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Why You Need An Estate Plan

Why you need an estate plan. The objectives of estate planning are threefold:

• First, to assure that assets you own are transferred at your death in accordance with your wishes. This often involves several considerations: support for a surviving spouse; providing for minors; assuring that responsible persons are in charge of your estate to carry out your wishes.

• Second, to minimize or eliminate any federal or state taxes which may be imposed on your estate or your heirs.

• Third, to provide for protection of your assets and assure medical treatment in accordance with your wishes in the event that you are incapacitated or subject to long-term institutional care. If you have minor children, the appointment of a guardian in the event of your death can also be accommodated.

Components of an Estate Plan

An estate plan is composed of various documents. Documents which every adult should have are: a will; a medical directive (also called a "living will"); a medical power of attorney and a durable general power of attorney. Documents which may or may not be suitable for you are revocable and irrevocable trusts. In addition, how you hold title to assets - including brokerage and bank accounts, real estate and retirement or pension plans - is very important and can affect your estate plan. These terms are explained further below.

Frequently Asked Questions

One way of introducing estate planning is to answer some questions clients frequently ask. Please keep in mind that the answers can change from state to state and are subject to change as the law evolves. These answers assume that Arizona law applies.

Q. What is community property?

A. Community property is the law in Arizona and seven other states. The concept of community property differs markedly from the law in the other states, which is derived from English common law. In general, community property is property acquired and accumulated during a marriage. Each spouse is considered to own one-half of the community property. Therefore, the estate of each spouse consists of that spouse’s one-half of community property plus that spouse’s separate property. Separate property is property acquired before a marriage and during a marriage outside of the community, for example, by gift or inheritance. A spouse’s community property interest does not automatically pass to the other spouse upon death. Instead, the community property interest of each spouse has to be dealt with by will. A married person can leave his or her community property interests to whomever he or she chooses. For example, if both spouses have children from a former marriage, they may want to leave some or all of their community property to the children rather than the surviving spouse. In addition to traditional community property, Arizona recognizes another type of community property which is community property with right of survivorship. Unlike other community property, community property with right of survivorship passes automatically to the surviving spouse at the death of the other.

Q. Can community property be changed to separate property or vice-versa?

A. Yes, by written agreement signed by both parties. If the agreement is reached before marriage it is called a pre-nuptial agreement. If it is reached during marriage, it is a post-nuptial agreement.

Q. What happens if I die without a will?

A. This is called intestacy and in such cases the law will form an estate plan for you. The rules of intestate distribution are too complex to describe here but they are inflexible and may not distribute your property according to your wishes. To give one example, if you die with your spouse and one or more children surviving, the surviving spouse receives everything and the children nothing if the children are issue of both you and your spouse. However, if there are one or more children of yours who are not issue of your spouse, then the surviving spouse receives only one-half of your separate property and none of your community property interest. The children receive the rest.

Q. What is probate?

A. Probate is the manner of administering a decedent’s estate and passing title of property to the proper recipients. The decedent’s wishes in this matter are generally respected if they are set forth in a proper will. Contrary to popular belief, probate procedures in Arizona are not necessarily complicated, lengthy or costly. It all depends on the size of the estate and provisions of the will and whether the will is contested. Because probate deals with property passing under a will, it does not deal with property passing by right of survivorship, property (like IRA accounts) which names a beneficiary other than the estate of the deceased, or property passing under the terms of a trust.

Q. What is a personal representative?

A. 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.

Q. What is "administration" of my estate?

A. Administration of an estate involves the collection of assets, payment of liabilities, and distribution of properties to the beneficiaries or heirs. If the estate is very small, containing less than $ 30,000 worth of personal property and $ 50,000 worth of real property, a simplified transfer of assets by affidavit may be available. Otherwise, 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." Informal proceedings are by far the most common. Generally, they are administrative (rather than judicial) in nature. Informal administration is less cumbersome and time consuming, and therefore is less expensive. An informal proceeding allows administration of 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 the court. "Supervised" administration is a single continuous proceeding requiring formal procedures and frequent court involvement. Some of the factors to consider in determining which procedures or devices to use are: (1) the value of the estate subject to administration; (2) the degree of trust, co-operation, and agreement among the beneficiaries and creditors of the estate; (3) the express wishes of the decedent regarding administration, as stated in his or her will; (4) the complexities of the administration; and (5) the degree of protection from liability needed by the successors or by the personal representative or both.

Q. What property passes outside of a will?

A. Certain property passes to designated survivors without regard to provisions of a will. This property includes insurance policies, retirement plans, property held as joint tenants with survivorship, and property held in trusts or given as gifts during the decedent’s lifetime.

Q. What are the requirements for a valid will?

A. The will must be in writing, signed by the maker of the will (called the testator) and witnessed by two adults. The will is self-proving if it is notarized, meaning that no further evidence of its authenticity need be shown in probate court. There are certain exceptions to these requirements. For example, a holographic will, one in the testator’s own handwriting and signed by him or her, is valid in Arizona. Certain provisions of a will may not be enforced if they are contrary to public policy or illegal.

Q. Who becomes the guardian of minor children when a parent dies?

A. The surviving spouse, if there is one. If not, a guardian who is appointed by your will. If you have no will, or you do not designate a guardian, a court proceeding will be necessary to appoint one. You should give careful consideration to the person you name as guardian of your minor children and you should talk to that person to assure he or she is agreeable to assuming this 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 conservator (which may be the guardian) to administer the children's property and affairs. A court appointed conservatorship can be a cumbersome and expensive manner of dealing with the property of the minors. The conservatorship can be avoided by proper planning for the use of trusts for minors.

Q. What is the estate tax?

A. It is a tax on the value of estates at death and gifts made during a lifetime. There is a federal estate tax as well as a tax in most states. Generally, small estates are not subject to the federal tax owing to an exemption currently at $675,000 (during 2000 and 2001) and scheduled to rise to $1,000,000 by 2006. In addition, transfers to a surviving spouse and charities are generally not taxed.

Q. What is a Durable Power of Attorney?

A. It is an instrument by which you give someone the power to make medical, financial or other decisions on your behalf if you are incapacitated. It is called durable because it is designed to be effective in the event of your incapacity. The general rule is that a power of attorney becomes invalid if the principal is incapacitated.

Q. What is a living will?

A. It is a directive in which you instruct doctors and caregivers as to the amount of care you want (for example, in what circumstances should extraordinary life support systems be used?). It is usually coordinated with a medical power of attorney.

Q. What are some of the uses of trusts?

A. There are many different types of trusts used for many purposes. You might consider a trust to, for example, provide for the care, education and support of a minor; to provide income support for a spouse while passing principal on to the next generation; to keep principal away from a beneficiary who cannot be trusted to use it wisely; for protection against creditors; and for many other purposes. Trusts can be established as part of an estate plan to take effect upon death (a testamentary trust), or during your life (an inter-vivos trust). They can be revocable (subject to change by you at anytime) or irrevocable (cannot be changed without the consent of beneficiaries).

Q. Should I have a living trust?

A. Clients frequently have heard from friends or acquaintances, or in "seminars that are sponsored by people who prepare such documents, that everyone needs a living trust. In truth, such a trust can be a very useful tool if there is a need to avoid probate, provide for possible incapacity or maintain confidentiality of dispositions of your property upon your death. But trusts also require a certain degree of complexity which some people would prefer to avoid. As stated above, probate can often be done in an informal proceeding for a relatively modest cost. Living trusts are useful tools for some but are not needed by everyone. It all depends on the individual circumstances of the client.

Q. What are some of the factors which I need to consider in an estate plan?

A. Many special circumstances need to be considered. For example:

• Are there minor children?

• Are there children, elderly parents or others with special needs which must be met?

• Are there prior marriages and/or children by prior marriages?

• Is there a significant amount of separate property?

• Is any property located in a foreign country or are any beneficiaries not U.S. citizens?

• Is there a closely held business or farm encompassing a large part of the estate value?

• Is the value of the estate, considering both husband and wife, likely to exceed $ 1 million?

• Should you provide for incapacity, common catastrophe, medical instruction?

Q. How frequently should I review my estate plan?

A. As a general rule, every four or five years. This does not necessarily mean a large legal bill, because if no changes are required a review can be obtained for a modest cost. A review will also be called for if you move to another state, because that state’s laws may differ significantly from those of the state in which you were domiciled when your plan was devised. In addition, a review is advisable 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 call for further family financial planning. Finally, a divorce will completely reopen the matter of planning your estate.

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