6 Estate Planning Facts You Need To Know

While estate planning is a personalized process that is impacted by each individual’s unique family and financial circumstances, there are some questions that estate planners are asked, again and again, by a majority of our clients. Here are some of the questions I hear most often:

1. Will my estate need to go through probate after my death?

Your estate will need to be probated if its total value exceeds $20,000 and you have probate assets that need to be transferred upon your death. Probate assets are any assets you own that are solely in your name and that do not have any means of automatic transfer after your death. Non-probate assets are any assets that will transfer to another person automatically upon the death of the owner.

For example, assets you own jointly with another person, assets that have a beneficiary designation, or assets that you have transferred to a trust prior to your death, are non-probate assets because the law provides that ownership of the assets will automatically transfer to the joint owner or designated beneficiary upon your death. If you hold any real estate as a probate asset, regardless of its value, your estate will need to be probated in order to distribute the real estate to your intended beneficiaries.

2. Will my family members have to pay tax on their inheritance?

What is the inheritance tax? Generally speaking, there are three factors that determine the tax consequences following your death:

1) the value of your estate.

2) where you lived at the time of your death, and

3) the nature of your assets.

For deaths occurring in 2019, the first $11.4 million of an estate passes free from any federal estate tax. Some states impose their own estate tax, so depending on where you live at the time of your death, your estate may be subject to state estate tax even if it is not subject to federal estate tax. For 2019, the estate tax exemption (the amount that may pass free from estate tax) for Maine residents is $5.7 million. If your estate is taxable, the tax obligation belongs to your estate, not to your individual beneficiaries.

Individual beneficiaries may experience income tax consequences if they inherit tax-deferred assets, such as IRAs and 401(k)s, for example. Since income tax was not paid by the original owner of the asset before the owner’s death, when the asset is distributed to the beneficiary, the distribution is treated as ordinary income for the beneficiary and the beneficiary will be responsible for any resulting income tax obligation.

3. What happens if I die without a will?

Individuals who die without a will are said to die “intestate.” Each state has laws known as “intestacy statutes,” which govern who will serve as the personal representative of the estate and who will receive the assets of the individual who died intestate. In Maine, the intestacy statutes are codified in Article II, Part I of Title 18-C. In general, the laws of intestacy typically direct your assets to your relatives with the closest degree of kinship.

4. What is the difference between a will and a trust?

A will is a document that directs the disposition of any assets you own individually (your probate assets) after your death, and nominates the person who will be responsible for administering your estate (your Personal Representative). In contrast, a trust is an entity that holds property that is transferred to the trust. While a trust is most commonly created by a document, the document itself is not the trust. The trust document simply sets forth the terms upon which the trust will be managed. A trust may be created during your lifetime (an inter vivos trust), or it may be created after your death (a testamentary trust).

The terms for a trust that will be created after the death of the trust maker are commonly documented within the person’s will. For example, a will may direct the creation of a trust for the benefit of the deceased individual’s children if the children should happen to be minors at the time of the individual’s death. There are many different kinds of inter-vivos and testamentary trusts, each of which are used to accomplish a variety of estate planning goals.

5. How often do I need to update my estate plan?

Your family and financial circumstances will change over time. Marriages, births, deaths, changes in employment and changes in the law are among the many events that may impact your estate plan as time passes. Whenever you have experienced a significant life event, you should review your estate plan to determine whether your plan was impacted. At a minimum, your plan should be reviewed every 5-10 years to be sure it still meets your needs and reflects your wishes.

6. What will happen if I lose the ability to make decisions about my health or finances?

If you are an adult and you become incapacitated, another responsible adult must make decisions about your healthcare and finances. Your decisions will be made by an agent of your choice if you have planned ahead, or by a guardian and/or conservator appointed by the probate court, if you have not. Guardians and conservators are appointed only after incapacity has occurred and you are no longer able to weigh in on who should make decisions for you.

If you wish to plan ahead and select your own decision-makers, you can do so by creating a Durable Financial Power of Attorney (appointing an agent to make financial decisions) and an Advance Health Care Directive (appointing an agent to make medical decisions). These two documents are part of every complete estate plan and are recommended for every individual with capacity that has reached the age of 18 years.

While there are many forms for Advance Health Care Directives that are free of charge to the general public, a Durable Financial Power of Attorney should be drafted by an attorney to be sure it meets the specific requirements of the governing state.