Monday, December 1, 2008

What do you mean by an estate plan?

An estate plan is an umbrella term that refers to a plan as to what happens when someone dies or is incapacitated. Issues to consider are where your stuff will go, who will take care of your kids, who will make my decisions if you can't make them, how to make the probate process quicker and less expensive, continuation of a family farm or business, and what the effect of taxes and state liens will be.

There can be many pieces of an estate plan depending on the needs of an individual. Something that just about everyone should have is a will. Without a will, the state will apply the fallback provisions in state law to determine who gets your property, which may or may not follow your intent. Additionally, dying without a will which can specifically call for an expedient probate process, can cause a longer, more expensive probate process.

Also, everyone should have a health care directive, which states who makes the health care decisions for you in the event of your incapacitation and gives direction as to your wishes. This health care directive needs to include a HIPAA waiver to allow the hospital to release protected medical information to this person.

In the same vein, everyone should consider a power of attorney who can deal with your financial affairs in case of your incapacitation. However, once created, that person has as much right to your finances as you do and you should only execute a power of attorney if you have a trusted individual in place.

Besides these documents, other documents can be executed, trusts established, and business entities created which address your specific needs. This is why it is so important to contact a licensed attorney to look at all of your circumstances to craft an estate plan to fit your needs.

Wednesday, November 19, 2008

Is a trust a good idea for me?

A lot of people wonder if they need a trust or if a trust will be a "cure-all" to all issues that could come up after they die. This seemingly simple question is really only properly addressed through determining an individual's goals for their overall estate plan. A trust may play a role in accomplishing these goals.

First, a definition, a trust is a type of ownership where the control of the property and the benefits of ownership are split. A trustee has control of the property and the beneficiary has the benefits of the property. Because pieces of the ownership are split, trusts end up being a useful vehicle to accomplish many types of estate planning goals. These goals include:

1. avoiding or eliminating estate tax
2. avoiding probate
3. becoming eligible for medical assistance
4. farm or family cabin continuation
5. providing for young children or those with special needs
6. allowing another to use your assets to provide for your needs in case of incapacitation
7. using your assets to accomplish a charitable purpose.

If you are interested in using a trust to accomplish some of these goals, speak with a licensed attorney who can discuss your estate planning goals and various legal tools, including trusts, that may help.

Tuesday, October 21, 2008

What's a TODD?

The Minnesota Legislature recently enacted legislation allowing the use of "Transfer on Death Deeds", or TODD. The Minnesota Legislature enacted Minnesota Statute 507.071, to be effective August 2008, which establishes the nature and use of TODDs. So what is a TODD and what can it do for you?

A Transfer on Death Deed works a little bit like termination on death accounts that many people have at banks.

With a Transfer on Death Deed, prior to the their death a grantor/owner creates a transfer on death deed which lists the real property that will be disposed of on death. The deed is filed with the county where the real property is located. At death, the property automatically belongs to the recipient listed on the deed.... without the need for probate. It's a lot like a life estate, except that a TODD can be revoked by the grantor/owner for any reason. The grantor/owner has the benefit of use of the property for life, transferring the property upon death without probate, and still retains control in determining who gets the property. A TODD works great in situations where it is advisable for a piece of real property to stay out of probate proceedings.

However, a Transfer on Death Deed isn't the magic wand that some people want it to be. Property transferred by a TODD will still likely be used to determine a taxable estate because the owner retains the power to revoke the deed. Additionally, property transferred by a TODD is still subject to any mortgages, liens or judgments that the property was subject to during the life of the owner/grantor. Therefore, a Transfer on Death Deed will not reduce estate tax or prevent recovery of government benefits.

If you think that a TODD may be right for you, contact a licensed Minnesota attorney.

Monday, September 15, 2008

What is Ancillary Probate?

In an increasingly mobile society, individuals are owing property in more than one state. Whether it be the lake cabin in Wisconsin, the condo in Florida or an interest in the family farm in North Dakota, owning such property may complicate matters for those you leave behind.

When real property located in another state is "disposed" of (fancy lawyer language for "given") in a will, a separate probate proceeding in that state will have to be commenced. This type of probate is typically called "ancillary probate" (more fancy lawyer language for additional probate in another state that is secondary to the main probate occurring in the state of the decedent's death or domicile). This will require the payment of additional court fees and hiring of local counsel to appear on behalf of the estate. All of this will cost your estate money.

Additionally, ancillary probate might not be able to be started until certain steps are completed in the primary probate occurring in the home state. Ancillary probate, once begun, will also be subject to the calendar of that court, which may cause further delay in wrapping up the probate of the estate.

Another issue is that some states require that personal representatives meet certain conditions, such as residency, that your home state doesn't require. That could mean that the person you've given the power to deal with your estate won't make the cut in another state. In such a case, the court in the ancillary state may appoint another person or a professional to administer the estate, which may cost your estate even more money.

There are ways to avoid ancillary probate which require careful planning in disposing of the property outside of the will. If you have property in another state, let your estate planner know about it. Your estate planner can work with another attorney in the state where the property is located to make sure your estate is dealt with as efficiently as possible, both in time and money.

Friday, August 1, 2008

Seriously, parents need a will.

Everyone knows that, as soon as they have kids, they "should" get a will. Unfortunately, many people put it off, usually because of the cost, thinking that whatever the intestacy laws of the state they live in will probably do what they would do anyway. Well, one Minnesota law is a good reminder to all of us that relying on intestacy laws may cause a lot of headaches for those we leave behind.

Minnesota Statute 524.2-402(a)(2) provides that if a decedent dies without a will and leaves a spouse and descendants, the spouse will inherit a life estate in the home with the descendants inheriting a remainder interest. That means that both the spouse and descendants own the property at the same time, but that the spouse will have a right to live in the house for the remainder of that spouse's life. The purpose of this law is to give the descendants some right to the estate if the spouse remarries. However, this can create problems in cases where the descendants are minor children.

If a parent and their children hold property in this way, then the parent is prohibited from taking any major action, such as refinancing or selling the home, without the children's permission. If the children are minors, then the parent has to petition the court to allow such action to be taken and the children are usually compensated by getting a portion of the profits on any sale. Additionally, it's possible that the court might appoint a guardian/conservator for the minor child to independently represent the child's interest at the hearing. All of this comes at a cost of time and money and can seriously hinder the parent's ability to deal with the property.

How can this be avoided? Many people have their home in joint tenancy with right of survivorship. In the event of one parties' death, the property automatically goes to the other party without triggering will provisions or intestacy laws. Unfortunately in this case, property is held in joint tenancy only if the title specifically states that it is in joint tenancy. If there is any mistake or question as to the title, it will not be in joint tenancy. If this is the case, then the parties hold the property as tenants-in-common and, upon the death of one party, that interest will pass under will provisions or intestacy laws, including the law that makes children co-owners of the property.

In order to make sure that your spouse will not have to deal with this major headache, find a licensed attorney and get that will done.

Tuesday, July 8, 2008

Estate Planning for New Parents.

I was watching a rerun of one of my favorite TV shows, Jon and Kate Plus 8 (it's a reality show that follows a couple with twins AND sextuplets). In that episode, they got a will done... I, the estate planning dork that I am, freaked out that my favorite show was doing estate planning. Anyway, I'm going to go into more detail about a topic that I've touched on in previous posts: Estate Planning for New Parents.

When I refer to estate planning, I'm talking about going beyond drafting a simple will and establishing more complicated mechanisms to deal with your property after your death. The most popular mechanism is a trust, which allows one person (the settlor) to give control over property to another (trustee) for the benefit of yet another (the beneficiary). Trusts can be used to reduce the tax burden on an estate. However, even those whose estates are small enough to avoid tax can benefit from the use of establishing a trust in their will. Perhaps the largest group is parents with young children.

In the event that both parents die before the children have reached adulthood, a trust can give direction to the guardians of the children as to how to best spend the parents estate for the benefit of the children. Also, with a trust, the guardian is not given free reign over the money. Rather a trustee handles the money according to certain purposes laid out in the trust. Additionally, if a trustee is mishandling the children's wealth, a court can review the trustees actions. Finally, with a trust, you can delay the child's outright ownership of the money beyond their eighteenth birthday. As one parent of a sixteen year old said when asked what he thought his child would do if he got a large amount of cash at eighteen, "My kid would party like a rock star."

In the case of parents with more than one child, the most widely used trust is a pot trust. A pot trust initially pools the money in a common pot for the use of all children. The common pot is used because not all children have the same needs growing up and some will need more resources than others. One might have disabilities, or another might have a shot at the Olympics. In this trust there are two ages to consider. You determine the age that the children receive their money, but you also determine at what age the pot is split into equal shares. While many people decide to give the assets to the children at age 21 or 25, those same people will split the pot when the oldest turns 18 so that their college education doesn't suck all of the money out of trust, leaving nothing for the younger siblings.

With any trust you can condition outright ownership of money on certain events, such as marriage or a college graduation. Jon and Kate on my favorite show came up with an interesting plan, giving outright ownership upon college graduation or upon reaching a certain age, whichever comes first. That way, the children have an incentive to finish college in a timely manner, without unduly prejudicing the children who took longer to finish college or choose not to attend college.

Whatever your wishes may be, working with a licensed attorney to include a trust in your will is a great way to responsibly provide resources for your children's needs. Additionally, a licensed attorney can assist you in an extremely important piece that shouldn't be overlooked... making sure that the named beneficiary of your death benefits is the trust, so that the trust is sufficiently funded.

Monday, June 9, 2008

Why do I need a Will?

Most people know they should have one, but when is it necessary to have a will?

First, an important time to have a will done is when children are involved. In case of you and your spouse's death, your will can name your preferred guardian of your children. Unless that preferred guardian is found to be unfit, that person will be named as your children's guardian by a court. Additionally, because you have let your wishes be known, your relatives are less likely to dispute the appointment of the guardian. Without the guidance that a will provides, you will leave the task of finding the appropriate guardian up to a court and opens up a protracted fight as to who will care for your children.

Second, another good reason to have a will is to simplify the probate process for those you leave behind. With a will, you can request to have an unsupervised probate, which means that your personal representative (the person you have named in your will who will be distributing and caring for your estate) can act without constant court supervision. Additionally, you can waive the need for your personal representative to put up a bond (cash held by the court to make sure your personal representative does his job, but which is generally a huge burden on the representative).

Finally, another good reason to have a will is to keep your family from fighting. Even though you may not have a lot of money for them to fight over, sentimental items may be just a contentious. Family jewelry, china, or gnome collection can cause family members to fight, even if there is little monetary value involved. In Minnesota, a personal property list that is simply signed by the decedent carries the weight of a will if it is referred to in a will. The personal property list can be changed at anytime, allowing one to add items or change who will receive them without redoing the will. However, you will need a will referring to the list to make the list effective.

Wills aren't just for the rich. People of all income levels, or really those they leave behind, benefit from the clear indication of intent and convenience in distributing the estate that a will provides.

Wednesday, May 7, 2008

You Have the Green Card... Now What? Part II.

Now for the federal tax issues. The US taxes the transfer of wealth through gifts and estates. Interestingly enough, US estate and gift tax is generally much higher than similar taxes in other countries, even those who are known for astronomically high income tax rates. The US taxes approximately 45% of estates exceeding a certain amount depending on the year, usually $1 million or $2 million. However, US tax laws allow portions of the estate to be exempt for various reasons, no matter how big the estate is. One of the biggest is through marital transfers. Amounts in the estate transferred to a spouse are not taxed. This is known as the marital deduction.

However, the martial deduction is NOT available to spouses who do not have US citizenship. This is the biggest tax difference regarding non-citizens. Why don't non-citizens receive this tax benefit? We have to go back to the reason behind the marital deduction. The IRS is not granting a tax break so much as deferring when the tax is paid. Let's say that Husband dies leaving 5 mil to his citizen spouse. When she dies, she would theoretically have that 5 mil in the estate, which would then, theoretically, be taxed. However, the IRS is not as confident that they will get their money if the spouse is a non-citizen. The thinking goes that once the citizen dies, the non-citizen will go back to their home country. Without the spouse having citizenship or being domiciled in the US, the IRS has no way to tax the amount that went to the spouse.

Is there any way for a non-citizen spouse to avoid estate tax? There are two main ways. The first is through an estate tax treaty between the US and the spouse's country of citizenship. Many of these treaties allow a limited marital deduction. The US-Germany treaty, for instance, allows a martial deduction equal to the amount that is tax exempt in that year. For example, this year estates under $ 2 million are exempt from estate tax. A German spouse would also be able to receive an additional $2 million of the estate tax free under a marital deduction. Your planner should be aware of tax treaties and use the provisions in the applicable treaty to your advantage.

Second, the IRS does not tax amounts set in trust, with an American trustee, for the benefit of the spouse. These trusts are known as qualified domestic trusts, or Q-DOTs. There are some negative aspects of Q-DOTs. First, the spouse will not have control over the money and will have to go through a trustee in order to obtain funds. Second, Q-DOTs must meet certain requirements in order to be considered valid by the IRS. Make sure you are working with a planner who is familiar the the IRS rules regarding Q-DOTs.

With the right understanding of tax treaties and proper use of Q-DOTs, you can minimize or eliminate the tax burden you or your non-citizen spouse may have upon death.

Thursday, April 10, 2008

You Have the Green Card... Now What? Part I.

For the next few posts, I'll be doing a series on a topic that I've had an interest in for a long time: how not being a US citizen can effect estate planning. I'll try to address what a non-citizen, or their spouse, should think about and make certain that their estate planner is considering when constructing an estate plan, including what tax issues to consider. I'll also try to hit on what a US citizen should be concerned with when inheriting property from outside the US. I'll refer a lot to German law because I've specifically looked at the law in that country. Today, I'll mention some non-tax issues to consider when setting up the estate plan.

First of all, if you or your spouse is not a US citizen, make sure your estate planner knows about it. As I post on this subject, you'll see that non-citizens have a lot more to consider and if your estate planner doesn't know your status, the plan will almost certainly not meet your needs. Most good planners routinely address status in the first meeting. If they don't, it might be a sign to move on to a planner with experience in the area.

Additionally, many countries do not follow American notions of what probate and estate law applies to an individual. Most states apply the law of where the person was domiciled (basically, living) or where they died. Some countries, including Germany, apply the law of the person's citizenship. So, a German court, or possibly a US court, would apply German law to a German citizen who lived and died in the US. If this happens, the foreign law will have a big impact on what happens to the estate.

One of the big non-tax issues for the non-citizen is whether the country of citizenship recognizes a children's right to take against the will. In America, a testator (the fancy legal term for the person who make a will) has an unlimited right to disinherit the children... and the children can't do a thing about it. In many civil law countries, a testator doesn't have this right. For example, in Germany, a disinherited child can make a claim for half of what they would have been entitled to, if no will had been in place. This means that if you want to give everything to your spouse, with the idea that the spouse will get taken care of during their life and pass the wealth on to the kids when they die, your kids have the right to interfere with that plan.

This is a lot of information, but gives you an idea of how different law can be between countries and how important it is for your planner to be aware of those differences and how it can affect you.

So, what can a non-citizen do to deal with some of these non-tax issues? A helpful thing for your estate planner to do to deal with the non-tax issues is to put your country's consulate number on speed-dial. Many consulates have a legal department especially for legal questions from their citizens. With a quick call to your consulate, your planner can learn what your country's law is, how it may affect you, and what property it will affect. Additionally, your planner can work together with a planner in your home country to implement your plan and make sure that your will will be recognized in either country. Ultimately, the goal is for your planner to be able to craft a plan to meet your, or your spouse's, particular non-citizen needs.

Wednesday, March 5, 2008

Making sure ALL of your children are taken care of.

CNN is reporting what will hopefully be the last in the court hearings regarding Anna Nicole Smith's death.

In summary, a California court ruled that, although Danielynn was not expressly provided for in the will, she will be able to benefit from a trust, created by the will, which was set up for Anna's son Daniel. Daniel predeceased Anna.

Although the story is sure to be tabloid fodder today, it does raise a good point about making sure all of your children (born and yet-to-be-born) are taken care of after you are gone.

Minnesota, like all states, gives very limited to no rights for children to inherit if there is a will which does not provide for them. This is because common law jurisdictions, like the US and the UK, prefer to give freedom to the testator to distribute their estate as they see fit. Other countries, like France and Germany, allow children to take some assets even if the will expressly disinherits them.

The common law approach is great for parents who want to teach their lazy kids a lesson, but can create problems for those parents who want to provide for their kids, yet who don't make the necessary provisions. Although Minnesota, like most states, allow children who are born after a will is executed to get some inheritance, this requires court action and can make the process of getting the assets to the children costly in both time and money.

In the recent Anna Nicole Smith hearing, it appears that a pivotal point for the judge was that the trust provisions expressly allowed for any children born after the execution of the will to benefit from the trust. The lesson is one that can be generally applied to estate planning: if you want something to happen, don't leave it up to a judge. Rather, clearly state your wishes in your will or trust documents. When you meet with your estate planner, be sure to discuss your wishes in the event that children are born after you execute your will.

Tuesday, March 4, 2008


Welcome to the Minnesota Estate Planning and Probate Blog. This monthly blog will discuss news items and topics relating to estate planning, along with discussions about the basics of estate planning and is meant for the estate planning practitioner and individuals wishing to learn more about estate planning and probate alike.