Simply signing a will or power of attorney with a “do it yourself” plan may actually be worse than doing nothing, costing family members, especially a “special needs” member the loss of government benefits or resulting in an ex-spouse inheriting assets.
Estate Planning

• Trust Administration
• Power of Attorney
• Power of Attorney for Healthcare
• Trust Tax Preparation
• Estate Tax Preparation
• Business Formation
• Business Valuation
• Audits

After an individual’s death, his or her assets will be gathered, business affairs settled, debts paid, necessary tax returns filed, and assets distributed as the deceased individual (generally referred to as the “decedent”) directed. These activities generally will be conducted on behalf of the decedent by a person acting in a fiduciary capacity, either as executor (in some states called a personal representative) or as trustee, depending upon how the decedent held his or her property.

As a first step, it is helpful to know the meaning of a few common terms:

Fiduciary– An individual or bank or trust company that acts for the benefit of another. Trustees, executors, and personal representatives are all fiduciaries.

Grantor– (Also called “settlor” or “trustor”) An individual who transfers property to a trustee to hold or own subject to the terms of the trust agreement setting forth your wishes. For income tax purposes the same term is used to mean the person who is taxed on the income from the trust. Confusing, but different concepts.

Testator– A person who has made a valid will (a woman is sometimes called a “testatrix”).

Beneficiary– A person for whose benefit a will or trust was made; the person who is to receive property, either outright or in trust, now or later.

Trustee– An individual or bank or trust company that holds legal title to property for the benefit of another and acts according to the terms of the trust. This can be confusing in that you can sometimes be both a trustee and a beneficiary of the same lifetime (inter-vivos) trust you established or a trust established by someone else for you at their death (testamentary trust).

Executor– (Also called “personal representative;” a woman is sometimes called an “executrix”). An individual or bank or trust company that settles the estate of a testator according to the terms of the will, or if there is no will in accordance with the laws of the decedent’s estate (intestacy), although a person acting in intestacy may be called by a different name, such as administrator.

Principal and Income – Respectively, the property or capital of an estate or trust and the returns from the property, such as interest, dividends, rents, etc. In some cases, gain resulting from appreciation in value may also be income.

Power of Attorney

An important part of lifetime planning is the power of attorney. A power of attorney is accepted in all states, but the rules and requirements differ from state to state. A power of attorney gives one or more persons the power to act on your behalf as your agent. The power may be limited to a particular activity, such as closing the sale of your home, or be general in its application. The power may give temporary or permanent authority to act on your behalf. The power may take effect immediately, or only upon the occurrence of a future event, usually a determination that you are unable to act for yourself due to mental or physical disability. The latter is called a “springing” power of attorney.  A power of attorney may be revoked, but most states require written notice of revocation to the person named to act for you.

The person named in a power of attorney to act on your behalf is commonly referred to as your “agent” or “attorney-in-fact.” With a valid power of attorney, your agent can take any action permitted in the document. Often your agent must present the actual document to invoke the power. For example, if another person is acting on your behalf to sell an automobile, the motor vehicles department generally will require that the power of attorney be presented before your agent’s authority to sign the title will be honored. Similarly, an agent who signs documents to buy or sell real property on your behalf must present the power of attorney to the title company. Similarly, the agent has to present the power of attorney to a broker or banker to effect the sale of securities or opening and closing bank accounts. However, your agent generally should not need to present the power of attorney when signing checks for you.

Why would anyone give such sweeping authority to another person? One answer is convenience. If you are buying or selling assets and do not wish to appear in person to close the transaction, you may take advantage of a power of attorney. Another important reason to use power of attorney is to prepare for situations when you may not be able to act on your own behalf due to absence or incapacity. Such a disability may be temporary, for example, due to travel, accident, or illness, or it may be permanent.

If you do not have a power of attorney and become unable to manage your personal or business affairs, it may become necessary for a court to appoint one or more people to act for you. People appointed in this manner are referred to as guardians, conservators, or committees, depending upon your local state law. If a court proceeding, sometimes known as intervention, is needed, you may not have the ability to choose the person who will act for you. Few people want to be subject to a public proceeding in this manner so being proactive to create the appropriate document to avoid this is important. A power of attorney allows you to choose who will act for you and defines his or her authority and its limits, if any. In some instances, greater security against having a guardianship imposed on you may be achieved by you also creating a revocable living trust.

Estate, Gift, and GST Taxes

The federal government imposes taxes on gratuitous transfers of property made during lifetime (gifts) or at death (bequests/devises) that exceed certain exemption limits. Gift taxes are imposed on transfers during lifetime that exceed the exemption limits, and estate taxes are imposed on transfers at death that exceed the exemption limits. The generation-skipping transfer (GST) tax is imposed on transfers to grandchildren and more remote descendants that exceed the exemption limits so transferors cannot avoid transfer taxes on the next generation by “skipping” a generation. The GST tax is levied in addition to gift or estate taxes and is not a substitute for them.

The gift, estate, and GST tax exemptions were $5 million in 2011.  The exemptions are indexed for inflation, resulting in exemptions of $5.12 million for 2012 and $5.25 million for 2013.  An individual can transfer property with value up to the exemption amount either during lifetime or at death without paying any transfer tax.  In other words, any portion of the exemption used during lifetime reduces the amount of exemption available at death for estate tax purposes. For example, if you made a lifetime taxable gift of $2 million in 2013, your remaining exemption amount that could be used by your estate at your death would be $3.25 million ($5.25 million 2013 inflation adjusted exemption, less the $2 million lifetime gift). The GST exemption essentially allows the earmarking of transfers, made during lifetime or at death, that either skip a generation or are made in trust for multiple generations.  Certain gifts are not applied toward the exemption, such as “annual exclusion” gifts and direct payments to medical or education providers, and can be made completely tax-free.

Transfers between spouses and to certain trusts for spouses, made during lifetime or at death, may be made without the imposition of any tax.  These transfers also do not use any exemption. This is known as the “unlimited marital deduction.”

The $5 million inflation adjusted estate tax exemption is “portable” between spouses beginning 2011 so that a surviving spouse may take advantage of a deceased spouse’s unused exemption (DSUE) through lifetime gifts by the surviving spouse, or at the surviving spouse’s later death.

This means that no transfer tax is assessed on estates up to $5.25 million for individuals and $10.5 million for married couples, assuming no lifetime gifts other than annual exclusion gifts or certain transfers for educational or medical expenses were previously made.

It is important to note that there was no inflation indexing of the transfer tax exemption prior to 2012. Given the large $5 million base amount that is indexed, the annual increases in the exemption amounts are likely to be substantial, even when inflation is not particularly high. This will create new planning opportunities. First, for taxpayers who fully use their exemption in any given year, there will be a significant new exemption available the next year. Second, for the first time, the growth in the exemptions will enable taxpayers whose estates grow to remain protected from the imposition of transfer tax.

With the new high exemptions, most people will no longer be subject to the federal estate tax, but this fact should not be interpreted to mean that planning is not necessary. Federal estate, gift and GST taxes are but one component of the myriad of issues addressed in the estate planning process.  In addition, many states now impose state estate tax, and the state estate tax exemption, if any, may be much lower than the federal exemption. The most common state estate taxes are based on a specified percentage of the federal estate tax.  Some states impose an inheritance tax tied to the family relationship between the decedent and the recipient of property from the estate.

Only Connecticut currently imposes a state gift tax. This means that residents of any state, other than Connecticut, that imposes a state estate tax, may be able to significantly reduce or even eliminate their state estate tax at death by making gift transfers during their lifetimes.  These taxes can be particularly complex or apply in unexpected ways.  In addition, the determination as to which state may tax a particular taxpayer or tax property located within that state regardless of where the taxpayer resides is complex.  Accordingly, this type of planning should be pursued only with professional guidance.

Estate Guidlines

As a general rule, the administration of an estate or trust after an individual has died requires the fiduciary to address certain routine issues and follow several standard steps to distribute the decedent’s assets in accordance with his or her wishes. These guidelines focus on activities that occur in an estate or trust immediately after the individual has died.

Understanding the Will

It is very important to read and understand the will or trust so that you will know who the beneficiaries are, what they are to receive and when, and who, if any, your co-fiduciaries are

Does the will give everything outright, or does it create new trusts that may continue for several years? Does a trust mandate certain distributions (“All income earned each year is to be paid to my wife, Nancy”) or does it leave this to the trustee’s discretion (“My trustee shall distribute such income as she believes is necessary for the education and support of my son, Alan, until he reaches age 25”)? The document often imparts important directions to the fiduciary, such as which assets should be used to pay taxes and expenses. The document will usually list the fiduciary’s powers in some detail.

Most fiduciaries retain an attorney who specializes in the area of trusts and estates to assist them in performing their duties properly. An attorney’s advice is very helpful in ensuring that you understand what the will or trust and applicable state law provide. For example, at an initial meeting it is common for the attorney to review step by step many of the key provisions of the will or trust (or both) so that you will understand your role. Be mindful that if you accept the appointment to serve as an executor or trustee, you will be held responsible for understanding and implementing the terms of the trust or will.

Managing Estate Assets

It is the fiduciary’s responsibility to take control of (marshal) all assets comprising an estate or trust. Especially when a fiduciary assumes office at the grantor’s or testator’s death, it is crucial to secure and value all assets as soon as possible. Some assets, such as brokerage accounts, may be accessed immediately once certain prerequisites are met.  Typical prerequisites are an executor obtaining formal authorization, sometimes referred to as Letters Testamentary, from the court and producing a death certificate.  Other assets, such as insurance, may have to be applied for by filing a claim. The usual practice is to engage a professional appraiser to value the decedent’s tangible property, such as household furniture, automobiles, jewelry, artwork, and collectibles. Depending on the nature and value of the property, this may be a routine activity, but you may need the services of a specialist appraiser if, for example, the decedent had rare or unusual items or was a serious collector. Real estate, whether residential or commercial, and any business interests also must be valued. Besides providing a valuation for assets that may be reported on a court-required inventory or on the state or federal estate taxreturn, the appraisal can help the fiduciary gauge whether the decedent’s insurance coverage on the assets is sufficient. Appropriate insurance should be maintained throughout the fiduciary’s tenure. The fiduciary also must value financial assets, including bank and securities accounts. Bear in mind that for federal estate tax returns for estates that do not owe any federal estate tax, certain estimates are permitted. This might lessen the appraisal costs that must be incurred.

Handling Debts and Expenses

It is the fiduciary’s duty to determine when bills unpaid at death, and expenses incurred in the administration of the estate, should be paid, and then pay them or notify creditors of temporary delay. In some cases the estate may be harmed if certain bills, such as property or casualty insurance bills or real estate taxes, are not paid promptly. While most bills will present no problem, it is wise to consult an attorney in unusual circumstances, as the fiduciary can be held personally liable for improperly spending estate or trust assets or for failing to protect the estate assets properly, such as by maintaining adequate insurance coverage.

The fiduciary may be responsible for filing a number of tax returns. These tax returns include the final income tax return for the year of the decedent’s death, a gift or generation-skipping tax return for the current year, if needed, and prior years’ returns that may be on extension. It is not uncommon for a decedent who was ill for the last year or years of his or her life to have missed filing returns. The only way to be certain is to investigate. In addition, if the value of the estate (whether under a will or trust) before deductions exceeds the amount sheltered by the estate tax exemption amount, which is $5 million inflation adjusted ($5.25 million in 2013), a federal estate tax return will need to be filed.  Even if the value of the estate does not exceed the estate tax exemption amount, a federal estate tax return still may need to be filed.  Under the concept of portability, if the decedent is survived by a spouse and he or she intends to use any estate tax exemption the deceased spouse did not use, an estate tax return must be filed.

Since the estate or trust is a taxpayer in its own right, a new tax identification number must be obtained and a fiduciary income tax return must be filed for the estate or trust.  A tax identification number can be obtained online from the IRS website. You cannot use the decedent’s social security number for the estate or any trusts that exist following the decedent’s death.

It is important to note for income tax planning that the estate or trust and its beneficiaries may not be in the same income tax brackets. Thus, timing of certain distributions can save money for all concerned. Caution also should be exercised because trusts and estates are subject to different rules that can be quite complex and can reach the highest tax rates at very low levels of income. Some tax return preparers and accountants specialize in preparing such fiduciary income tax returns and can be very helpful. They are familiar with the filing deadlines, will be able to determine whether the estate or trust must pay estimated taxes quarterly, and may be able to help you plan distributions or other steps to reduce tax costs.

Most expenses that a fiduciary incurs in the administration of the estate or trust are properly payable from the decedent’s assets. These include funeral expenses, appraisal fees, attorney’s and accountant’s fees, and insurance premiums.  Careful records should be kept, and receipts should always be obtained. If any expenses are payable to you or someone related to you, consult with Rafael M. Amezaga, Jr. about special precautions that should be taken.

Funding the Bequests

Wills and trusts often provide for specific gifts of cash (“I give my niece $50,000 if she survives me”) or property (“I give my grandfather clock to my granddaughter, Nina”) before the balance of the property, or residue, is distributed. The residue may be distributed outright or in further trust, such as a trust for a surviving spouse or a trust for minor children. Be sure that all debts, taxes, and expenses are paid or provided for before distributing any property to beneficiaries because you may be held personally liable if insufficient assets do not remain to meet estate expenses.  Although it is usual to obtain a receipt and refunding agreement from the beneficiary that states that he or she agrees to refund any excess distribution made in error by the fiduciary, as a practical matter it is often difficult to retrieve such funds. In some states, you will need court approval before any distributions may be made. Where distributions are made to ongoing trusts or according to a formula described in the will or trust, it is best to consult an attorney to be sure the funding is completed properly. Tax consequences of a distribution sometimes can be surprising, so careful planning is important.

Trust Administration

Trusts are designed to distinguish between income and principal.  Many trusts, especially older ones, provide for income to be distributed to one person at one time and principal to be distributed to that same person a different time or to another person. For example, many trusts for a surviving spouse provide that all income must be paid to the spouse, but provide for payments of principal (corpus) to the spouse only in limited circumstances, such as a medical emergency.  At the surviving spouse’s death, the remaining principal may be paid to the decedent’s children, to charity, or to other beneficiaries. Income payments and principal distributions can be made in cash, or at the trustee’s discretion, by distributing securities as well as cash. Never make assumptions, as the terms of every will and trust differ greatly. There is no such thing as a “standard” distribution provision.

Unless a fiduciary has financial experience, he or she should seek professional advice regarding the investment of trust assets. In addition to investing for good investment results, the fiduciary should invest within the applicable state’s prudent investor rule that governs the trust or estate and with careful consideration of the terms of the will or trust, which may modify the otherwise applicable state law rules.  A skilled investment advisor can help the fiduciary decide how to invest, what assets to sell to produce cash for expenses, taxes or outright gifts of cash, and how to minimize income and capital gains taxes. Simply maintaining the investments that the decedent owned will not be a defense if an heir claims you did not invest wisely or violated the law governing trust investments. In all events, it is important to have a written investment policy statement stating what investment goals are being pursued.

During the period of administration, the fiduciary must provide an annual income tax statement (called a Schedule K-1) to each beneficiary who is taxable on any income earned by the trust. The fiduciary also must file an income tax return for the trust annually. The fiduciary can be held personally liable for interest and penalties if the income tax return is not filed and the tax paid by the due date, generally April 15th.

Closing the Estate

Estates may be closed when the executor has paid all debts, expenses, and taxes, has received tax clearances from the IRS and the state, and has distributed all assets on hand. Trusts terminate when an event described in the document, such as the death of a beneficiary, or a date described in the document, such as the date the beneficiary attains a stated age, occurs.  The fiduciary is given a reasonable period of time thereafter to make the actual distributions. Some states require a petition to be filed in court before the assets are distributed and the estate or trust closed. When such a formal proceeding is not required, it is nevertheless good practice to require all beneficiaries to sign a document, prepared by an attorney, in which they approve of your actions as fiduciary and acknowledge receipt of assets due them. This document protects the fiduciary from later claims by a beneficiary. These formalities are recommended even when the other heirs are relatives, as that alone is never an assurance that one of them will not have an issue and pursue a legal claim against you.  Finally, a final income tax return must be filed and a reserve kept back for any due, but unpaid, taxes or estate expenses.