From the Estate Planning, Probate & Trusts Practice.
What is an estate plan?
An estate plan is a comprehensive strategy for ensuring that you and the people you care about most are provided for in the event of your incapacity or death. At a minimum, a well-crafted plan should include three essential documents—your Will, financial Power of Attorney, and Advance Medical Directive (“living will”). Many plans also include one or more trusts. With the help of your attorney, these documents are prepared with your specific planning goals in mind. Every aspect of your finances is also taken into account, including the extent and nature of your assets, how property is titled, transfer-on-death provisions, beneficiary designations, and likely tax consequences. The completed plan will be tailored to your individual circumstances and leave you prepared for whatever lies ahead.
What exactly is a trust and why might I need one?
A trust is a legal arrangement that makes it possible for one person to manage assets on behalf of another. The manager, or trustee, can buy, sell, and invest the assets and make disbursements to the beneficiaries according to the terms of the trust document. The trustee holds the legal title to the trust property, which can include cash, securities, real estate, personal property, or life insurance. Trusts are extremely useful for estate planning. For example, a trust created during your lifetime, called an inter vivos trust, can simplify the probate process or help you set aside assets for your children. A trust created through your Will, called a testamentary trust, can help you minimize estate taxes or provide for minor children or a relative with special needs. Your attorney will be glad to advise you on whether a trust should be part of your estate plan.
Can an estate plan help reduce taxes?
Yes, in certain circumstances. Married couples enjoy the benefit of being able to pass an unlimited amount of wealth between themselves tax-free. Leaving assets to anyone other than a spouse, however, can lead to a substantial tax liability if the value of the estate exceeds a certain exclusion amount. At the federal level, this amount is $5.34 million in 2014 and increases annually with inflation. The Maryland estate tax exclusion amount is fixed at $1 million. In other words, if a couple’s combined assets, including life insurance payouts, are worth more than $1 million, estate taxes could be due on the amount that exceeds $1 million. With proper planning, the spouse who dies first can direct a portion of his or her assets equal to the state or federal exclusion amount, as appropriate, into a “bypass” trust. This trust typically benefits the surviving spouse by paying amounts of principal and interest for life. When the second spouse dies, the remaining trust principal is excluded from his or her estate, resulting in a tax savings. The trust principal may then go to the couple’s children or perhaps a charity, according to the terms of the trust.
I am in a same-sex relationship. How can we protect ourselves beyond a basic estate plan?
Under the Civil Marriage Protection Act, which took effect January 1, 2013, Maryland has become one of a handful of states to legalize same-sex marriage. Obtaining a marriage license confers many important legal benefits, including avoiding the Maryland inheritance tax for assets left to the surviving spouse, avoiding (or at least delaying) estate taxes, and protecting your home and other assets from creditors by titling the property as “tenants by the entirety.” Maryland also provides benefits to unmarried couples who have documented their relationships. These include being allowed to visit each other in the hospital and ride together in an ambulance, as well as exempting a residence titled as “joint tenants with right of survivorship” from the Maryland inheritance tax. Whether you are married or not, your estate plan can incorporate special testamentary language and other provisions to help prevent disapproving family members from challenging your Will.
I’ve heard about revocable living trusts. Should I have one?
A revocable living trust is essentially a Will substitute and can be useful in limited circumstances. Clients seeking estate planning should be wary, however, of anything marketed as a discrete “product.” An effective estate plan is a comprehensive strategy that takes all of your assets and planning goals into account. A revocable living trust can be part of your plan, but choosing this device should not be where the planning begins. Despite many claims to the contrary, a revocable living trust will not help reduce estate taxes or even eliminate the need for a Will. And because the Maryland probate process is relatively efficient and economical, the after-death savings in time and money may well be outweighed by the trouble and expense of setting up and maintaining the trust in your lifetime. After reviewing your goals and circumstances, we will be glad to determine whether a revocable living trust is right for you.
What is probate?
Also called estate administration, probate is the process by which the assets of someone who has died are transferred to the beneficiaries named in the person’s Will. In Maryland, the process generally applies only to assets the decedent owned individually and not jointly. The process is administered by the Personal Representative (“executor”), who is appointed by the county Orphan’s Court based any guidance left in the decedent’s Will. The Personal Representative is responsible for following specific procedures and deadlines for reporting estate assets, paying debts, filing tax returns, and making distributions. The attorney for the estate provides whatever guidance and assistance the Personal Representative may need in order to complete the probate process efficiently, or if requested, may settle the estate on the Personal Representative’s behalf.
My assets are relatively modest. Do I still need an estate plan?
Absolutely. Two of the documents in an estate plan—your financial Power of Attorney and Advance Medical Directive (“living will”)—have little to do with the extent of your wealth. They ensure that someone you trust will be handling your finances and making medical decisions on your behalf if you can no longer do these things for yourself. In end-of-life situations, your Advance Medical Directive states your healthcare preferences to guide your agent in the decision-making process. In the same way, having a properly executed Will enables you to appoint a Personal Representative (“executor”) of your choosing, as well as guardians for any minor children. And regardless of the extent of your wealth, having a Will enables you to pass it on to the people or organizations you choose.
What happens if I die without a Will?
Dying without a Will would subject your estate to the “default” rules of intestacy. The rules vary depending on whether you are single, married, or have children. For example, the assets of a single person with no children would generally go to the person’s parents. For a married person with no children, $15,000.00 would go to the surviving spouse and the remainder would be divided evenly between the spouse and the parents of the deceased. Without a Will to guide them, the courts would be forced to choose someone to administer your estate and to serve as the guardian of any minor children. A valid Will helps to ensure that your assets go to the people or charities you designate, and that your estate and your children are cared for by someone you know and trust.
I am young and healthy. Do I really need a financial Power of Attorney and Advance Medical Directive?
Accidents and health problems can of course affect any of us at any time. The added danger for someone young and healthy, however, is that the resulting incapacity could last for many years. Having these documents ready when the need arises will help eliminate the need for a court-appointed guardian and can prevent disagreements among family members at an already difficult time. It will help keep your finances under control and your medical needs tended to. And for those making medical decisions on your behalf, leaving clear instructions as to your wishes will provide them with the assurance that they are making the right choices for your care—no matter how long your incapacity lasts.