What can estate planning do?Estate planning can be of value for many reasons. Some of the most important can be efficient disposition of assets to loved ones, avoiding lengthy probate and conservatorship proceedings, proper tax planning, and preserving assets for future generations through long term trust arrangements.The goal of estate planning is to permit you, the client, to make the important choices for yourself and your family’s future during your own lifetime. It is never easy to think about death and leaving one’s loved ones behind. Naturally, some decisions that are part of estate planning can be difficult. However, by setting up a comprehensive plan, you can protect your family and ensure that your wishes are respected in the event of incapacity or death. Understanding the desires of each client is the first step in creating a good plan. Part of our job is to help you define what those wishes are: then we work to build a legal structure that will fulfill those wishes and withstand challenges. What information is needed to start building an effective plan?We help each client create a list of assets, including real estate, business and personal property. We consider what your future financial needs will be. We assist you in filling out a complete questionnaire covering liabilities, pensions, savings plans, businesses. Each client creates a list of all relatives and other persons who they wish to have certain property or act as guardians or trustees.Why is a Will important?A Will determines what happens to a person’s property at death. Even if all of your known assets have been disposed of through trusts, insurance policies and other non-probate instruments, a will is still an essential vehicle for appointing agents for administration, identifying relatives to be skipped over or dispensing limited bequests, inserting a no-contest clause, leaving funeral or burial instructions, and directing previously unknown assets and remainders to beneficiaries or trusts.One of the most crucial reasons for having a Will is to provide for the future of minor children. Parents with minor children or other dependent relatives should definitely have a Will to provide directions for the guardianship and care of minor children and others who cannot care for themselves. A properly executed Will can provide for domestic partners and loved friends, for a church or charity, or even for pets. In combination with a testamentary or intervivos/living Trust, a Will can provide additional security for those left behind. Without a properly executed Will, New Mexico state laws governing intestacy ( dying without a will) determine how a person’s property is distributed at death. The laws of intestacy are based on traditional ideas of fairness and provide a plan for a division of property between a surviving spouse, children and other relatives. New Mexico law also protects some of the value in a home or personal property for the spouse and family. However, the rules of intestacy do not fit many family and personal situations. A Will is a much more effective way to allocate property according to the client’s wishes. What is the difference between Community and Separate Property?New Mexico is a community property state. In general, all property that is accumulated by either spouse in a marriage through earnings during that marriage is considered community property. Community property is divided 50%-50% to each spouse. When one spouse dies, one half of the community property may be disposed of by their Will.Separate property includes property acquired before marriage, gifts and inheritances received by the person making the Will, and damage awards received from lawsuits. Separate assets that are commingled (used to provide for the married couple and blended in with earned income) may also be transmuted or turned into community property. A Will covers the disposition an individual’s property on death. If the deceased person is married, then the Will can define how all of the deceased spouse’s separate property and the one-half proportion of community property belonging to the deceased spouse are distributed. The person making the Will can decide what happens to this property and to whom it will be given. What happens without a Will?When a person dies without a will or with an invalid will, New Mexico laws of intestacy protect surviving spouses by passing the decedent’s separate property automatically to a surviving spouse if there are no children. If there are children, the surviving spouse takes 25% of the deceased spouse’s separate property and the children take 75%.The one-half of the community property which the decedent could have exercised the power of testamentary disposition through a will passes in intestacy to the surviving spouse. If there is no spouse and no children, then property is passed in intestacy to the first of the following groups of surviving relatives equally: to the decedent's parents, to the descendants of the decedent's grandparents or descendants of grandparents, and then to the decedent's other relatives (see Chapter 45, Article 2 NMSA 1978 for the full hierarchy). If there is no taker, the intestate estate passes to the state. What are Estate Taxes?The saying goes that there is no escaping death or taxes. It hardly seems fair, but an ordinary tax return must be filed for the last taxable year of a person’s life. Estate tax is different. Estate taxes are high but there is an excluded amount that changes year by year that can pass free of tax. For U.S. citizens in 2007, the exclusion amount from the gross estate plus previous taxable gifts was $1,500,000. For 2008, the excluded amount was $2 million. For 2009, the exclusion amount was $3,500,000. In 2010 the estate tax disappears completely, but the rules concerning the valuation of inherited assets, called the "tax basis," change in a way that is not favorable to a beneficiary. It is likely that Congress will put a new law, retroactive to January 1, 2010 into place. However, the current law also changes how inherited property is valued at the time of inheritance. It used to be that property was inherited at the value it had at the date of death. For 2010, the value will now be based on the original cost to the owner who has passed it on. This means that when the person inheriting the wealth sells stock or property, there may be very large capital gains taxes payable. Unless Congress does change the law this year, the estate tax is revived in 2011 and the exclusion amount goes back down to $1 million.For most estates, it is unusual to pay federal estate tax. When and if the exclusionary amount drops to $1 million in 2011, a lot more families will be affected by estate taxes. However, there are still a number of ways of transferring wealth during life that reduce taxation at death, too complex to discuss in these brief notes. In the past, estate taxes applied to the total fair market value of the deceased’s estate, including houses, life insurance, bank and stock accounts, savings bonds, IRAs, jewelry and other personal effects, and other assets on the date of death. Final medical bills, funeral expenses, administration costs, gifts to charity, and attorney's fees are subtracted from this number to calculate the net taxable estate. If the death occured in 2009, estate tax was due when the net taxable estate exceeds $3,500,000. How is a Trust created?A trust is created by the transfer of property by its owner (called the settlor) to a trustee who holds the property for the benefit of another person or persons (called beneficiaries).The settlor transfers assets into the name of the trustee of the trust. Assets can include land, houses, bank accounts, stock accounts, and other assets; these then pass automatically to the trust's beneficiaries when the settlor dies. When the settlor acquires additional assets, he can title those in the name of the trustee of the trust and add them to it. Some forms of assets can simply be listed in a document added to the trust document; title to real property must be formally recorded. Upon the death of the settlor, a successor trustee who is chosen by the settlor and named in the trust (this could be one or more of the beneficiaries, a trusted friend, a bank or attorney) takes over as trustee. The trustee is obligated to follow the instructions of the settlor set forth in the trust concerning the distribution of property and the payment of taxes and expenses. Like both marriages and wills, a trust that is correctly set up in one state remains valid if the person creating the trust moves to another state. Property from more than one state can be included in a trust. What is a revocable intervivos/living trust?In a revocable trust, the settlor or grantor (who funds the trust) retains control of the property and can end the trust and take back the assets at any time. The person establishing the trust is often – at the same time - the settlor, the initial trustee, and the beneficiary of the income of the trust until his or her death. At death, the trust becomes irrevocable and the property in the trust passes to other beneficiaries. One advantage of a trust established in the lifetime of the settlor is that any property held in it is not part of the probate estate and passes directly to the beneficiary at the settlor’s death. A trust established when the settlor is alive is called an intervivos trust. Because an intervivos trust is not probated, the terms of the trust can remain private.What is an irrevocable trust?In an irrevocable trust, the settlor completely gives up ownership and control of the property placed in the trust. The trust pays tax on its accumulated income, but current distribution or payment of income to beneficiaries is deducted.What is a testamentary trust?A testamentary trust is created in a will. The trust does not take effect and property does not pass into the trust until death. The will contains the trust provisions and serves as the trust document.Making a devise or bequest in your will to a trustee of a trust funds the trust. The trust must be identified in your will and must exist as a written document. Upon your death, the will distributes your assets, or some part of your assets, into the trust to be held, managed, and distributed by the appointed trustee according to your instructions. A court probate proceeding must be started to fund a testamentary trust. Once a personal representative is appointed in a probate case, that person has the power and duty to follow the terms of the testamentary trust and transfer the designated assets into the trust. Testamentary trusts are often used to manage the property of children or grandchildren until the child reaches a certain age. Assets may be distributed over time or be used for specific purposes such as education. Like other trusts, testamentary trusts can manage property for someone who has a physical or mental handicap. For couples in a second marriage, a testamentary trust can provide income - and even principal in the case of need - for a surviving spouse with the remaining assets going to the deceased's children from a previous marriage. What is an A-B trust?A-B trusts are particularly suited to wealthier families whose assets exceed the current 2009 $3,500,000 exclusion amount for federal estate taxes and couples with children in a second marriage. In an A-B trust, the couple's assets are held in one trust until one spouse dies. After the first spouse dies, the trustee creates two trust shares, an A trust (survivor’s trust) and a B trust (decedent's trust). These assets are not included in the surviving spouse's estate for determining estate tax liability, yet the surviving spouse may be able to use the B trust’s income and even its assets if the trust is so written and there is need. The B trust usually becomes irrevocable upon the death of the first spouse, and the surviving spouse cannot change the beneficiaries, trustee, or terms of the B trust.What is a charitable trust?Charitable remainder trusts are irrevocable structures established by a donor to provide income to a beneficiary while the public charity or private foundation receives the remainder value when the trust terminates. So, for example, a trust could provide income to a surviving spouse for his or her lifetime. The donor may claim a charitable income tax deduction, and may not have to pay an immediate capital gains tax when the charitable remainder trust disposes of the appreciated asset and purchases other property as it manages its portfolio of trust property. At the end of the trust term, the charity receives whatever amount is left in the trust.Charitable lead trusts make payments, either of a fixed amount or a percentage of trust principal to charity during its term. At the end of the trust term, the remainder can either go back to the donor or to heirs named by the donor. The donor may sometimes claim a charitable income tax deduction or a gift/estate tax deduction for making a lead trust gift, depending on the type of a charitable lead trust. Generally, a non-grantor lead trust does not generate a current income tax deduction, but it eliminates the asset or part of its value from the donor’s estate. If the trust itself qualifies as a public charity, donations to the trust may be deductible to an individual taxpayer or corporate donor. Charitable trusts may be set up during a donor's life or as a part of a trust or will at death. What about pets and trusts? What is an honorary trust?An honorary trust does not have a specific human or legal entity, like a person, a corporation or charitable organization, as a beneficiary. Honorary trusts are used to care for a person's pets or provide for the maintenance of cemetery plots. In the case of trusts for animals, the trust terminates after the earliest of when no living animal is covered by the trust or 21 years. A court may reduce the amount of the property transferred to an honorary trust if it determines that amount substantially exceeds the amount required for the intended use.What is a spendthrift clause?Sometimes the person establishing the trust has concerns about a beneficiary’s ability to manage trust assets well, or wishes to prevent trust assets from being attached by creditors if a beneficiary is sued. A spendthrift clause specifies that a beneficiary's interest shall not be transferable or assignable by the beneficiary, or be subject to the claims of the beneficiary's creditors. Creditors demands for supply of necessities are sometimes allowed. A spendthrift clause cannot be used to avoid claims for alimony or child support.What about minor children?It is extremely important to name a guardian for minor children in a Will. Families with children should think seriously about who should be guardian of minor children if both parents die. Sometimes a grandparent or older relative may be a good choice; at other times an older person may not be able to take on the responsibility of raising a young child.Securing the financial future of minor children by establishing a trust funded by current assets or insurance benefits may be the key to children’s financial security. A trust offers flexibility in how property or income is distributed to minors. Trusts can be structured to make distributions directly to a minor or indirectly to the minor's guardian. A trust can include instructions for how funds are distributed for a minor's benefit, for example, for educational purposes or to cover anticipated special needs. The trust can also be set up so that assets are retained in trust until the minor comes of age or until a later date. How can a living will or advance care directive help in the event of physical or mental disability?Planning for your own future includes giving advance instructions on the health care you wish to be provided should you be unable to make or voice decisions due to illness or incapacity. This may include choosing a health care proxy, a trusted person or persons who will ensure that your wishes regarding health care are carried out. You may also wish to set clear instructions or limits for the medical circumstances in which your life should be prolonged, based on your personal values or religious and spiritual beliefs.What is a durable power of attorney?A durable power of attorney is a written instrument under which an individual designates another person as their agent or "attorney in fact." The individual, or "principal" authorizes the agent to engage in certain specified business or financial transactions on behalf of the individual with third parties such as banks, landlords, title companies, stockbrokers, etc.A durable power of attorney is structured to come into effect if certain events occur and a determination is made that an individual cannot act for himself or herself. A durable power of attorney may depend on the word of two doctors, for instance, to become effective. If and when the individual is once again capable of handling her or her affairs, the power of attorney may be held to be no longer in effect. “Durable” means that the authority of the agent to act on behalf of the principal does not end if the principal becomes disabled. What about same-sex and different sex cohabitants and domestic partners?Couples that live together on a permanent basis outside of marriage do not have the protections that state laws governing marriage provide. They may acquire property, share income or raise children together, but in the absence of a valid marriage, written contracts are often the best available means for cohabitants to determine their own legal future.Some different-sex cohabitants might actually find it easier simply to get married when they realize how extensive such contracts must be if they are to address all the rights and duties that marriage automatically confers, and when they consider the various benefits of marriage which cannot be acquired by contract alone. At this point, in New Mexico, same-sex partners don’t have that option. Domestic partners can provide a formal legal structure for their relationship with a will, trusts, powers of attorney, a durable power of attorney for health care, a living will declaration, contracts to jointly purchase property, real property titles, insurance beneficiary designations, legal adoption decrees for minor children, and a written cohabitation agreement. A cohabitation agreement can cover many of the responsibilities addressed in marriage laws including the identification of property and debts brought into the relationship, income and support, tax issues, division of household duties and expenses, insurance, health and medical care, conflicts arising upon possible termination of the relationship including support rights, death, responsibility for children, and pension rights. For more information on domestic partnerships, see Planning for Nontraditional Families on this website. The materials available at this web site are for informational purposes only. They are not legal advice or a substitute for legal advice. Every situation is different. You should contact your attorney to obtain advice on your particular issue or problem. Use of and access to this Web site or any of the e-mail links contained within the site do not create an attorney-client relationship between the law office of Kate Fitz Gibbon and the user. The opinions expressed at or through this site are the opinions of the individual author alone. |