What is it about Estate Planning that no one wants to think about
it, talk about or do anything about it until it is too late? Well, for starters, Estate Planning can be very confusing and complicated depending upon your particular situation especially if you don’t understand what it is or why you need to plan. It also involves talking about death, and we all know that no one wants to think about death or dying. There are some issues that you should consider in order to determine which vehicle would be best for you:
■Will the heirs receive equal or unequal shares?
■At what age should your heirs receive their share or should it be paid in two or three installments at different ages?
■Should specific property be left to certain heirs?
■Do you intend to disinherit or omit any heirs?
■What to do in cases where you marry someone who has a separate estate, which you want your new spouse to benefit from but also want the remainder of the estate to go to your heirs and not to your new spouse’s heirs?
■What if you have a child with reckless spending habits or substance abuse problems, and you fear that this child will quickly misuse his or her inheritance?
■How to deal with mentally or physically disabled heirs?
■How to assure that heirs will use their share to pay for schooling and do so prudently?
■What if an heir dies before you do?
In order to understand Estate Planning it is necessary to start from the beginning. There are two important words and definitions which you must know. The first word is “Estate”. The word Estate includes the total property owned by an individual prior to the distribution of that property under the terms of a will, trust or inheritance laws of your State. An individual’s Estate includes all assets and liabilities. The second word you must know is the word “Property”. Property is described as either real or personal. Real property is real estate,(i.e. houses, buildings, land) and personal property is everything else. Personal property includes physical assets such as automobiles, equipment, household items, and also includes financial property such as securities, notes or loans, receivables, bank accounts, cash and insurance policies.
WHY SHOULD YOU PLAN?
There is a simple answer. If you do not have a plan for the distribution or passing of your estate and you die, you are said to have died “Intestate”. This means that you died without creating any type of document (i.e. Will or Trust) which provides instructions for the passing of your estate onto your loved ones. Dying Intestate is like taking your property and attempting to throw it to your loved ones on the other side of a ravine which is filled with hazards. These hazards may include probate, creditors, con-artists, lawsuits, judgments, lawyers and death taxes.
Whether you know it or not you have already done some estate planning for the distribution of your estate to your loved ones. If you die intestate, the laws of intestacy of your state will determine how your property will pass to your loved ones. If you do not have heirs that fit the State’s formula, then all your hard earned wealth will be taken by the State. Usually the State’s formula and rules for passing assets to your loved ones will not be what you would have chosen if you had an estate plan.
One of the best ways to avoid the hazards is to build a “bridge” across the ravine to your loved ones to provide for your estate to be taken safely avoiding and/or minimizing the hazards. In order to understand how important planning is, it is extremely important to understand the hazards. If you die with any property that is titled in your personal name, there must be a probate process for that property to pass to your loved ones. “Probate” is the legal procedure for handling two major functions of your estate. The first is identifying the proper and rightful heirs to your estate and the share size that each heir will receive. The second is getting the legal title of the property out of your name and into the name of the heirs.
A Will can take care of the first function. If you don’t have a Will the State shall use its own formula for determining who your
heirs are and their share. Even with a Will, the re-titling of your property still must be handled through the Probate process. When someone dies, the only way that property can be re-titled in the names of their loved ones or heirs is by a court order.
What you want to do is avoid probate because it is time consuming and can become very expensive. On a national average, probate costs run from 6% to 10% of the value of the estate. What does this mean? This means that an estate worth only $200,000 could cost $12,000 to $20,000 to probate. These costs are based upon the fair market value of the property and not on just the net worth or equity. Probate can end up dragging on for years, and can lead to family battles and may result in your wishes being ignored. Lastly, probate is a public proceeding resulting in the loss of privacy.
JOINT TENANCY
You may be thinking, “Everything I own, I own as a joint tenant with my spouse or significant other”. Many married couples and parent-child arrangements own property both real and personal as joint tenants with rights of survivorship. This means that when one of the two should die, the surviving owner will automatically receive the interest of the one who died without going through the probate process. This is one way to avoid probate but it also comes with several problems. Property held as joint tenants means that the whole amount of the estate is subject to all of the liabilities of all joint owners. In other words, if one owner gets a judgment, tax lien etc., the lien holder can take the entire property to satisfy the judgment. There may be some exceptions where personal residences are involved, but the exceptions do not apply if the asset is later sold or when both owners die. Moreover, if a parent holds title to a home as a joint tenant with a child, and that child gets a divorce, the divorcing spouse of the child can potentially take the whole house in the divorce settlement.
When one owner dies and leaves assets to the survivor through joint tenancy, the surviving spouse has outright control over the assets. The problem arises when the surviving spouse finds a new spouse or lover, and gives away some or all of the assets away to that new spouse or lover, leaving the original heirs out of the picture.
Usually the surviving spouse does not do any formal estate planning, so even though probate is avoided on the death of the first spouse, it is not avoided on the death of the survivor. 
When property is owned either by one owner or jointly, and then one of the owners becomes mentally incapacitated, the property sits in legal limbo. This can prevent the property from being sold or even leased until an expensive and time consuming court procedure called “conservatorship” is completed wherein the court appoints someone to act in the name of the incapacitated owner.
ASSETS WITH DESIGNATED BENEFICIARIES
You may also be thinking “all of my assets have designated beneficiaries”, such as insurance policies, pension plans, annuities, bank and investment accounts.” However, when the original owner dies, the remaining amounts will be paid to the named beneficiary or contingent (secondary) beneficiary if the primary beneficiary does not survive the original owner, all without probate. However, this too has potential problems.
Most Beneficiary arrangements do not have controlled or timed payouts to the beneficiaries. In other words, if the original owner dies and leaves young children, there can be no control over how much is paid out to the children outright or to the guardian of the children if one is appointed. Another problem is that there are no provisions for beneficiaries who become incapable of handling their financial affairs. Distributions to designated beneficiaries can be attached by creditors, and can be the subject of lawsuits, liens, bankruptcies and divorce problems of the beneficiary. If the beneficiary dies before the original owner problems will arise such as money being paid to the spouse of the beneficiary rather than being held for the beneficiary’s children.
Aside from avoiding probate, proper planning will also help you reduce and possibly even avoid payment of death taxes on your estate. 
You may be thinking that death or estate taxes were abolished in 2001 by the Tax Act. Actually the 2001 Tax Act provides for federal estate or death taxes to stick around up through at least the year 2009 and then be replaced with some loss in step-up basis. The loss in step-up basis simply means that your heirs will not receive your assets with a basis which is equal to the fair market value of those assets at your death. Thus, when your heirs try to sell your assets on your death, they have to pay capital gains taxes on the profit made. The profit is the difference between what you paid for the assets and what your heirs sell them for. Prior to the 2001 Tax Act your heirs would have received a full stepped up basis (fair market value), and never had to pay a capital gains tax. Moreover, the 2001 Tax Act did not abolish death taxes at the state level and these too can be quite significant.
This may seem complicated but to put it in more simple terms, if you as an individual expect to be worth about $1 Million by the time of your death, or the year 2010 whichever comes first, (if you are married that it is upwards of $2 Million) then your estate faces death tax issues. If you did pre-2001 estate planning, your existing trust or other estate planning needs to be revisited and probably updated.
Even though the 2001 Tax Act provides for exemptions from federal death taxes upwards of $3.5 million by the year 2009, what if the exemption is not enough for your estate? Or what if your estate faces capital gains taxes due to the loss of basis step up? There could be problems with respect to the appreciation and growth that your estate will enjoy before your death, especially when you add in death benefits from life insurance and remainder amounts of your pension plan. Good estate planning can easily increase death tax exemptions by several million dollars for married couples, but some advanced planning is necessary for maximum reduction of death taxes. Neither a Will, beneficiary arrangement nor joint tenancy ownership of property are enough to take care of death taxation issues for either married or single estate owners.
WHAT CAN I DO TO ENSURE THAT MY ASSETS ARE DISTRIBUTED TO MY RIGHTFUL HEIRS?”
This brings me to the final part of this article, which will explain the different types of documents that can be used to solve your problems. One of the big benefits of pre-death estate planning is the ability to name your heirs, specify the share of your estate you want them to receive, and dictate or control the manner and timing at which point your heirs shall receive their share. Actually, this part of estate planning can be done with either a will or a trust. Although, a trust would be the ultimate document to avoid probate, protect the estate from judgments and liens and to minimize if not eliminate federal death taxes.
There are situations where a will is the best choice and other situations where a trust is the best vehicle. Generally speaking, a will is sufficient where the estate is small enough that formal probate is not required or it is reasonably safe to leave all of the estate through beneficiary and/or joint tenancy arrangements AND there are no significant tax liabilities; there is no need to hold an heir’s share of the estate in some type of controlled payout; and your mental incapacitation is not likely to cause problems with financial and legal transactions. Even though a will is not required for assets which are held by beneficiary and/or joint tenancy arrangements, a general purpose Will should still be prepared. The will shall serve as a catch all in the event that there are assets you forgot about, or received after the will was prepared or there is a problem or mistake with a beneficiary or joint tenancy arrangement.
On the other hand, a trust is generally necessary where the estate cannot safely be transferred by beneficiary and joint tenancy arrangements, and exceeds approximately $75,000 to $100,000; or there is some possibility that an heir may challenge a particular transfer; where avoiding probate is an important objective; where the estate cannot be paid outright to one or more heirs either because they are minors or that the heirs should have controlled payments; where there are significant tax liabilities; when necessary to protect assets from legal difficulties or a divorce of a non-owner spouse or where the estate needs careful handling during any period of time where the estate owner becomes mentally incapacitated.
What is a trust? you ask, well, a trust is a legal device used to take care of property in special ways. A trust is a legal agreement or c
ontract between two parties called a grantor and trustee. The Trust agreement is entered into for the benefit of a third party or for a beneficiary. Trusts are private documents and have tremendous amount of flexibility in what provisions you can include. The trust is recognized by laws and courts as an independent legal entity. Trusts are much like corporations. Through the trustee it may own property, it may file tax returns and pay taxes, it may own bank and investment accounts, earn income, distribute profits to the beneficiaries and conduct business activities.
The grantor is the one who owns the property which they wish to have managed, controlled, protected and transferred to heirs by a trust. Once the property is transferred into the trust the grantor no longer holds legal title to the property. However, the grantor may retain the exclusive rights to use the property or its income and usually has full control over the property. The trustee is the legal administrator of the trust and the legal title holder of the property. The relationship between the grantor and trustee is determined by whatever language is put into the trust document. The beneficiaries are the individuals or charities that receive benefits or income from the trust property and then eventually receive the property itself. When the grantor keeps for his lifetime the right to the income and use of the trust property, the beneficiary will receive the benefits after the grantor dies, or the trust agreement may provide where both the grantor and beneficiary receive the benefits or income from the trust simultaneously.
There are several different types of trusts including living trusts, revocable trusts, irrevocable trusts (also known as life insurance trusts), charitable remainder trusts, educational trusts and spendthrift trusts. These are estate planning vehicles which are outside the scope of this article and are more applicable to advanced estate planning. Depending on your situation and needs, these types of documents should be discussed in further detail with Mr. Masiakos. In addition to the vehicles discussed in this article, estate planning also includes preparing Powers of Attorney; Living Wills, Healthcare Proxies and even Designation of Guardians or Conservators. These documents are just as important as a Will or Trust since they govern what happens to you physically and what your wishes are should you become terminally ill. These documents should also be discussed in detail with Mr. Masiakos. The purpose of this article was to explain to you as simply as possible what estate planning is, why you should plan, and the basic vehicles you can use toward proper planning. Please remember that this article is for informational purposes only. Your needs will most certainly be different from someone else and you should always consult with an experienced estate planning lawyer such as myself. I offer a free one-hour consultation consisting of a complete evaluation and review of your current estate situation, and present estate plan, (if you have one). This is a $250 value with no obligations on your part. Do not wait for the inevitable to come. Plan now to ensure that your hard earned wealth is protected.
The foregoing content is not legal advice nor is it intended to serve as legal advice. It is for informational purposes only. You should consult with an experienced Estate Planning attorney to address your individual needs.
JORDAN MASIAKOS, P.C. Attorney At Law 200 Willis Avenue Mineola, NY 11501 Tel: (516) 873-0795 Fax: (516) 873-6686 Email: masiakoslaw@optonline.net Web: www.masiakoslaw.com