1. Why do I need a will?

If you do not write a will (which may be as simple or as complex as you choose to make it), you are delegating the distribution of your assets and the decision as to who will oversee that process to the legislature. A will allows you to decide where you want your assets to go, on what schedule, and under what circumstances. There may be tax-planning aspects to this, but the more important point is to be sure that your hard-won assets go where you choose after your death.

You may decide that certain sentimental belongings should go to special persons. You may wish to leave some property to friends or to charity. You may wish to leave your estate in proportions other than those the legislature would have chosen for you --either for tax or "real life" reasons. You may believe that your heirs should receive their inheritance in trust rather than outright --at least until they are older, have finished their education or some other condition. You may wish to leave second spouse money in trust for his/her life, then guarantee that the money will go to the children of the first marriage upon the second spouse's death. You may wish to provide for an elderly, sick or disabled relative whom the legislature would ignore --or provide for that person's inheritance to be managed for them under the conditions you provide.

If you have a long-time "significant other," not your spouse (and Georgia abolished common law marriage in 1997), a will may be essential to pass your estate to that person. A will permits you to appoint a guardian for your minor children when both parents are deceased. A will allows you to appoint an executor to wrap up your estate and a trustee to administer the trusts you have created, to nominate the successors to those offices, and to relieve those persons of having to post fiduciary bonds or file inventories with the probate court. A will allows you to set the terms and powers of your executor or trustee, and to determine their compensation for serving.

2. Why do I need my will drawn by a professional?

The problem with self-done wills, packages and inexpertly drawn documents is not so much that they won't work, but that they will. You need to be certain that the instrument is effective, to be sure, but you need to be aware of what it is going to do. Did you think of everything? If you and your spouse leave it "all to my spouse, if alive, then to my children" as many forms might: (a) are they the surviving spouse's children as well as the first spouse's; and (b) do you need to use both spouses' unified credit to avoid paying around 40% --or more-- to the government; and (c) in a catastrophe, do you risk handing over too much money too soon to distraught late adolescents? [I have seen each of these problems in the last few years from well-intentioned poor planning.] When you do your own will, have you thought through how the will is to be funded? It's quite possible, in modern times, to have a will which doesn't have assets to work upon because the bulk of the estate --insurance, retirement benefits and jointly-held property-- passes by contract or by operation of law outside of the probate estate controlled by the will.

Under "tax reform," the estate tax is phased down -then out for one year- but comes back unless Congress acts to make the elimination permanent. Thus, your estate plan needs to take into account that the formulas for maximizing use of your "unified credit" will change the actual distribution of your estate, then cause a "snap back" when the tax returns.

3. What if I change states, marry, divorce, have another child?

Unless your will says that it anticipates marriage, marriage will revoke your old will. Divorce used to do this as well, but the "modern trend" from state to state is to salvage the will, reading the ex-spouse out of it. Still, this should be verified, not assumed; better yet, you should draw up a new will revoking the old one explicitly. The birth of a child should also be anticipated, if possible. The general rule is that after-born children will be treated equally with the children mentioned in the will, but this doesn't provide for there not having been children mentioned, nor for desired differences between the older children's treatment and the treatment of a young child (since you may want the younger children to be raised to maturity before your estate is equalized among all of your children). Also, if you change your will by codicil -or otherwise- the new children are no longer "after-born" since the change has "re-published" the will after their birth.

Most states will try to salvage a will from another state. However, since state laws and procedures vary, the mechanics of your out-of-state will may not work in the new state the way you had intended; some exemptions may not apply, and some assets may be difficult to leave the way you had wanted them left in your original state. The most obvious change is that the "self-proving" feature of your will may not carry over to the new state, since each jurisdiction's requirements seem to be particular.

The better thought is to have your will redrawn so as to conform to the rules of the state in which you are likely to die: the new state you have moved to. Or, you may handle some of these issues through a "living trust" -especially if you own real property in several places.

4. What does a codicil do?

A codicil is a change to your will, and it should be executed with the same formality as your will. Once done, it becomes a part of your will, and should be kept with it. Things dictated in your will should be changed by a codicil (or by a new will, if repeated codicils start to become cumbersome), but there are ways to give discretion in your will to a trusted person so that some practical changes can be made by suggesting how that discretion should be used and avoiding (in practical terms) the need to do a codicil for each change. A codicil is also a re-publication of your will, so the codicil should consider what changes have taken place in your circumstances and in the law since your last will or codicil in order to do the "housekeeping" to bring the re-published will up to date. For example, your afterborn children aren't "afterborn" anymore, so are they read into the will along with the children you specified by name or do we assume you meant to leave them out? The changes in the law which were "grandfathered," now aren't, so we must catch up.

5. What is the "unified credit"?

Everyone is given a personal credit against gift and estate tax owed. In the credit shelters the first $s (the amount increases each year) of assets transferred (so the tax brackets up to that point are invisible; the credit itself isn't $1M, but rather the tax on that amount), and is scheduled to continue going up over the coming years. The credit doesn't diminish by the "annual exclusion" gifts, marital gifts or charitable gifts which don't generate any tax liability to be offset. The credit can be used -- automatically is used-- on lifetime gifts; what is left over (ignoring some esoteric calculations) at death is available to shelter the estate. Any credit not used after that is lost, hence the desire to use the credit of the first spouse to die if the second credit is not enough to shelter the estate at the second death. There is a generation-skipping transfer tax on transfers to lower generations --currently, a flat 55%-- and that has a $1,000,000.00 exemption. This system is separate from --and layered on top of-- the regular estate tax system.

6. What is the annual exclusion?

Each living person can give $11,000.00 per calendar year (indexed for inflation) to anybody he wants --and as many anybodies as he wants-- without owing gift tax. Only outright gifts count, unless special trust terms are included. In some cases, grandparents may make direct payments of tuition to schools and medical expenses to providers without cutting into this ten thousand. Outright gifts between spouses or to charity don't come under this system because they have their own exclusion. Married persons can agree --and file a form-- to allow both exclusions to shelter a larger payment from one spouse. Use of this exclusion over time can be a very effective estate planning ingredient --and you get to watch your recipients enjoying their good fortune (and you get to see how well they make use of these amounts before leaving them something larger in your will or trust)

7. What is a "living trust" or "loving trust"?

As distinguished from a "living will" (see another FAQ), these are marketing terms for a revocable intervivos trust. Unlike an irrevocable trust, a trust which the grantor can modify or revoke at will has no tax effect; the trust is taxed to the grantor for income and estate purposes, and no gift is made at the time of creation. This trust is used in states where probate is difficult to reduce the assets passing under the will; generally the grantor would be his own initial trustee and his executor would be his successor trustee and the expected terms of his will would be written into the revocable trust, which would become irrevocable upon the grantor's death, with a simplified "pour-over" will written to sweep previously-outside assets into the trust (so they can be integrated into the estate plan). The revocable trust is not a panacea --especially in states, like Georgia, where probate is relatively straightforward-- and will not really save much on taxes and accounting fees (or probably, legal fees) as a "will substitute". It can be useful in states where probate is difficult or where fees are based upon the size of the probate estate. It is desirable where real property is owned in another state and there are no other shortcuts to ancillary probate in that second state. It is desirable where privacy is a concern --a probated will is a public document, but a trust is not-- or where a "running start" might deter a will contest. Because the successor trustee can be empowered to step in upon the grantor's resignation or disability, a revocable trust, done in anticipation of health problems or accident, may be a good way to avoid having to have a guardianship for a failing grantor, and can be stronger and more comprehensive than a durable power of attorney in practical terms.

8. What is a "living will"?

A Living Will has nothing to do with your property after death, but with your health during life. Living wills are designed to allow you to refuse extraordinary medical procedures in the event you have been injured (or your health has failed) and you are going to die anyway of a "terminal condition." There can be some controversy when your condition isn't going to kill you within the foreseeable future -you're just going to linger- and so the Living Will should be combined with a Durable Power of Attorney for Health Care (which, in Georgia, the legislature says can all be one document) to allow someone you designate to make whatever health care decisions you could have made (except for "pulling the plug" on a pregnant woman or involuntarily committing you to a psychiatric facility) had you been able to voice your wishes. This is not limited to terminal situations -it can simply be while you're unconscious during surgery, for example- and it can go so far as withdrawing food and water: really "pulling the plug." Georgia makes clear that these instruments are meant to be as subjective as the maker wants: they are intended to reflect your own personal values in these matters. I usually add a paragraph (since the law allows it) saying who you want to have as your guardian if one ever has to be appointed for you.

I also recommend to clients that they give a copy of their Living Will/Health Care Power to their primary physician (and any other whom they are seeing for health care when this is possibly going to come up); most hospitals will ask, upon admission, if you have one (and will give you a "fill in the blanks" simple form if you do not). Since, as a practical matter, it is easier "not to hook you up" than to "pull the plug" on you, you should verify that your physician will respect your wishes before you get into an extreme situation; having to fight it out in court with the medicos over your living will or health care Agent's decision rather defeats the purpose.

9. What does an insurance trust do?

An insurance trust, sometimes called an ILIT, is simply one type of irrevocable intervivos trust. In contrast to a revocable trust (see another FAQ), the irrevocable trust has tax effects, because it is a separate "person" for estate tax purposes. Some irrevocable trusts are designed to be income taxed to the grantor, but an ILIT tries to cut all strings between the grantor and the trust. Thereafter, the grantor's completed gifts to the trust are taxed at their then-existing value, not at their value upon the grantor's death. The grantor donates an insurance policy (then waits three years to die) or the trustee takes out a life insurance policy on the grantor (or grantor and spouse). When, upon the grantor's death, the policy goes from the sum of premium payments to its death benefit, that growth is not estate-taxed. It is also not considered taxable income to anyone. The trust then dissolves, or it continues under the terms originally established by the trust instrument (as with any irrevocable trust), until the time and circumstances for the beneficiaries to get their inheritance.

10. What does a family limited partnership do?

The family limited partnership is a standard estate planning technique The thrust behind a family limited partnership is for one or more family members (usually the older generation) to serve as general partners (or to set up a corporate general partner), having at least a 1% general partnership interest (so the general partner's share is not a sham), and then much, most or all of the limited partnership interest, as well.

An independent business motive will be involved so as not to make this simply a tax-savings device. Nonetheless, there will generally be tax advantages to the older generation being able to transfer its limited partnership interests to lower generations subject to some degree of valuation discount (since an arms-length purchaser would not pay full pro rata price for a limited partnership interest of this sort where there is no control and no outside market). Over time, much of the older generation's limited partnership interest can be moved in this way. As limited partners, the recipients are exposed only to the loss of their shares, not to general liability for the debts of the entity (as the general partner is).

The family limited partnership allows gifts of the partnership itself without having to split up the underlying assets. One business reason for formation is to permit the combination of diverse assets or the combination of money from the partners' independent resources, providing liquidity or diversification until market conditions ripen. Of course, when ripe, increases in value will, to the extent of the limited partners' interest, flow directly (thus, not subject to gift taxes).

As reflected in the example above, because limited partners are prohibited by state law from participating in entity management (at least as limited partners), the older generation can transfer value (and the future income earned by that equity) without surrendering actual control over the underlying assets. This is an advantage when dealing with children or young adults who may not yet have the maturity to handle the wealth being passed to them. Also, while limited partners are liable for taxes on their shares of the entity's pass-through income, the actual payment of money is at the discretion of partnership management (the general partner/ older generation); not only can this be useful to persuade the children to cooperate in long-term family planning, but it makes the limited partnership shares unattractive for the children's creditors to levy on.

11. What does an irrevocable trust do?

As distinguished from a revocable trust (see "living trust" FAQ), an irrevocable trust creates another "person" immediately. The settlor of the trust gives up (usually) control over the assets in the trust -over the ability to revoke or modify the terms or with only the power to do so subject to fiduciary powers or subject to the consent of an "adverse" party- and the trust becomes a completed gift when the assets are contributed. (There may be deliberate provision to make this a "grantor" trust for income tax reasons while a completed gift for gift tax purposes, since the rules are different, because this permits the grantor to engage in certain transactions without tax problems) Thus, the gift can be given at its current value. There will be no basis step-up (or step-down, given market conditions) at death, but the appreciation between the funding of the trust and the date of the settlor's death will not be subject to estate tax (or GST tax, if applicable). An ILIT (see another FAQ) is a type of irrevocable trust, and so are Grantor retained trusts (GRAT or GRUT). A trust created under will is usually an irrevocable trust, since the grantor is deceased.

12. How do Grantor Retained Trusts work?

A GRAT is an annuity trust: a percentage of the initial contribution paid out to the grantor each year during the trust. A GRUT is a unitrust: a percentage of the balance of the trust as of a yearly date paid out that year to the grantor of the trust. Accordingly, a grantor can contribute additional funds to a GRUT, but not to a GRAT (you have to do another GRAT). By comparing the annuity tables for the Grantor's life (or the term of years) with the IRS tables, the value (present value) of the retained interest can be determined; that amount, subtracted from the total gift to the trust, gives the amount considered transferred to the donee (and subject to immediate gift tax). If the actual performance of the trust is better than the IRS tables, the trust may be growing while the official value has it diminished to pay the retained interest. Thus the Unified Credit used or gift tax paid may be leveraged (but, in poor market conditions it may be reverse leveraged). If the trust is treated as a grantor trust for income tax purposes, the grantor may pay the income tax on the "excess" income which will ultimately go to the donee upon the dissolution of the trust.

13. How do Charitable Remainder Trusts work?

A remainder trust (CRAT = annuity trust; CRUT = unitrust) is, itself, a tax-exempt, because at the death of the settlor or the end of the term the balance of the trust will go to a charity. Accordingly, the trust can receive property at its fair market value (not at the settlor's basis) and can generate a tax deduction for the present value of the remainder (see discussion of GRATs and GRUTS above). This can allow for the freeing up of appreciation trapped inside the property (because the property cannot be sold without generating capital gains), and its conversion into a stream of income for the settlor. The immediate tax deduction may be sufficient to pay for an insurance policy to replace for the heirs, in whole or in part, the remainder going to the charity (see ILIT discussion above). However, there should be genuine charitable intent since it is probably not possible to fully avoid real net value after taxes going to the remainderman; there have been anti- abuse rules put in place to prevent the use of the CRT merely to wash assets of tax liability. But, to the extent that illiquid assets or assets subject to significant tax upon sale or distribution can be used for funding, the leverage can be considerable -and the CRT may be an alternative to donations the socially-conscious settlor would've made in any case. < /FONT >

14. What about a charitable lead trust.

While not a tax exempt itself, a trust which provides that the immediate interest will go to charity (generating a deduction as it goes) may be a good way to leverage down the transfer value of assets which the donee isn't expected to actually use for some time (think of a trust fund for presently-young descendants). If the assets involved will appreciate faster than the tables, additional leverage may be gained.

15. What happens in probate?

Probate is the term when the deceased has a will. If there is no will, there is administration. Under probate, there is an executor who has the power and exemptions granted in the will. Under administration, there is an administrator who can petition (with the consent of the heirs) for the court to give certain powers and exemptions [note: this description is extremely simplified]. Most probate is done in solemn form so as to get closure fairly promptly rather than having the estate remain in limbo for some time. Nonetheless, the estate may remain open for some time while clearance is being gotten from the taxing authorities, and during this time the executor is responsible for managing the assets of the estate and paying taxes for the estate's income (on a fiscal year -except that the estate's income or loss may be carried out to the residual beneficiaries' income tax returns in the final year of the estate). In some simple cases where there are no debts and the heirs are in agreement as to the disposition (and there is no will) there may be No Administration Necessary filed.

Probate begins when the will is presented to the court. Those persons who would take if the will were not good must be notified and given a chance to object. Generally, we try to get waivers before filing so as to speed up the process. If an heir is a minor or not legally competent, a guardian ad litem may have to be appointed to act for them. When there are no objections or the objections have been dealt with, authority may be issued to the executor to take over the estate. (Before this time, there may need to be a temporary administrator appointed to hold things together while the petition is being litigated). The executor will advertise to tell debtors and creditors of the deceased, now of the estate, to make their debts known. The executor will collect the assets of the deceased which do not pass outside of probate (see other FAQs) and may have to file an inventory with the court, unless relieved, or post a fiduciary bond, unless also relieved.

The executor will file the final income tax returns for the deceased. Thereafter, the estate will file fiscal returns in its own right. The executor must determine if the estate will be above the applicable unified credit such that estate taxes are owed (and note that the taxable estate will be greater than just the probate estate) or if there is another reason to file an estate tax return. The executor will determine how the taxes are to be paid and may be able to get contribution from those taking non-probate but taxable assets. The executor will also be responsible for paying the debts of the estate: administration, funeral and last illness and the debts and taxes of the deceased. If there is not enough money, the executor will liquidate assets to cover these costs: the residuary, the general bequests (sums of money) and the specific bequests (in-kind property), in that order

Thereafter, the executor will distribute assets to the beneficiaries as set out in the will (or, in the case of administration, the administrator will distribute according to the Rules of Intestate Succession). There may be income to the estate depending on how certain bequests are funded. There may be direction for some bequests to be in trust, and the executor will participate in getting that trust established. There may be direction to liquidate some property and pass out the proceeds or to value property so as to make proportional distributions without the beneficiaries arguing among themselves. There may be instruction for the estate to pass business assets out or to sell business assets with special financing or other conditions. When the assets have been distributed to the beneficiaries, the executor (or administrator) will petition to be dismissed and relieved of liability for having done his or her job. Here, those persons who were to get something are the ones notified and given the opportunity to object to the dismissal.

16. What about non-probate assets

Some assets will pass by operation of law: joint tenancy with right of survivorship, for example. It is necessary to examine how these assets are titled to verify that, indeed, it is a joint tenancy rather than a tenancy in common. Other assets, such as life insurance or retirement plans, may pass by operation of contract: the trustee or company has a contractual agreement to pay the listed beneficiary (if any). One reason for creating a revocable trust (see FAQ) is to create passage by operation of the trust provisions rather than the probate process.

These non-probate assets, however, may be part of the taxable estate.

These non-probate assets (and some assets passing by intestacy or under a will which does not anticipate what happens if a recipient is a minor or incompetent) may require that a guardian be appointed to hold the assets for the recipient. In Georgia, real property may not require a court- appointed guardian automatically nor may small amounts of cash, but larger amounts may (and I have handled those issues, as well).

Some assets, such as IRAs, may have complex rules (which may vary depending on the time in life of the deceased's death and the age of the successor beneficiary) and elections as to how the benefit will be paid out.

17. Why use an LLC or Subchapter S corporation?

Both entities offer limited liability and some management advantages, bur permit the income and losses to pass through to the owners' tax returns rather than being trapped inside the entity itself: generating double tax or thwarting the timely use of available deductions.