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January 2010 Edition
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Estate Planning
Overview, Part I
By: Paul Nicolosi
Why
Plan Your Estate?
The knowledge that we will eventually die is one of the things that seem to
distinguish humans from other living beings.
At the same time, no one likes to dwell on the prospect of his or her own
death.
But if you postpone planning for your passing until it is too late, you run
the risk that your intended beneficiaries – those you love the most – may
not receive what you would want them to receive either because of extra
administration costs, unnecessary taxes or squabbling among your heirs.
This is why estate planning is so important, no matter how small your estate
may be.
It allows you, to ensure that your assets and other possessions will go to
the people you want, in the way you want, and when you want.
It permits you to save as much as possible on taxes, court costs and
attorneys’ fees; and it affords the comfort that your loved ones can mourn
your loss without being simultaneously burdened with unnecessary red tape
and financial confusion.
All estate plans should include, at minimum, two important estate-planning
instruments: a durable power of attorney and a will.
The first is for managing your property during your life, in case you are
ever unable to do so yourself.
The second is for the management and distribution of your property after
death. In addition, more and more, Americans also are using revocable (or
“living”) trusts to avoid probate and to manage their estates both during
their lives and after they’re gone.
Your Will
Your will is a legally binding statement directing who will receive your
property at your death.
It also appoints a legal representative to carry out your wishes. However,
the will covers only probate property.
Many types of property or forms of ownership pass outside of probate.
Jointly owned property, property in trust, life insurance proceeds and
property with a named beneficiary, such as IRAs, insurance policies or
401(k) plans, can all pass outside of probate.
Why should you have a will?
Here are some reasons:
First, with a will you can direct where and to whom your assets (what you
own) will go after your death.
If you died instate (without a will), your estate would be distributed
according to state law.
Such distribution may or may not accord with your wishes.
Many people try to avoid probate and the need for a will by holding all of
their assets jointly with their children. This can work, but often people
spend unnecessary effort trying to make sure all the joint accounts remain
equally distributed among their children.
These efforts can be defeated by a long-term illness of the parent or the
death of a child. A will can be a much simpler means of affecting one’s
wishes about how assets should be distributed.
The second reason to have a will is to make the administration of your
estate run smoothly. Often the probate process can be completed more quickly
and at less expense to your estate if there is a will.
With a clear expression of your wishes, there are unlikely to be any costly,
time-consuming disputes over who gets what.
Third, only with a will can you choose the person to administer your estate
and distribute it according to your instructions. In Illinois this person is
called your “personal representative”.
If you do not have a will naming him or her, the court will make the choice
for you.
Usually the court appoints the first person to ask for the post, which is
most closely related to you at the time of death.
Fourth, for larger estates, a well planned will can help reduce estate
taxes.
Fifth, and most important, through a will you can appoint who will take your
place, as guardian of your minor children should both you and their other
parent both pass away.
Filling out the worksheet that our office provides will help you make
decisions about what to put in your will. Bring it and any additional notes
to our office and our estate planning professionals will be able to
efficiently prepare a will that meets your needs and desires.
Estate Administration- Probate Procedure
Probate is the process by which a deceased person’s property, known as the
“estate”, is passed to his or her heirs and legatees (people named in the
will), the entire process, supervised by the probate court, usually takes
about one year. However, substantial distributions from the estate can be
made in the interim.
The emotional trauma brought on by the death of a close family member is
often accompanied by bewilderment about the financial and legal steps the
survivors must take. The spouse who passed away may have handled all of the
couple’s finances.
Or perhaps a child must begin taking care of probating an estate about which
he or she knows little about. And this task may come on top of commitments
to family and work that can’t be set aside.
Finally, the estate itself may be in disarray or scattered amount many
accounts, which is not unusual with a generation that saw banks collapse
during the Depression.
Here we set out the steps the surviving family members should take. These
responsibilities ultimately fall on whoever was appointed executor or
personal representative in the deceased family member’s will. Matters can be
a bit more complicated in the absence of a will, because it may not be clear
who has the responsibility of carrying out these steps.
First, secure the tangible property. This means anything you can touch, such
as silverware, dishes, furniture, or artwork. You will need to determine
accurate values of each piece of property, which may require appraisals, and
then distribute the property as the deceased directed.
If property is passed around to family members before you have the
opportunity to take an inventory; this will become a difficult, if not
impossible, task. Of course, this does not apply to gifts the deceased may
have made during life, which will not be part of his or her estate.
Second, take your time. You do not need to take any other steps immediately.
When bills do need to be paid, they can wait a month or two without adverse
repercussions. It’s more important that you and your family have time to
grieve.
Financial matters can wait. When you’re ready but not a day sooner, meet
with one of our attorneys to review the steps necessary to administer the
deceased’s estate. Bring as much information as possible about finances,
taxes and debts. Don’t worry about putting the papers in order first; our
attorney will have experience in organizing and understanding confusing
financial statements.
In general rules of estate administration include the following steps:
1. Filing the will and petition at the probate court in order to be
appointed executor or personal representative. In the absence of a will,
heirs must petition the court to be appointed “administrator” of the estate.
2. Marshalling, or collecting the assets. This means that you have to find
out everything the deceased owned. You need to file a list, known as an
“inventory”, with the probate court. It’s generally best to consolidate all
of the estate funds to the extent possible. Bills and bequests should be
paid from a single checking account, either one you establish or one set by
our firm on your behalf, so that you can keep track of all expenditures.
3. Paying bills and taxes. If an estate tax return is needed—generally if
the estate exceeds $675,000 in value—it must be filed within nine months of
the date of death. If you miss this deadline and the estate is taxable,
severe penalties and interest may apply. If you do not have all of the
information available in time, you can file for an extension and pay your
best estimate of the tax due.
4. Filing tax returns. You must also file a final income tax return for the
decedent and, if the estate holds any assets and earns interest or
dividends, an income tax return for the estate.
If the estate does earn income during the administration process, it will
have to obtain its own tax identification number in order to keep track of
such earnings and file an estate income tax notion in addition to the
decedent’s final income tax return.
5. Distributing property to the heirs and legatees. Generally, executors do
not pay out all of the estate assets until the period runs out for creditors
to make claims, which in Illinois is 6 months from the date the estate,
notice of death in the newspaper. But once the executor understands the
estate and the likely claims, he or she can distribute most of the assets,
retaining a reserve for unanticipated claims and costs of closing out the
estate.
6. Filing a final account. The executor must file an account with the
probate court listing any income to the estate since the date of death and
all expenses and estate distributions. Once the court approves this final
account, the executor can distribute whatever is left in the closing
reserve, and finish his or her work.
Avoiding probate through joint ownership or trusts can eliminate some of
these steps. But whoever is left in charge still has to pay all debts, file
tax returns, and distribute the property to the rightful heirs.
You can make it easier for your heirs by keeping good records of your assets
and liabilities. This will shorten the process and reduce the legal bill.
Guardianship and Conservatorship
Every adult is assumed to be capable of making his or her own decisions
unless a court determines otherwise. If an adult becomes incapable of making
responsible decisions due to a mental disability, the court will appoint a
substitute decision maker, called a “guardian”.
Guardianship is a legal relationship between a competent adult (the
“guardian”) and a person who because of incapacity is no longer able to take
care of his or her own affairs (the “ward”).
The guardian is authorized to make legal, financial, and health care
decisions for the ward. Depending on the terms of the guardianship, the
guardian may or may not have to seek court approval for various decisions,
but generally the guardian acts without being required to incur the expense
of court approval.
Some incapacitated individuals can make responsible decisions in some areas
of their lives but not others. In such cases, the court may give the
guardian decision-making power over only those areas in which the
incapacitated person is unable to make responsible decisions (a so-called
“limited guardianship”).
In other words, the guardian may exercise only those rights that have been
removed from the ward and delegated to the guardian. Guardianships are
consuming and expensive.
Prefer planning with Power of Attorneys for health care and financial
matters will significantly reduce cost and time in the event you became
incapacitated. (See Page for detailed discussion of Power of Attorney).
Incapacity
Generally a person is judged to be in need of guardianship when he or she
shows a lack of capacity to make responsible decisions.
A person cannot be declared incompetent simply because he or she makes
irresponsible or foolish decisions, but only if the person is shown to lack
the capacity to make sound decisions. For example, a person may not be
declared incompetent simply because he or she spends money in ways that seem
odd to someone else. Also, a developmental disability or mental illness is
not, by itself, enough to declare a person incompetent.
Process
Anyone interested in the proposed ward’s well being can request a
guardianship.
An attorney is usually retained to file a petition for a hearing in the
probate court in the proposed ward’s county of residence. The proposed ward
is entitled to legal representation at the hearing, and the court will
appoint an attorney if the allegedly incapacitated person cannot afford
lawyer.
At the hearing, the court with the help of the Guardian ad Litem attempts to
determine if the proposed ward is incapacitated and, if so, to what extent
the individual requires assistance.
If the court determines that the proposed ward is indeed incapacitated, the
court then decides if the person seeking the role of guardian will be
responsible.
Guardian
A guardian can be any competent adult-the ward’s spouse, another family
member, a friend, a neighbor, or a professional guardian (an unrelated
person who has received special training).
A competent individual may nominate a proposed guardian through a durable
power of attorney in case she ever needs a guardian.
The guardian need not be a person at all—it can be a non-profit agency or a
public or private corporation. If a person is found to be incapacitated and
a suitable guardian cannot be found, courts in many states can appoint a
public guardian, a publicly financed agency that serves this purpose.
In naming someone to serve as a guardian, courts give first consideration to
those who play a significant role in the ward’s life – people who are both
aware of and sensitive to the ward’s needs and preferences. If two
individuals wish to share guardianship duties, courts can name co-guardians.
Reporting Requirements
Court often give guardians broad authority to manage the ward’s affairs. In
addition to lacking the power to decide how money is spent or managed, where
to live and what medical care he or she should receive, wards also may not
have the right to vote, marry or divorce, or carry a driver’s license.
Guardians are expected to act in the best interests of the ward, but give
the guardian’s often-broad authority; there is the potential for abuse. For
this reason, courts hold guardians accountable for their actions to ensure
that they don’t take advantage of or neglect the ward.
The guardian of the property inventories the ward’s property, invests the
ward’s funds so that they can be used for the ward’s support, and files
regular, detailed reports with the court.
A guardian of the property also must obtain court approval for certain
financial transactions.
Guardians must file an annual account of how they have handled the ward’s
finances.
Guardians must offer proof that they made adequate residential arrangements
for the ward, that they provided sufficient health care and treatment
services, and that they made available educational and training programs, as
needed.
Guardians who cannot prove that they have adequately cared for the ward may
be removed and replaced by another guardian.
For more information, please see Part II of this article
About the Author:
Nicolosi & Associates -
Attorneys at Law Since 1948. Skilled in the law. Experienced in business.
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