Frequently Asked Questions

Estate Planning

Q: What is estate planning?

 

Estate planning is the process of arranging for the management and distribution of a person's assets during their lifetime and after death. It involves creating legal documents such as Wills, Trusts, Powers of Attorney, and Advanced Medical Directives, to ensure that an individual's wishes regarding their property, finances, and personal care are carried out according to their desires.  A proper estate plan will involve strategies to minimize potential estate taxes and probate costs, as well as ensure your estate passes with maximum privacy and minimum risk of litigation. 

 

Q: Why do I need an estate plan?

 

Without an estate plan in place your assets will be distributed by the State according to what are called “intestacy laws.”  State laws require that an estate be admitted to probate court, which requires that the estate assets be publicized in court and ultimately distributed according to state law in a public proceeding in court.  Many people mistakenly believe that their assets will be automatically shared among their children upon their passing, however, this is not necessarily true.  If you don’t have a proper estate plan in place your assets will not be passed in accordance with your wishes, instead they will be distributed according to State law.  This often results in the wrong people getting your assets as well as more of your estate being lost to higher estate taxes.

 

If you pass away without establishing an estate plan, your estate will undergo probate, a public, court-supervised proceeding. Probate can be expensive and tie up the assets of the deceased for a prolonged period before beneficiaries can receive them. Even worse, your failure to outline your intentions through proper estate planning can result in inter-family disputes and expensive litigation. This can be true even if you do not have vast wealth to be passed on. It is not uncommon for bitter family feuds to be fought over small inexpensive family heirlooms. 

 

Q: What does my estate include?

 

Your estate is simply everything that you own, anywhere in the world, including:

• Your home or any other real estate that you own 

• Any property owned by you, such as your car, watches, and jewelry

• Your business or shares of a business

• Your brokerage accounts, checking, savings, and your share of any joint accounts 

• The full value of your retirement accounts 

• Any other accounts you own or jointly own such as savings or checking accounts

• Any life insurance policies that you own 

 

Q: Who should I name as a guardian for my children?

 

If you have children under the age of eighteen, you should designate a person or persons to be appointed guardian(s) over their person and property. You need to have an appointed guardian not only in the event of your passing, but also if you are incapacitated.  In the event you are incapacitated you will want to make sure you have appointed a guardian for your children.  You should name a guardian and a back-up guardian in the event your primary guardian is not able to act as guardian.  

 

Additionally, you should not name couples as joint guardians.  At least not without accounting for what should happen if the couple is no longer together or if one dies or is incapacitated.  For example, you may want your sister and brother-in-law to act as guardian; however, if the couple breaks up or happens to die, would you still want your brother-in-law to act as guardian? 

 

Q: Do my college-age and adult children need a guardian named?

 

Yes, this is especially true for your college aged children. Once your children turn 18, they are legally considered an adult and you are no longer entitled to their medical information, to discuss their medical situation with their doctors, nor to make medical decisions on their behalf unless they have appointed you as their guardian in a Power of Healthcare Attorney document. Additionally, you may also want to consider discussing whether your children want to appoint you as their Financial Power of Attorney. This will entitle you to act on their behalf to manage their finances in the event they are incapacitated, to include accessing their bank accounts to pay their bills.  

 

Of course, if a surviving parent lives with the minor children (and has custody over them) he or she automatically continues to remain their sole guardian. This is true despite the fact that others may be named as the guardian in your estate planning documents. You should name at least one alternate guardian in case the primary guardian cannot serve or is not appointed by the court. 

 

Q: What estate planning documents should I have?

 

A comprehensive estate plan should include the following documents at a minimum: a Will, guardianship documentation, a living will, and durable powers of attorney for healthcare and finances. These documents should be created for you by an attorney after a discussion about your specific family situation and personal desires.
 

Guardianship Documents.  For those with minor children, the nomination of a guardian must be set forth in a Will. The other major function of a pour-over-will is that it allows the executor to transfer any assets owned by the decedent into the decedent's trust so that they are distributed according to its terms.

A will, also referred to as a last will and testament, is primarily designed to transfer your assets according to your wishes. A will also typically names someone to be your executor, who is the person you designate to carry out your instructions. If you have minor children, you should also name a guardian as well as alternate guardians in case your first choice is unable or unwilling to serve. A will only becomes effective upon your death, and after it is admitted by a probate court.

A durable power of attorney for financial decisions is a document in which you appoint a person you trust to make financial decisions on your behalf, for your benefits. They will be empowered to manage your affairs, pay your rent, pay your bills, manage investments in the event that something happens to you. It does not mean they can take your money or otherwise access your accounts if you are not incapacitated.  

 

A durable healthcare power of attorney is the document where you are appointing someone to make medical decisions for you and have access to your medical information, and have discussions with your doctor in the event you are unable to make these decisions for yourself.  In this document you are also making your wishes known as to how you want to be treated in the event you are unable to make decisions for yourself, such as if you are in a persistent vegetative state, to include whether or when you want life sustaining treatment withdrawn. You can allow your health care agent to decide about all health care or only about certain treatments. You may also give your agent instructions that he or she has to follow. Your agent can then ensure that health care professionals follow your wishes. Hospitals, doctors and other health care providers must follow your agent's decisions as if they were your own.

Without a durable power of attorney, it may be necessary to apply to a court to have a guardian or conservator appointed to make decisions for you during a period of incapacitation. This guardianship process is time-consuming, expensive, emotionally draining and often costs thousands of dollars.
 

A living will document is a document which states a patient’s preferences for different types of treatment in differing circumstances, typically addressing end-of-life type circumstances in situations in which you are permanently unconscious, terminally ill, or otherwise unable to communicate.  

A revocable trust or “living trust” is a trust that you can change or terminate at any point in your lifetime.  It can be used to ensure your assets are distributed immediately to your loved ones without requiring a public court-supervised hearing and avoiding any potential probate litigation.  Another benefit of avoiding probate court is that you can avoid probate court fees which in some cases can exceed $10,000.  You (and your spouse) are the trustee(s) and beneficiaries of your trust during your lifetime. You also designate successor trustees to carry out your instructions in case of death or incapacity. One of the great benefits of a properly funded living trust is the fact that it will avoid or minimize the expense, delays and publicity associated with probate. 

If you have a revocable living trust, you may also need a pour-over-will. A pour over will is designed to catch any property that was not originally transferred to your revocable living trust before you passed. Think of it as a safety net that ensures all your assets are transferred to those you intended in the way you intended.

 

Q: Who can establish a power of attorney?

 

Generally, any individual over the age of majority and who is legally competent can establish a power of attorney.
 

Q: Who may act as an agent under a power of attorney?

 

In general, an agent, or attorney-in-fact, may be anyone who is legally competent and over the age of majority.  Most individuals select a close family member such as a spouse, sibling or adult child, but any person such as a friend or a professional with an outstanding reputation for honesty would be ideal.  You may appoint multiple agents to serve either simultaneously or separately.  Appointing more than one agent to serve simultaneously can be problematic because if any one of the agents is unavailable to sign, action may be delayed.  Confusion and disagreement between simultaneous agents can also lead to inaction.  Therefore, it is usually more prudent to appoint one individual as the primary agent and nominate additional individuals to serve as alternate agents if your first choice is unwilling or unable to serve. 

 

Living Trusts

 

Q: Why do I need a Trust?

 

The proper estate plan is unique to everyone’s situation and personal preferences. So, you may not need a trust. Typically, people chose to set up a trust for three main reasons; 1) to ensure privacy in keeping a list of their assets out of a public court hearing, 2) to avoid probate court and the costs of probate courts, and 3) when holding real property in multiple states.  If these considerations do not apply to you a simple Will, Guardianship, and Powers of Attorney documents may be sufficient. However, if in discussions with your estate planning attorney you find these situations may apply to you then setting up a trust or trusts may be appropriate for your estate plan.   

 

When a loved one passes away, his or her estate often goes through a court-managed process called probate or estate administration where the assets of the deceased are managed and distributed. If your loved one owned his or her assets through a properly drafted and funded living trust, it is likely that no court-managed administration is necessary, though the successor trustee needs to administer the distribution of the deceased. The length of time needed to complete probate of an estate depends on the size and complexity of the estate as well as the rules and schedule of the local probate court. 

Every probate estate is unique, but most involve the following steps:

• Filing of a petition with the proper probate court 

• Notice to heirs under the will or to statutory heirs (if no will exist) 

• Petition to appoint executor (in the case of a will) or administrator for the estate 

• Inventory and appraisal of estate assets by executor/administrator 

• Payment of estate debt to rightful creditors 

• Sale of estate assets 

• Payment of estate taxes, if applicable 

• Final distribution of assets to heirs 

 

Q: What is a revocable living trust?

 

A properly drafted revocable living trust (RLT) is a powerful estate planning tool that allows you to remain in control of your assets during your lifetime, have them managed during incapacity, and efficiently and privately transfer them to your loved ones at death according to your wishes.

Sometimes referred to simply as a living trust, an RLT holds legal title to your assets and provides a mechanism to manage them. You would serve as the trustee and beneficiary of your trust during your lifetime. You also designate successor trustee(s) to carry out your instructions for how you want your assets managed and distributed in case of death or incapacity. 

In order for the living trust to function properly, you need to transfer many of your assets to your living trust during your lifetime. The fact that it is "revocable" means that you can make changes to it or even terminate it at any time.

 

Q: What are the advantages of having a living trust?

 

Like a will, a living trust is a legal document that provides for the management and distribution of your assets after you pass away. However, a living trust has certain advantages when compared to a will. A living trust allows for the immediate transfer of assets after death without court interference.  It also allows for the management of your affairs in case of incapacity, without the need for a guardianship or conservatorship process. With a properly funded living trust, there is no need to undergo a potentially expensive and time-consuming public probate process.  In short, a well thought out estate plan using a living trust can provide your loved ones with the ability to administer your estate privately, with more flexibility and in an efficient and low-cost manner.

 

Q: Will I lose any control over my property if I create a revocable living trust?

 

Creating a revocable living trust and transferring your assets to the name of that trust will generally not affect your ability to control such assets. During your lifetime when you are mentally competent, you have complete control over all of your assets.  As the trustee of your trust, you may engage in any transaction that you could before you had a living trust. There are no changes in your income taxes. If you filed a 1040 before you had a trust, you can continue to file a 1040 when you have a living trust. There are no new Tax Identification Numbers to obtain. Because a living trust is revocable, it can be modified at any time or it can be completely revoked if you so desire. Upon your incapacity, the individuals you designate will be able to transact on your behalf according to the instructions you have laid out in the living trust. Upon your passing, the living trust can no longer be modified and the successor trustee(s) you have designated will then proceed to implement your wishes as directed.

 

Q: Do I have to transfer all my assets to my living trust?

 

Assets with beneficiary designations such as a life insurance policy or annuity payable directly to a named beneficiary need not be transferred to your living trust.  Furthermore, money from IRAs, 401(k) accounts and most other retirement accounts transfer automatically, outside probate, to the persons named as beneficiaries. Bank accounts that are set up as payable-on-death account (POD for short) or an "in trust for" account (a "Totten Trust") with a named beneficiary also pass to that beneficiary without having to be titled into your trust. It is important, however, to seek the counsel of an experienced estate planning attorney who can advise on and assist with transferring necessary assets to your trust.

Q: If I transfer title to real property to my living trust can the bank accelerate my mortgage?

Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your living trust as long as you continue to live in that home. 

 

Estate Taxes

Q: Will my estate be subject to death taxes?

 

There are two types of death taxes that you should be concerned about:  the federal estate tax and state estate tax. As of 2023, the Federal government taxes 40% of amounts over $12,920,000 of an estate. Transfers during life or at death receive a stepped-up basis. A stepped-up basis means that a transferred asset will be valued at its current value at the time of the decedent’s death for tax purposes.  In addition, spouses may utilize portability between spouses. Meaning a surviving spouse is able to receive any unused amounts of the $12,920,000 excluded from federal taxes of the deceased spouse’s estate.

 

DC Estate Tax.  In D.C. the amount excluded from estate tax is $4,528,800.  DC does not have portability available for spouses or a qualified termination interest property (QTIP) election, which would allow for a spouse to transfer an asset to the surviving spouse for their lifetime without incurring estate tax on the deceased spouse’s estate. For 2023, estate tax is required to be filed with D.C. for estates valued at over $4,528,800. 

 

MD Estate and Inheritance Taxes.  For decedents dying on or after January 1, 2019, the Maryland estate tax threshold is $5,000,000, and will not be indexed for inflation, but includes portability.  In Maryland, A return is required for every estate whose federal gross estate, plus adjusted taxable gifts, plus property for which a Maryland QTIP (Qualified Terminal Interest Property) election was previously made on a Maryland estate tax return filed for the estate of the decedent's predeceased spouse, equals or exceeds $5,000,000 and the decedent at the date of death was a Maryland resident or a nonresident who owned real or tangible personal property having a taxable situs in Maryland. The top estate tax bracket is 16% of the amount that the estate value exceeds $5,000,000.

 

Maryland is the only state that imposes an inheritance tax on property that passes under a Will, intestate laws, under a trust, deed, joint ownership, retirement accounts or otherwise.  Life insurance proceeds are exempt from inheritance tax unless payable to the estate. 
 

Q: What is my taxable estate?

 

Your taxable estate comprises of the total value of your assets including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies minus liabilities and deductions such as funeral expenses paid out of the estate, debts owed by you at the time of death, bequests to charities and value of the assets passed on to your U.S. citizen spouse. The taxes imposed on the taxable portion of the estate are then paid out of the estate itself before distribution to your beneficiaries.

 

Q: Who pays taxes on gifts? Do my children have to pay taxes on gifts I give them?

 

Under Federal gift tax law, there is an annual exclusion amount per spouse of $17,000.  By utilizing gift-splitting, a married couple is allowed to double the amount they can give to third parties without incurring gift tax liability. So, for example, if Father makes a lump sum $32,000 gift to Son, the couple can elect to split the gift, and the entire gift will be free of gift tax due to the $16,000 annual exclusion which is doubled to $32,000 for the couple.

 

Q: How can I minimize estate taxes?

 

Strategies to minimize estate taxes include gifting assets during your lifetime, setting up trusts, taking advantage of marital deductions, and charitable donations. Consulting with an estate planning attorney or financial advisor is crucial.