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Estate Planning

Estate Planning & General Issues

1.  What documents should every individual have in place?
Each individual should have at least a Will, General (Financial) Power of Attorney; Medical Power of Attorney; and a Living Will.

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2.  What is a Will, and why do I need one?
A Will designates who will receive your assets at death and who will administer your estate (the “Personal Representative”, aka Executor). For an individual with any minor children, the Will also nominates the child’s guardian.

A Will allows you to name your own beneficiaries, your personal representative, and a guardian for minor children. It also makes administration of the estate simpler in many respects. Without a Will, Arizona statutes determine which family members are your beneficiaries and who has priority to act as Personal Representative.

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3.  What is a General Power of Attorney and why do I need one?
A General Power of Attorney is a document that names an Agent with the authority to act on your behalf for financial and business matters. This gives the Agent the legal authority to access your assets and property, but with an obligation to act in your best interest. The goal is to have someone who can act for you and take care of your financial affairs if you become incapacitated. A General Power of Attorney must obviously be implemented with care, and only with someone in whom you place a great deal of trust.

An effective General Power of Attorney is absolutely critical in the event of incapacity. Without such a document, if an individual becomes unable to manage his or her affairs, their family or friend will have to go to court to become appointed as a Conservator, which involves the court appointing an additional attorney, an investigator, and holding an open hearing to determine incapacity. The court appointed Conservator must also comply with continuing supervision of the court. Therefore, having an appropriate person named under an effective General Power of Attorney can save thousands of dollars in expenses, as well as a great deal of time and trouble.

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4.  What is a Medical Power of Attorney and why do I need one?
A Medical Power of Attorney is a document that names a Health Care Agent to act on your behalf in making medical and health care decisions. This gives the Agent the legal authority to receive medical information from hospitals and doctors, and to make medical decisions if you cannot make them for any reason.

An effective Medical Power of Attorney can allow your selected surrogate to make decisions in emergency situations and avoid the need for court interaction on an emergency basis, or even long range court action in the event of incapacity. Without such a document, an emergency guardianship might be necessary to make critical medical decisions, or a standard guardianship might be necessary if an individual has dementia and cannot care for themselves.

Similar to a Conservatorship, the family or friend will have to go to court to become appointed as a Guardian, which involves the court appointing an additional attorney, an investigator, and holding an open hearing to determine incapacity. Therefore, having an appropriate person named under an effective Medical Power of Attorney can save thousands of dollars in expenses, as well as a great deal of time and trouble.

The Federal law known as HIPAA makes hospitals and physicians act very carefully in disclosing medical information to other individuals, even family members, and a Medical Power of Attorney with the appropriate language can ensure that the medical professionals will communicate with the appropriate person.

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5.  What is a Living Will and why do I need one?
A Living Will, or Advance Directive, is a document that spells out your wishes in the event of certain medical situations, most commonly, terminal and incurable situations with no possibility of recovery. It gives hospitals and doctors, working with your medical Agent, the legal authority to implement your wishes.

The goal of a Living Will is to avoid any unnecessary difficulty for your family or friends in the event of a catastrophic situation, by clearly defining your wishes. Many people want to make sure they are not kept alive artificially in an incurable situation, and this document avoids the need for court action to implement that wish. Most importantly, it can avoid the type of struggles and arguments that can erupt among family members in these situations, as unfortunately seen in the media.

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6.  What Decisions Do I need to Consider in Preparing an Estate Plan?
Part of an attorney’s services are to discuss your options with you, to help you come to informed decisions as to what your documents should say. You certainly don’t need to decide everything before meeting with an attorney. However, the following are a list of the decisions that will have to be made before finalizing your estate plan:

  • Should I have a Revocable Trust, or just a Will?
  • Who do I want to receive assets at my death?
  • Do any of those beneficiaries need their shares held in Trust?
  • If a continuing Trust is necessary at my death, who do I want to manage that Trust? (Who will be Trustee?)
  • Who do I want to administer my assets if I become incapacitated? (Agent under General Power of Attorney, and/or the Trustee)
  • Who do I want to make medical decisions for me if I become incapacitated? (Agent under Medical Power of Attorney)
  • Who do I want to administer my assets at my death? (Personal Representative)
  • Do I have enough assets to worry about Estate Tax? If so, should I consider advanced planning to reduce estate taxes?

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7.  Do I need a Revocable Trust?
Estate planning is not a one size fits all proposition, and the answer to this question depends greatly on your individual situation, and ultimately is your decision.

If someone tells you, “Everyone needs a Trust!”, that is not true. However, a Trust can offer a number of potential benefits of which you should be aware, and the importance and applicability of these benefits vary depending on your circumstances.

The terminology can also be quite confusing. When most people are talking about a “Trust”, they are talking about a “Revocable” “Living” Trust, a Trust you set up while you are alive, which you can change whenever you wish. There are other types of trusts, including trusts that can be set up under your Will after your death (“Testamentary Trusts”) such as a trust for a child until a certain age. There are also “Irrevocable Trusts” which are set up for more specialized purposes such as estate tax planning or asset protection. The person who sets up a Trust is called the Settlor, Trustor, or Grantor (attorneys have a hard time agreeing on anything!) and the person in charge of assets under the Trust is the Trustee. However, most people start out as the Settlor and their own Trustee, meaning they are the only one involved with the Trust while they are alive and competent.

Some of the potential benefits of a Revocable Living Trust are:

  • Avoiding Probate- A properly funded Revocable Living Trust can help avoid the need for a probate through the court system. Probate is the process of transferring assets from a decedent’s individual name out to his or her beneficiaries, and giving someone the authority to administer the estate. By transferring all assets into a Revocable Living Trust during lifetime, it is not necessary to file a probate, and the nominated Trustee can proceed under the document without any court approval and action. Generally, this would save about $5,000 in attorneys’ fees and court costs. However, even without a probate, there are administrative expenses and work involved.  When a probate is filed, the Will does become a matter of public record, even though details about finances and assets do not have to be made public.  Therefore, if keeping the terms of disposition private is extremely important, avoiding probate through a revocable trust may be advisable.Recent Arizona statute and rule changes may make a probate more difficult and expensive than it was previously.  For instance, it will now be required that any family member serving as a Personal Representative attend some form of training.Probate is unrelated to estate taxes. An individual will have to pay estate taxes if they have a large enough estate, whether or not his or her assets pass through Probate.

    It is critical to note that a Revocable Living Trust won’t be effective to avoid probate unless your assets are legally transferred into the Trust while you are alive. One of the services Bogutz & Gordon provides when creating a Revocable Living Trust is to help guide you and answer questions you might have to properly transfer your assets into the name of the Revocable Living Trust. If you set up a Trust, but never transfer assets into the Trust while you are alive, then you still will need a probate at death.

  • Managing Assets in the Event of Incapacity-A typical Revocable Living Trust names a successor Trustee who will not only take over administration at death, but who will also manage assets for your benefit in the event of incapacity. In some sense, this is similar to an Agent under a General Power of Attorney. However, since you transfer your assets into trust, it is generally a more efficient means of management than under a Power of Attorney. Banks and institutions generally are easier to work with under a Trust Agreement, the instructions to your Trustee will be more specific, and the Trustee will have more protection under Arizona law.
  • Estate Tax-In certain situations, a husband and wife can create a Revocable Trust that divides into separate shares when the first spouse dies, and this can help minimize or eliminate estate tax. This is typically referred to as an “A-B” Trust division, and involves carefully drafted language to make sure both spouses get to use their estate tax exemptions. If a married couple has enough money where estate tax is an issue (the current threshold is $5,000,000, although it is scheduled to drop to $1,000,000 in 2013 if Congress makes no change), then this arrangement has the potential to save hundreds of thousands of dollars in estate taxes. A Trust can also include other provisions carefully tailored to reduce or eliminate estate tax, but the fact that assets are held in a Revocable Living Trust doesn’t necessarily reduce estate tax.
  • Continuing Trusts-Perhaps one of the most important benefits of a Revocable Trust is to establish continuing trusts for beneficiaries. For instance, it is important to consider what Trust arrangements should be made for younger beneficiaries, otherwise they will receive everything by age 18 or 21. To delay outright distribution to a beneficiary past age 21, the document must set out the terms of the Trust, appoint a Trustee, and specify how and when assets will be distributed.For instance, think how important it is that a child not receive a $500,000 inheritance outright and in his hands at the age of 18, or even age 21. In certain situations, giving this young a beneficiary cash of that amount in their hands could be disastrous.  Not only might all the money be wasted,  but worse, the child’s security, incentive, and well-being can be threatened. A Trust allows you to specify provisions so the child can benefit and receive distributions, but not have direct access to all of the money.This also is important for older beneficiaries with known issues, such as drug addiction, financial problems, or circumstances under which they qualify for government benefits. In these situations, protecting their inheritance can not only protect their money, but perhaps even their life.

    Even with beneficiaries who are mature, responsible, and trustworthy, there still can be benefits to establishing their shares as lifetime trusts,  This can help protect the beneficiary’s inheritance from creditors, keep it separate from his or her spouse (and protected in the event of a divorce, and even keep assets from being subject to estate tax in the beneficiary’s estate.

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8.  How Does Estate Tax Work?

The Federal Government taxes the assets you own at your death, and if those assets are more than the estate tax exemption (which is now $11,400,000 for 2019 through the end of 2025), there is a tax on the excess, which is now set at 40%. Assets that pass to a charity or a spouse can qualify for a deduction to reduce or eliminate this tax. The tax is based on a “snapshot” of the value of assets at death, and it is not related to the income tax.

The significant estate tax leads to much complex law, but suffice it to say that the Federal Government has seen through a lot of attempts to try and avoid the estate tax, and therefore, all assets you own or control at your death are subject to estate tax. This includes real estate, stocks and bonds, IRA’s and retirement plans, and it includes assets whether they are owned directly, in a Revocable Living Trust, in joint tenancy, etc. It also includes the full death benefits of life insurance, which are exempt fromincome tax, but not the estate tax.

If an individual dies, and their assets, at the snapshot of death, exceed the estate tax exemption, then a Federal Estate Tax Return, Form 706, needs to be filed within 9 months after the individual’s death, and the estate tax due must be paid at that time.

While the new tax law provides an increased exemption of $11,400,000, with an increase for inflation,  this law is yet again set to expire in 2026 and return to the base amount of $5 million, also indexed for inflation.  Therefore, the estate tax is something that should be considered by any individuals who may have more than $5 million in assets.

It should be noted that Probate and Estate tax are not related. An individual will have to pay estate taxes if they have a large enough estate, whether or not his or her assets pass through Probate. A Revocable Living Trust can help avoid probate, but it will not keep assets from being subject to estate tax.

There are a number of techniques, some simple, some quite complex, that can be implemented to reduce or eliminate estate tax, including use of the “A-B” arrangement for a married couple, which is discussed above. More advanced options include charitable giving, irrevocable trusts, and maximizing the gifts made to beneficiaries.

There are no silver bullets or magic spells that can make the estate tax go away, but there are certainly some effective techniques to consider, including the alphabet soup of the QPRT (Qualified Personal Residence Trust), ILIT (Irrevocable Life Insurance Trust), GRAT (Grantor Retained Annuity Trust), CRT (Charitable Remainder Trust), and FLP (Family Limited Partnership), as well as Charitable Family Foundations.

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9.  What is the Estate Planning Process like at Bogutz and Gordon?
Our goal is to answer your questions and educate you on the information you need to make your decisions, in a comfortable and responsive environment. We then prepare the documents which implement your specific decisions and goals, taking into account your wishes, first and foremost, but also the legal details and technical requirements that are vital to the protection of your families and beneficiaries.

One of the comments we frequently hear from clients who come in to do their estate planning is, “Well, that was easier than I thought!”.

We start by setting an initial appointment, and asking you to complete our Estate Planning Questionnaire and returning it to us prior to the meeting, or bringing it with you to your appointment. The purpose of this is to give us as much information to start with, so we can advise you as accurately and efficiently as possible. However, don’t worry if you don’t know the answers to the questions or you don’t have a chance to complete it, we can always discuss it at our meeting.

Don’t be nervous if you don’t know exactly what you want to do, or you aren’t certain what estate planning documents you need, or what they do. A big part of our services is to answer your questions, educate you on your options, and point out important considerations. It’s not just a question of filling out a document for you, the first and most important step is determining your situation and allowing you to define your wishes.

At our initial meeting, when we discuss your options and issues, we will indicate the fees charged for the various estate planning services.

When we decide exactly how to proceed, we will prepare drafts for you, and send them out for you to review and consider. We include in the drafts small “text boxes” which give you some brief explanation as to what the exact legal terminology does, and why it’s in the documents. This touch frequently makes reviewing the “legalese” in documents more meaningful.

Additionally, once we finalize your documents and execute, we continue to be available for your estate planning. With a Revocable Trust, we work with you to transfer assets into that Trust, to ensure the benefits you wanted. Additionally, beneficiary designations for any type of plan are critical, and we are available to answer questions about complex questions like IRA and retirement plan and life insurance beneficiary designations. This work is critical to making sure your wishes are carried out.

If your estate is large enough to create estate tax issues, we are fully versed in advising you on your options, including the costs, benefits, and risks of the various procedures, as well as the ability to provide examples which, although hypothetical, provide the type of concrete analysis that is vital to considering your options and determining your plan.

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