Here are some of the most common questions I am asked and my short answers. If you’d like more detail, please call—I’d be happy to discuss it with you. ~ Meri-Beth Robertson
Do I really need a Will?
Obviously, as an estate planning attorney, I think it’s important for everyone to have a Will. However, if you have children it is absolutely imperative. A Will is your only opportunity to designate a legal guardian for your children in case something happens to you while they are minors. It also makes sense to include a trust in your Will so that a responsible adult can look after your childrens’ inheritance until they are old enough to manage the money on their own. If parents pass away without having a Will, these very important decisions must be settled in court, which can be an expensive and prolonged proceeding.
Remember, too, that you can always revise the Will later. Often, simple changes can be made with a short, inexpensive Codicil. So, if you and your husband are arguing about who the guardian should be – don’t let indecision paralyze the process. Just get something in place that makes sense now and agree to revisit it in 2 or 3 years.
At what age should I get a Will prepared?
Many people think a Will is something you have prepared around retirement age. However, pick up a newspaper any day and the headlines are filled with stories of people whose lives were unexpectedly cut short. Now is the time to get your planning done.
What documents should I have prepared as part of my estate plan?
I typically recommend that each client have three documents: a Last Will and Testament, a Power of Attorney and an Advance Directive (also known as a “living will”). That way you focus on all of these issues at once, make sure that all of the documents are in sync with one another, and then file them away with the comfort of knowing that everything is in order.
A Will basically disposes of a person’s assets upon his/her death. It also designates who will handle the estate (“the executor”) and, if there are minor children, who the guardians will be. While a Will can be a simple document, many Wills contain trusts which accomplish a variety of objectives. For example, trusts included in a Will can reduce or even eliminate death taxes, safeguard the inheritance of a young or financially irresponsible beneficiary, and protect an inheritance from a beneficiary’s creditors or a future divorce. If a Will contains trusts, it will set forth all of the trust terms and will designate a trustee to oversee the trusts.
A Power of Attorney is a legal document which designates a person (your “attorney-in-fact”) who can act on your behalf in legal and financial transactions and can sign legal documents and tax returns on your behalf. This document can be drafted so that it only becomes effective if you become mentally incompetent (a “springing” power of attorney) or it can be a more general power which, for instance, gives your spouse broad powers to act for you if you travel frequently.
The Advance Directives which I typically prepare for clients contain both an instruction directive (“living will”) as well as a health care proxy where the client appoints an individual (and one or more successors) to make health care decisions for her if she is unable to express her own wishes.
In addition to preparing these documents, I always review how the clients’ assets are titled and take a careful look at the beneficiary designations of their IRAs, life insurance, 401(k)s, etc. This is a critical part of making sure that the whole estate plan works the way it was intended. For example, if a Will contains a thoughtfully drafted trust to hold a child’s assets until he reaches the age of 35, but the life insurance beneficiary designation simply lists the child by name, he will receive those insurance proceeds at age 18 regardless of what the Will says. This is one area where attention to detail is critically important.
I heard the Federal estate tax exemption is over $5 million so why should I worry about estate taxes?
While the federal estate tax exemption amount is currently a very generous $5,430,000, the New Jersey estate tax exemption is only $675,000. For many New Jersey residents, the value of their house alone puts them into the taxable range. Add in the value of liquid investments, life insurance proceeds, IRAs and 401(k)s and there can be a hefty New Jersey estate tax bill which takes a lot of people by surprise.
It is true that no estate tax is due on the first death if property passes to a surviving spouse. While this may seem like good news, it lulls people into thinking that they don’t have to do any tax planning. A simple “sweetheart Will” in which the husband leaves everything to his wife outright wastes a valuable opportunity to use the husband’s $675,000 exemption. This is one of those situations where if you don’t use it, you lose it. The end result—the wife now owns all of the couple’s assets. When she later dies, she will be able to shelter $675,000 but every dollar above that amount will be taxed before it passes to their children. If, instead, they had done some planning in advance and had properly structured Wills, they could have ensured that at least $1,350,000 of their assets passed tax free to their children.
New Jersey also has an inheritance tax, which affects people who are not leaving assets to spouses, children or grandchildren. If, instead, property is passing to siblings, nieces and nephews or friends, New Jersey inheritance taxes will come in to play and should be thoroughly understood.
Is life insurance taxable?
This is a confusing issue for a lot of people in part because of the different taxes involved. When a person dies and you receive a check for insurance proceeds as a beneficiary, those proceeds are not included in your taxable income – you receive them income tax free. However (unless some special planning was done – such as owning the insurance in an irrevocable life insurance trust), the full amount of the death benefit is includable in the “gross estate” of the person who passed away for purposes of calculating his Federal and New Jersey estate taxes. That means the proceeds are included in determining whether the estate exceeds the $675,000 New Jersey exclusion amount.
Should I set up a “living trust” to avoid probate in New Jersey?
This is one of the most common questions I am asked and in 99% of the cases the answer is NO. First of all, probate in New Jersey is a relatively simple process. It is not expensive or complicated so there is no need to avoid it. If you live in New Jersey and own a second home in another state (such a s Florida or New York), you may wish to set up a living trust (also called a revocable trust) to own that real estate. This can help to avoid ancillary probate in that second state when you die. Absent this vacation home scenario, it is unlikely that you need a living trust. I have administered several estates where clients’ assets had been put into revocable trusts during their lifetimes and in many cases, the administration has been more complicated than if they had set up a basic Will and durable Power of Attorney.