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1. What is probate?
2. What happens if I die without a will?
3. What is a guardianship?
4. What is a trust?
5. What happens if I don’t have a trust?
6. How much do estate taxes cost?
7. How can estate planning save taxes?
8. What is a “Durable Power of Attorney”?
9. What’s the difference between a “living will” and a “will” or “living trust”?
10. What is a “revocable living trust?
11. What is the difference between “estate taxes” and “income taxes”?
12. Can I make a “do-it-yourself” will?
13. Does everything pass through my will?
14. How do I pick a Personal Representative/Executor?
15. How do I pick a guardian for my children?
16. How do I pick a trustee for my children?
- What is
probate?
Probate is the legal
proceeding designed to close an estate and
supervise transfer of assets from the
deceased to his beneficiaries.
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- What happens
if I die without a will?
The estate law (called
the law of intestacy) in your jurisdiction
governs the distribution of your estate. It
is inflexible and may lead to results
radically at odds with your wishes. Further,
the state will assign a guardian of its
choosing. Finally, your children will not
benefit from a trust should you die without
a will.
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- What is a
guardianship?
A guardian is a legally
appointed parental substitute. They have
authority to raise the child, but are
subject to limited court supervision. In
many states the function of a guardian “of
the person” (child rearing) and “of the
estate” (money management) are separated. In
your will, you should provide for both a
guardian to raise your children, and a
trustee to care for the assets of your
estate that are left to the children in
trust. The trust will give instructions to
your trustee regarding your expectations and
desires for your child.
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- What is a
trust?
A trust is a legal device
created by someone (the testator in the
will) for caring for money on behalf of
another (the beneficiary). The authority
over the fund is given to a “trustee”. The
trustee must manage the money in accordance
with the terms of the trust. In your will,
you will likely establish a trust for your
minor children to be sure your estate is
managed properly for them and they are
provided for adequately.
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- What happens
if I don’t have a trust?
In most instances, your
children will receive their share of your
estate outright when they turn the age of
majority in your state. Until then, the
funds will be subject to strict court
supervision, meaning your named guardian
will have to petition the court for any use
of money on your children’s behalf.
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- How much do
estate taxes cost?
Estate taxes are
calculated on your “net estate”, after
certain deductions (such as charitable
contributions, expenses of last illness and
funeral costs). In year 2000, any net estate
over $675,000 is taxable on the excess
beginning with a 37% tax rate and quickly
escalating to 55%.
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- How can
estate planning save taxes?
Beneficiary designation
in your retirement accounts (such as IRA’s
and 401k’s) governs how those assets are
distributed at death. Huge income tax
consequences are at stake depending on what
designations you make. Estate taxes are due
on your net estate. Simple estate planning
can effectively double your personal
exemption (currently $675,000) if you are
married. Other devices, such as irrevocable
life insurance trusts (ILIT’s) can shelter
thousands.
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- What is a
“Durable Power of Attorney”?
A DPOA is a substitute
for a guardianship. It is your way of
granting someone else authority to take care
of you and your affairs should you become
mentally disabled from caring for yourself.
Normally, DPOA’s spring into force upon
disability. However, sometimes the elderly
wish to grant such authority to someone
(such as an adult child) immediately. See
our section on disability planning.
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- What’s the
difference between a “living will” and a “will”
or “living trust”?
A living will (or
“directive to physicians”) is your personal
instruction to your physician to “turn off
the machines” if you are dependent on them
for life support and unlikely to recover. It
bypasses anyone else who might have
authority to make such decisions (such as a
spouse or DPOA holder). See “revocable
living trust” below.
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- What is a
“revocable living trust?
A RLT is a will
substitute, and can be a very effective
means of passing your estate to your
beneficiaries. To do so, you transfer title
to your assets into the trust while you are
alive. You serve as trustee of your own
assets. Then, when you die, they pass
directly to your beneficiaries without a
probate.
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- What is the
difference between “estate taxes” and “income
taxes”?
Income taxes are due on
income you earn. They also apply to deferred
income, such as IRA’s and 401k’s. Estate
taxes are paid on the net value of your
estate as it passes to your beneficiaries.
They are in addition to any income tax due.
Estate taxes can be very high, but apply
after a relatively high personal exemption.
Much “estate planning” is designed to
minimize these confiscatory taxes.
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- Can I make
a “do-it-yourself” will?
There is no law against
it. A few states permit handwritten wills.
Most do not. Regardless, the requirements of
wills are very technical and vary quite
dramatically from state to state. “Fill in
the blank” forms can not take into account
the uniqueness of your estate. One mistake
in drafting or execution can invalidate your
entire plan. The few hundred dollars you
save could cost your estate thousands in
legal fees to undo the chaos.
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- Does
everything pass through my will?
Your will only controls
your “probate estate”. You may hold a bank
account or real estate as “joint tenants
with right of survivorship” with someone.
Those assets will not pass through your
will. Life insurance, or retirement plans
generally designate a beneficiary and will
bypass your will, unless you make your
estate your beneficiary. The danger is, you
may leave assets directly to minor children,
bypassing the trust carefully created in
your will. Complex income tax issues make
this a dangerous area regarding retirement
plans. Be sure to review all of your assets
with your Netwills attorney to coordinate
your entire estate.
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- How do I
pick a Personal Representative/Executor?
The role of executor is
best filled by someone in your locale who
knows you and your wishes. They should be
responsible adults. However, they need not
be estate experts. The estate attorney will
lead them through the process. The
commitment lasts until the estate is closed,
usually within less than a year. As a
general rule, do not pick someone much older
than yourself.
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- How do I
pick a guardian for my children?
Consider your children’s
best interest in choosing a guardian, rather
than your concern with hurting someone’s
feelings. For example, someone close by may
be better than a closer relative far away.
The guardian(s) should be a responsible
adult, who shares your philosophy of child
rearing. Generally, you do not need to make
them trustee of your money, though it is
usually most convenient to do so. As a
general rule, do not pick someone much older
than yourself.
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- How do I
pick a trustee for my children?
The trustee manages the
money set aside for the children until they
reach the age you designate for receiving
their inheritance outright. Therefore,
choose someone who is financially
responsible. They can obtain professional
help if necessary, or you can select a
corporate trustee if the size of the estate
warrants it. Someone close by where the
children will be located is probably best.
As a general rule, do not pick someone much
older than yourself.
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