft wills to cover all the various factual and legal situations that reasonably may be expected to arise.

Accordingly, the will that we draft for you may be a lengthy document. The burden to you of reviewing and approving a long will may be a blessing to your family when they later find that you have anticipated and resolved what might have been cumbersome problems.

Question:  How will my estate be taxed at my death?

Answer:  Your estate may be subject to at least two taxes: the federal estate tax and (in almost all states) a state death tax.

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 include the value of all the property in which you own an interest at the time of your death. Additionally, your gross estate may include property that you do not own, but over which you have retained or received certain rights or powers.

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 statute.

The federal estate tax and the federal gift tax are combined ("unified") and one progressive set of rates applies. The rates increase as the cumulative total of taxable transfers increases. A unified credit or "applicable credit amount" against the gift or estate tax permits the tax-free transfer of a prescribed amount of property known as the "applicable exclusion amount." The credit and exclusion amounts increase over time as illustrated below.

Prior to January 1, 2003, exemptions from Federal and Massachusetts estate taxes were the same ($1 Million in 2002), and Massachusetts only received a portion of the Federal estate tax, the so-called “sponge tax.” Under the new Massachusetts legislation, effective January 1, 2003, Massachusetts has decoupled the Massachusetts estate tax from the Federal estate tax and will no longer track the Federal estate tax exemption. Instead, the Massachusetts exemption will be based on Federal law as it was in effect on December 31, 2000. The table below illustrates the differences between the Federal estate tax exemption and the Massachusetts estate tax exemption.

    Year        Federal Applicable Exclusion      MA Applicable Exclusion 
   
   2002               $1,000,000                                     $1,000,000
   2003               $1,000,000                                     $700,000    
   2004               $1,500,000                                     $850,000          
   2005               $1,500,000                                     $950,000            
   2006 - 2008     $2,000,000                                     $1,000,000           
   2009               $3,500,000                                     $1,000,000
   2010               REPEALED                                      $1,000,000    
   2011               $1,000,000                                     $1,000,000          
 

The result of this change in Massachusetts law is that many residents may have to pay Massachusetts estate tax even though they may pay no Federal estate tax because of the larger Federal estate tax exemption.

Before these recent Massachusetts estate tax changes, the Massachusetts estate tax tracked the Federal estate tax rules; therefore, a typical estate plan for a married couple prepared before January 1, 2003 would defer all estate taxes until the death of the second spouse, and it would maximize the use of both spouses’ Federal estate tax exemption. Because of the changes in Massachusetts law, this typical plan may result in Massachusetts estate tax being due upon the death of the first spouse to die. The new Massachusetts estate tax rates range up to 16% depending on the size of the estate.

The availability of the unlimited marital deduction will allow many estates to pass tax-free to the decedent's surviving spouse. While this result seems desirable initially, in some instances there may be tax savings from incurring some tax on the death of the first spouse. At our office conference, we will review in detail with you this issue.

Question:  Who will raise my minor children after my death?

Answer:  If you die leaving unmarried minor children, the other parent ordinarily will raise and support them. If the other parent is not living, however, your minor children will require a "guardian." A guardian is an individual who is appointed primarily to care for the person of a minor; the guardian's power over the minor's property is very restricted. You may appoint a guardian for your children in your will. 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.

Clients frequently tell us that they have chosen one of their parents as the guardian in the event of both clients' deaths, but in many situations we believe that such a selection is unwise. For example, assume that the youngest child of the client is three years old and the client's parent is fifty-eight. When that child is fifteen (a time when child-adult communication can be difficult under the best of conditions), the grandparent will be seventy. Under these circumstances, another choice may be better for your child. You should look first to your contemporaries in your families (such as brothers, sisters, or cousins). If such family contemporaries are not appropriate, then consider friends with children in the same age range as yours.

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 conservator to administer the children's property and affairs. In some instances, the conservator may fulfill the duties of the guardian as well. A court appointed conservatorship can be a cumbersome and expensive manner of dealing with the property of the minors, however, and it should be avoided. Proper planning for the use of trusts or custodianships for minors can avoid the conservatorship.

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.

Question:  How frequently should I review my estate plan?

Answer:  As a general rule, we suggest that you contact us every four or five years for a conference to review your estate plan and to update the information in your permanent file. We also recommend that you contact us in the event of a dramatic change in your finances or in your family situation. For example, a substantial increase in your estate (through increased life insurance, inheritance, gifts, or successful investments) may create opportunities for tax savings, as well as necessitate further family financial planning. A divorce, of course, will re-open completely the matter of planning your estate. Likewise, do not hesitate to contact us any time you have a question as to whether or not changes in tax or other substantive laws may affect your estate plan.