By Howard S. Goldman, Esq.

Some people think that estate planning is only for wealthy individuals subject to large taxes. But minimizing estate tax liability is only one reason for estate planning. Consider these six additional reasons for completing an estate plan:

1. Determining who shall receive a share of your assets;
2. Deciding how and when your beneficiaries shall receive their inheritance;
3. Selecting an executor for your estate and a guardian for your children:
4. Providing for the orderly continuance or sale of your family business;
5. Creating a living trust; and,
6. Planning in case of your permanent disability.

In the absence of a valid executed will, state laws determine who inherits your assets and when they receive them. Further, the Probate Court will appoint a guardian for your children and an administrator for your estate. Accordingly, your wishes will not control disposition of your own estate and your estate may incur unnecessary taxes and administrative costs.

Minimizing Estate Tax Liability

The estate tax is a transfer tax on the value of the decedent’s estate before it is distributed to the beneficiaries.

At the federal level, the exemption amount has fluctuated over the past five years. On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act into law which set the exemption at five million dollars ($5,000,00.00) each year, with adjustments for inflation. This law was only good for two years and scheduled to sunset on December 31, 2012. On January 1, 2013, Congress passed the American Taxpayer Relief Act and President Obama signed it into law on January 2, 2013. The America Taxpayer Relief Act essentially made permanent the exemption rate of five million dollars ($5,000,000.00) adjusted for inflation each year. In 2015 the applicable exclusion rate was five million, four hundred and thirty thousand ($5,430,000.00) and in 2016 the applicable exclusion rate is five million four hundred and fifty thousand ($5,450,000.00). As a practical matter, this means that the vast majority of all estates will not owe any federal estate taxes.

Massachusetts is one of 18 states (plus the District of Columbia) that imposes a separate estate or inheritance tax. Massachusetts estate tax is different from the Federal estate tax system. At the state level in Massachusetts, the applicable exemption amount for all estates since 2006 continues to be one million dollars ($1,000,000.00). The Massachusetts estate tax exemption is not indexed for inflation. This means that no state tax is imposed on estates that are valued at less than one million dollars ($1,000.000.00). For married couples that effectively combine their exemptions the aggregate exemption amount doubles to $2,000,000. For estates that exceed the threshold there is a graduated tax with rates ranging from .8% to 16%.

To minimize estate taxes: (a) make a provision for a certain amount of assets to pass to the
surviving spouse, tax free, up to the amount exempted from federal estate tax and/or state; (b) place an additional amount of assets in a qualified terminable interest trust (QTip) so that income of these assets will be paid to the surviving spouse; (c) make up to $13,000 annual of gifts to each of your children per spouse, the amount permitted to be transferred tax free; (d) consider charitable remainder trusts which require that certain amount of assets are placed in trust with income being distributed to the owner, and upon his/her death, the principal amount shall be distributed to a designated charity, thereby eliminating the trust principal for the taxable estate; and (e) establish an irrevocable life insurance trust to exclude life insurance proceeds from the taxable estate.

Who Shall Receive and When?

A properly prepared and executed will designates beneficiaries of your estate and considers alternative beneficiaries in the event the primary beneficiaries predecease you. Often, certain personal effects, such as jewelry or art work, are designated to pass to certain people. Additionally, parents often desire to have assets pass to their minor children in trust, with the principal to be disbursed upon the beneficiary reaching a particular age in order to protect against youthful indiscretions.

Consider taking an inventory of your assets and liabilities, including but not limited to your real estate holdings, vehicles, jewelry, artwork, investments and life insurance policies. Next, make a list of your intended beneficiaries, ie the individuals who you would like to benefit from the distribution of your assets, most often including family, friends and charities. Bring all of this information when you meet with an attorney to help draft your will.

Selecting Executor, Trustee, and Guardian

An executor is your personal representative after your death, and is responsible for such functions as: (a) administering the estate and distributing the assets to your beneficiaries; (b) paying estate expenses and outstanding debts; (c) ensuring that all life insurance and retirement plan benefits are received; and (d) filing or hiring a person to file all necessary tax returns, and paying the appropriate federal and state taxes from estate funds. When those duties are complete, this responsibility ends.

A trustee is required if your will creates trusts to accomplish more long-term goals, such as providing for minor children or giving to a charity or educational institution. Your trustee is responsible for managing the trust’s assets and ensuring that the beneficiaries are provided for in accordance with the provisions of the trust. Finally, a guardian is appointed to act as surrogate parents for your children, ensuring that the children’s best interests are served. A guardian should have the financial capability to provide for your children, and have ample time to devote to caring for your children. Other factors to consider are the age and geographical location of the potential guardian and their religious beliefs. It is important to remember that the guardian initially named in the will can be changed to another person as circumstances dictate.

Orderly Business Succession

If you own a business, your will should provide for a management succession plan, including who should operate the company in the short term. The will should also provide for a buy/sell arrangement with existing shareholders or outside interests and should refer to an existing Buy-Sell Agreement, if one exists. If no Buy-Sell Agreement exists, consider drafting one so that your wishes regarding the disposition of your business at the time of your death can be followed.

Consider a Living Trust

A Living Trust is a legal document that resembles a will. It contains instructions for managing your assets, should you become disabled, and directions for the distribution of your assets upon death.

First, assets in a Living Trust are not probated. Probate is the process of proving and administering a will under the jurisdiction of the Probate Court. It can be a time-consuming and potentially expensive process.

Second, a Living Trust provides a good vehicle for managing your assets in the event of your disability, much like a durable power of attorney. While you are alive and well, you act as your own trustee. In the event of your disability or death, the successor trustee that you selected takes over.

Durable Powers of Attorney and Disability Planning

Durable Power of Attorney

A Power of Attorney is a document in which you name another person to act as your agent to do things on your behalf while you are alive. Generally, it is effective when signed. A Durable Power of Attorney remains effective when you are incapacitated, for example, by a stroke. The person you choose to represent you does not need to be an attorney-at-law; you may name your spouse, a relative, or a friend.

Health Care Proxy

A Health Care Proxy is a document in which you may name someone to make health care decisions on your behalf at any time you are incapable of making or communicating such decisions yourself. It can be revoked or revised at any time.

Living Will

A Living Will is a written expression of your wishes as to whether you wish life-prolonging medical procedures maintained even though there is no reasonable expectation that you will recover. It will help those entrusted with your medical care understand how you feel about the most critical medical care decision that someone may have to make for you. A Living Will may be revised or revoked at any time.

Summary

Estate planning should be contemplated and acted upon while you are healthy and able to implement those decisions which minimize estate tax liability, determine who shall become beneficiaries, decide who shall serve as executor, trustee, or guardian, and develop disability planning. The time to act is now.

About the Authors

Goldman & Pease LLC provides experienced, professional legal counsel in estate and probate manners, corporate, business law, real estate and civil litigation. The firm provides legal planning and counseling to assist clients to avoid problems by addressing changing circumstances and by anticipating future opportunities.

Attorney Howard S. Goldman is the founding partner of the law firm of Goldman & Pease LLC, 160 Gould Street, Needham, Massachusetts 02494 (781) 292-1080. Mr. Goldman concentrates his practice in the areas of real estate, finance, estate and probate matters and civil litigation. He is an active member of the Massachusetts, Norfolk, and Rhode Island Bar Associations in his field and is also an active member of CAI and IREM, where he frequently lectures and writes columns affecting the real estate and finance industries. Mr. Goldman serves as a member of the Zoning Board of Appeals for the Town of Needham and as a court appointed mediator at the Boston Municipal Court and as a pro bono advocate at Federal District Court mediations.

Senior Associate Rebecca Erlichman assisted in drafting this article and focuses her practice on estate and probate matters, transactional real estate matters, and real estate litigation. She is an associate member of the Zoning Board of Appeals for the Town of Medfield.