Why do we need estate planning?

PLANNING FOR THE FAMILY AND THE FUTURE Regardless of what financial circumstances you may find yourself in during life, some thought must be given to how things would change when you die. The loss of a loved one is always emotionally traumatic. It can also create a financial disaster. Estate planning is an activity meant to limit the financial disruption caused by death. Planning also will assure that the needs of your young children are met, that estate tax and income tax is eliminated or kept to a minimum, that a disabled child or parent is cared for, and that your widow (or widower) has adequate resources to live comfortably after you are gone. Here we will look at several important issues in planning for future life and death. In the estate planning process, you should be dealing with a lawyer experienced in that field. Often on larger estates, an accountant, life insurance agent, financial planner and bank trust officer will participate in the planning process. The legal cost of estate planning varies substantially depending upon the complexity of tax issues, the need for unusual drafting in a will, and the amount of the lawyer’s time required. It is safe to say, however, that the cost of good planning is modest. This is particularly true when comparing the cost to the expense of tax and legal difficulties that can result from an unplanned or poorly planned estate.

The Will

The cornerstone of the typical estate plan is the will. A will is a written document, executed under formalities required by law. Among many other objectives which the will can serve, it provides for the disposition of all property owned outright at death. A will can be changed any number of times, and it is only the last will, existing at death, which controls the disposition of the property. A person may leave property in any way he or she chooses. This could be outright or “in trust.” There are very few limitations placed by the law on how property can be left. There is a right created in a surviving spouse, however, to benefit from the estate. Even if totally disinherited by a will, a surviving spouse may have a right to take a share of the estate. This is called the “right of election.” The right of election is the greater of $50,000 or one-third of the estate. The amount of the “estate.” for purposes of this right of election includes joint property, certain gifts made before death and property in some types of trusts. This right can be waived by a written agreement, known commonly as a premarital agreement. In the case of second marriages, this agreement is used to protect the inheritance of children of the prior marriages.

One unfortunate aspect of wills is that the terms can turn family members against one another. A disfavored child who receives nothing under the will may be in a position to contest its validity. You must be competent and not under undue influence in order to execute a valid will. If a disgruntled family member can convince a court that you were not competent, or that someone psychologically forced you to execute the will, then it can be declared invalid. In that event, the contestant could share in your estate as if there were no will. These will contests take up much of the time of the Surrogate’s Court which supervises the administration of estates. They tend to be very costly in legal expense and emotional distress. It is critical therefore, in planning an estate, that every effort be made to avoid such a contest, or to minimize the risk of it.

Estate Planning

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When There Is No Will

A person who dies without a will is called an “intestate.” When you forgo the right to make a will, the law effectively makes one for you. New York law provides that the property of an intestate passes to family members as the statute provides. Contrary to popular opinion, the State of New York does not receive any of your property except where there are no descendants of any grandparent, and no will. Since this would include descendants of all cousins, it is extremely rare for an estate to pass to the State of New York. A more relevant problem is found in the way the legislature has chosen to dispose of your property if you have no will. For example, if you are survived by a spouse and children, the spouse will not necessarily receive the entire estate. Following is an illustration of how property passes when there is no will. Very seldom does this represent the wishes of the decedent, but it becomes the will, by default, nonetheless.

Substitutes for a Will

The will is not the only way of passing property at death. Forms of ownership and beneficiary designations can also take care of transfer at death. These will be discussed in more detail later. A planning tool whose use has become very popular in many parts of the country is the revocable living trust. This is a trust you create by agreement during your life. Like the will, it has a provision for disposition of the property after your death. You retain the right to revoke the trust, change the trustee, or amend the trust, making it very flexible. At your death, the property passes out of the trust to the beneficiaries you have chosen. In a sense, it serves as a substitute for the will. It has an important additional advantage in that it can serve to assist you with management of your financial affairs should you become incapacitated by a stroke or other illness or injury. While the trust has no tax advantage, it can be a valuable tool, particularly for the older person who is beginning to need assistance with financial affairs. The cost of creating such a trust and funding it is much greater than making a will generally, which may account for its lack of widespread use in New York.

There were many tax and non-tax disadvantages to use of a revocable trust, but many of these disadvantages were eliminated by federal and New York legislation. Further discussion is found in the chapter on Trusts later in this booklet.

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