Wills and Trusts Kit For Dummies

Introduction

Congratulations. Simply by opening this book you have put yourself a step ahead of most people. Yes, it’s tough to think about what will happen to your family after you die, but confronting these issues is part of taking care of your family.

My goal in writing this book is to give you the information and resources you need to create an estate plan. This book includes do-it-yourself tools to help you draft your own estate planning documents.

But don’t go thinking that this book will help you only if you want to create your own will and trust. It’s much broader in focus. I want you to be comfortable with estate planning documents, but also to recognize when you’ll benefit from professional estate planning services.

I am of the strong opinion that everybody needs an estate plan, and especially a will. With this book, anybody can create a simple will, even if it serves just as a stopgap before hiring a professional.

About This Book

Wills and Trusts Kit For Dummies is written in language that is easy to understand. It covers the basic issues in planning your estate, but also delves into the details and complications you can encounter in choosing your estate plan and creating a will or trust.

You probably won’t read this book and conclude, This is easy, but you’ll probably conclude, I can do this. If not, or if you realize that you simply don’t want to plan your own estate, that’s fine, too. You’ll be an educated consumer when you hire a professional to draft your estate plan.

Everybody needs an estate plan, so I’ll immodestly claim that anybody who doesn’t have an estate plan will benefit from reading this book. You’ll also benefit if your estate plan is out-of-date, and you’re not sure whether or how to update your plan.

A Special Note for Residents of Louisiana

If you’ve been shopping around for books on drafting your own will, you’ve probably found that most of them say, This book is valid for all states except Louisiana. You see this warning for two reasons:

Louisiana’s laws governing the execution of a will are more complicated than those of other states, and a mistake can invalidate your will.

More importantly, Louisiana’s unique forced heirship laws will trump inconsistent bequests in your will, and you’re severely limited in your ability to deviate from the state’s mandatory bequests.

Even if you create an otherwise valid will, without a good understanding of forced heirship laws, a court may end up largely disregarding your will or allocating your estate in a way that bears little resemblance to what you directed.

It’s beyond the scope of this book to give you the state-specific understanding you need to be sure that a Louisiana court will uphold your will. I thus reluctantly urge residents of Louisiana to have their wills drafted by a legal professional.

Conventions Used in This Book

Whenever you see a word in italics, I’m either introducing a new term or using it for emphasis. Likewise, all Web addresses appear in monofont type.

What You’re Not to Read

Throughout the book, I include sidebars that contain information and anecdotes that expand on the topics discussed in the chapters. You’ll easily spot the sidebars by their gray background color. The sidebars can be amusing and informative, but there’s nothing in them that you have to read to understand the material in this book. If you’re pressed for time, skip over the sidebars. If you find the time to read them later, they’ll still be there.

Foolish Assumptions

When writing this book, I had to make a few assumptions about you, the reader. If you meet any of these qualifications, you can find what you need in this book:

You don’t know much about estate planning and want to get a comprehensive understanding of what is involved.

You have a small to average estate and want to create your own estate plan composed of a will and possibly a living trust.

You have a large estate and want to do the basics of your estate plan yourself while getting professional assistance with specialized trusts and tax planning.

You have absolutely no desire to plan your own estate, but want to know how the estate planning and probate processes work and want to know what you’re doing when you hire an estate planning professional to create your estate plan.

I also assumed that you have a computer and can use it to print the worksheets from the accompanying CD to create your own estate planning documents. (You don’t have a computer? Then I’m assuming you have a friend who can print the forms for you.)

How This Book Is Organized

This book is organized into six parts that guide you through the estate planning process and specific estate planning documents. I include some stories and anecdotes to help you understand the concepts I discuss.

Part I: Getting Started with Your Will or Trust

This part explains why you need to plan your estate, the dangers of failing to do so, and the many benefits you get from completing your estate plan. I also cover some of the most important aspects of estate planning, and some of the biggest mistakes people make. You find out when you should get help from an estate planning professional, what professionals can do for you, and how to work with them.

Part II: Everything You Need to Know about Wills

This part helps you understand the central role of your will in your estate plan and the importance of keeping your will up-to-date. You also find out what you need to know about probate court.

In addition, you discover common landmines that can disrupt your estate plan and what you can do to avoid will contests.

Part III: Trust Me! How Trusts Work

If you’re considering using a trust for your estate plan, it’s important to know exactly what trusts are and what they can do for you. You’ve heard of a revocable living trust, but what about other types of trust. How can trusts help you avoid estate taxes? This part has all the answers.

Part IV: Carrying Out the Intent of Your Will and Trust

After you figure out the basics of your estate plan, you still have a bit more work to do. You need to take a look at how your retirement and life insurance plans figure into your estate and the special issues that can arise from your real estate holdings. You also need a plan for your personal and financial care in case of illness or disability. This part addresses those topics and more.

Part V: The Part of Tens

This part contains lists to help you with common estate planning issues and traps. I describe mistakes people often make when planning their wills and highlight situations where you may benefit from having a trust. I also tell you how to avoid traps that may increase your estate taxes.

Part VI: The Appendixes

This part contains supplemental information to help you complete your estate plan. Appendix A describes state law signing requirements for wills. Appendix B summarizes state estate and inheritance taxes. Appendix C is a form that you can use to help gather information for your estate plan. Appendix D lists the forms provided on the accompanying CD.

About the CD

The CD accompanying this book includes forms and worksheets for creating your estate planning documents. You can print them and mark them up by hand or fill them in on your computer and use them to produce your final documents. See Appendix D for a lot more information about the CD and the forms it contains.

Icons Used In This Book

In the margins of the pages of this book, you’ll find little pictures, called icons. These icons call your attention to important points about estate planning and help you avoid mistakes:

Tip.eps When you see the Tip icon, you find hints and suggestions to help you with your estate plan.

Warning(bomb).eps The Warning icon flags a potential trap or pitfall that you may encounter and helps you avoid costly mistakes.

Remember.eps The Remember icon highlights important actions to take and elements of your estate plan that you truly should not forget.

Louisiana.eps The Louisiana icon flags unusual aspects of that state’s laws, which make it very difficult to draft your own will.

OnTheCD.eps This icon lets you know that you can find a form on the accompanying CD corresponding to the estate planning document or process described in the passage you’re reading.

Where to Go from Here

You don’t have to start at the beginning of this book and read straight through if you don’t want to. This book is designed so that you can look at a topic you’re interested in and flip straight to that discussion. However, if you’re new to estate planning, consider reading through this book to get an overview of what’s involved.

If you’re about to do something dangerous and need an estate plan yesterday, you need a will so start with Chapter 7.

If you’re concerned about how much of your estate will get eaten up by taxes, the news (good and bad) is in Chapter 6.

If you have young children and want to be sure that they’re taken care of, proceed to Chapter 5 for some quick guidance.

If you have a will or trust already, Chapters 9 and 13 cover how to update your estate plan and amend or replace wills and trusts.

Part I

Getting Started with Your Will or Trust

In this part . . .

This part explains why you need to plan your estate and the dangers of failing to do so. You find out the process of planning your estate, the tools you can use, and when you need to get help from a professional estate planner. You also discover the process of gathering information about your heirs and assets and planning your bequests. You discover how to plan for special family and personal circumstances, including the care of your children, and avoiding taxes.

Chapter 1

Ensuring That Your Last Wishes Are Honored

In This Chapter

Understanding the estate planning process

Creating your estate plan

Getting help when you need it

Making your wishes known

Avoiding common estate planning pitfalls

You’ve worked hard all your life, have accumulated some assets, and have bought a copy of this book. You’re ready to plan your estate.

My best guess? You’re not excited about planning your estate. You have already figured out that you have a lot of work to do. You must also think about unpleasant things, including your death, the possibility of your incapacity, and how your family will cope without you.

What’s the primary purpose of an estate plan? Taking care of your loved ones after you’re gone. Why plan your estate now? Because the sooner you start, the more certain you can be that your plan will take care of your family’s needs in the way that you want.

As you proceed with this process, you’ll probably find out your estate planning needs aren’t as complicated as you thought. You may discover that all you need is a will, perhaps backed up by a simple living trust. You may discover that your needs are more complicated and enlist the help of an estate planning professional. Yet even then, your understanding of the estate planning process and tools will help you communicate your needs and choose your best options.

Having an estate plan also provides a great deal of comfort. You’ll be able to plan for your family’s financial needs. And after your death or incapacity, your loved ones won’t have to fret about what you would have wanted them to do. They’ll know your actual wishes.

The Good, the Bad, and the Ugly: What Can Happen When You Don’t Plan Your Estate

Simply put, if you don’t plan your estate, the government has an estate plan in store for you. Your state’s laws of intestate succession will apply, and the state will decide who inherits your assets, usually your spouse and children. But that’s not all:

In the event of your incapacity, a court may appoint people to make decisions for you regarding your personal and medical care and the management of your money. A stranger may end up deciding where you live, what medical treatment you receive, and perhaps even whether you really need $20 for a haircut.

If you have minor children, a court will have to decide who will care for them, but will not have the benefit of your input.

The business you spent a lifetime building may end up failing or in the hands of a court-appointed receiver.

Planning your estate isn’t a one-time task. Changes in your life circumstances can dramatically alter both your wishes for your estate, and whether your original estate plan even remains viable.

Sometimes it seems like your life doesn’t change much, so you may be wondering what sort of changes I am talking about. Consider the following:

Your estate will probably grow substantially over the course of your life, although it may also shrink.

You may marry, divorce, separate, have or adopt a child, or experience a death in your family.

Your children will grow up and establish their own households.

You may move between states, buy and sell property, or start your own business.

Your designated trustee or personal representative may no longer be available, or your relationship with that person may change.

Laws may change. In fact, they will. You can expect a new estate tax bill to be working its way through Congress within the next year or two, and it won’t be the last.

In all probability, you’ll update your estate plan several times during your life, and on occasion you may even start over from scratch.

Warning(bomb).eps If you don’t update your estate, over time your estate plan may become largely ineffective. When that happens, you’re not much better off than you were before you created the outdated estate plan.

Reaping the Benefits of Planning Your Estate

The biggest advantage of planning your estate is that your wishes will be respected, both while you’re alive and after your death.

Your estate plan helps you in several ways:

Incapacity planning helps ensure that you receive the type of medical care and treatment you want, that your assets are managed according to your own wishes, and that your end-of-life decisions are respected.

Your will and trust ensure that your assets are distributed to the heirs you choose, under terms and conditions you define.

Your business succession plan helps ensure that your business doesn’t fail following your incapacity or death, and that control of your business passes to a suitable successor.

When you don’t plan your estate, your incapacity plan will be defined by a court, and your estate will be carved up according to state law. The result may be far different from what you desire.

Planning for your care while you’re alive

In addition to planning for the distribution of your assets after you die, a complete estate plan looks at what will happen to your estate if an accident or illness leaves you unable to properly care for yourself.

Your incapacity plan includes your durable power of attorney, healthcare proxy, and living will:

Your durable power of attorney appoints an attorney-in-fact who can make financial decisions for you if you become incapacitated.

Your healthcare proxy appoints a healthcare advocate who can help you make medical decisions if you’re unable to make or communicate those decisions yourself.

Your living will describes what care you want to receive, and don’t want to receive, during the final days of your life.

If you don’t appoint people to help with your medical and financial needs, your family may have to go to court to have somebody appointed to make decisions for you. Your loved ones will face unnecessary burdens and confusion:

Your family will have to go to court to have somebody appointed to manage your personal and financial needs, at a time when they’re already under stress due to your incapacity.

The court won’t know who you’d prefer to assist with your medical and financial decisions, and may appoint somebody who you would find unacceptable.

Your helpers won’t know your wishes or the limits you’d impose on their choices if you were able to communicate them. They’ll have to try to guess what you would have wanted.

Warning(bomb).eps The impact of these choices may be profound. Whatever your plans, with a court-appointed guardian supervising your medical care, you’re more likely to undergo more intrusive medical care and to spend your last days in a hospital or nursing home. (Chapter 14 discusses incapacity planning in more detail.)

Ensuring that your assets go where you want

When you plan your estate, you pick your heirs and decide how much you want to leave to them. Although state laws do restrict your ability to disinherit certain heirs, especially your spouse, for the most part you can leave your money to family, friends, schools and charities, or anybody else you choose.

In defining your bequests, you may choose to simply distribute your assets to your heirs upon your death. But you may also choose to be very creative in how you distribute your assets.

You can defer your bequests to a later date (for example, When my son turns 25).

You can mete out your gifts in installments (for example, $20,000 to my daughter upon her 18th birthday, $20,000 on her 23rd birthday, and $60,000 upon her 30th birthday).

You can impose conditions on your bequests, requiring your heirs to satisfy those conditions before they receive the inheritance (for example, $50,000 to my son upon his graduation from college).

If you don’t plan your estate, the state will make all those choices for you. Your estate will go to your heirs according to your state’s laws of intestate succession, described later in this chapter in the section Realizing What Happens If You Don’t Have an Estate Plan. If you have minor children, the probate court may appoint a conservator to look after their assets until they turn 18. But any adult heir will immediately receive their legally defined inheritance. Your wish to support your alma mater or to give to charity? Forget it.

Remember.eps The only way to be sure that your assets are distributed the way you want is to plan your estate. (Chapters 3 and 4 detail the process of collecting information about your assets and planning your bequests.)

Looking Out for Common Pitfalls

Everybody makes mistakes, but some mistakes get made a lot. Actions that may seem like they’ll simplify your estate may in fact make it more complicated, burden your ability to use and enjoy your own assets, or increase the tax burden to your estate and heirs.

At the same time, once you understand the common pitfalls, most are pretty easy to avoid. You can avoid some mistakes simply by planning your estate now, rather than putting it off until your health starts to fail. (For more discussion of common estate planning mistakes, see Chapters 8 and 18.)

Benefits and dangers of jointly titling real estate, property, and bank accounts

A common shortcut to estate planning involves adding your desired heir to the title of your real estate, financial account, or other titled asset. You can choose between a number of different types of joint ownership, discussed in Chapter 17. In all likelihood, when you add somebody as an owner, you’ll create a joint tenancy with right of survivorship, meaning that they automatically inherit your share if you die before them.

Some huge risks can arise from joint ownership of a home. Take a common example, where you add your child to the deed as a joint tenant:

Your son gets divorced, and his wife asks the divorce court to award him half of his share of your house.

Your son may decide that the home is more than you can handle and ask a court to force the sale of the property.

Your son decides to move in. It’s his home too, isn’t it?

Your son suffers financial problems or doesn’t pay his taxes, and his creditors or the IRS try to collect against his share.

Also, adding a joint owner can increase that person’s capital gains tax exposure when the property is eventually sold.

Other issues may also arise:

What happens if you can no longer afford to support your home, or are no longer physically able to care for it, but your child won’t agree to a sale?

What happens if you want to refinance your mortgage to improve the property, get a better interest rate, or withdraw equity from your home, but your child refuses to cooperate?

What if you want to sell your house and move into a smaller home or condo, but your child wants to keep the family home?

What happens if you have to move into a long-term care facility?

Warning(bomb).eps When you give up your full ownership interest, you run the risk that your children will suddenly decide that they know what is best for you, and prevent you from making perfectly reasonable decisions relating to your own home.

Similar issues arise with joint ownership of bank accounts. As the law presumes that both you and your joint account holder have equal rights to the money, your co-account holder may empty the account. His creditors may try to garnish the account to satisfy his debts. If it truly is a joint account, with both of you contributing toward the balance, the IRS will still try to include the entire account balance in your taxable estate, and your child will have to prove to the IRS that he contributed part of the money and that his contribution should not be taxed.

Tip.eps Possible alternatives to joint ownership include the use of a living trust, or transfer-on-death titles and accounts. (Part III discusses living trusts. For discussion of joint ownership of real estate, see Chapter 17.)

Benefits and dangers of life estates

You own your home, and you want your children to inherit your home. So how about a life estate? In a life estate, you retain the right to use and control your home for the rest of your life, and you provide for your ownership of your home to pass to specific people upon your death. You’re called the life tenant, and the people who eventually receive your home are your remaindermen. Although I’m speaking in terms of your marital home, you can create a life estate for other property as well, which is called a retained life estate.

In a typical arrangement, once you create a life estate, you retain the exclusive right to the use and possession of your home. You pay the day-to-day expenses of your home, including routine maintenance, homeowner’s insurance, and property taxes. You pay the interest on the mortgage, but your remaindermen pay the portion of the mortgage payment that goes to the principal balance.

My children wouldn’t do that to me

You probably have thought at one time or another that your offspring would never do any of these awful scenarios to you. While other people may have children who will abuse joint ownership or empty a joint bank account, your children would never do such a thing. You know what? You’re probably right. The worst abuses happen in exceptional cases, and most children try to respect their parents’ wishes. But not all the problems arise from malice.

Your child may encounter financial troubles. It’s easy to borrow a car payment or a house payment from your joint bank account. Maybe your child even repays the loan the first time or two. But then she finds herself having borrowed two or three payments. Then four. And before she even appreciates what she’s doing, she’s borrowed far more of your money than she can realistically pay back. Do you sue your child? Call the police? The odds are that you won’t. You’ll suffer a strain in your relationship and have a less comfortable retirement than you had previously expected.

On the flipside, your child may be far more concerned with your financial stability than you are. Every time you make a purchase, your child may be demanding to know what you spent all that money on and did you really need it. I recently encountered a case where a child emptied out her mother’s joint bank account, not because her mother was spending inappropriately but because the daughter was afraid she might. She didn’t approve of her mother’s new boyfriend and was concerned that her mother might make excessive gifts.

As a life tenant, you face the same type of dependence upon the goodwill and cooperation of your remaindermen as you do with joint ownership (see preceding section). You need your remaindermen’s consent to refinance or sell your home, and difficulties can arise if you become unable to pay the home’s ongoing expenses.

A life estate may also appeal to you if you have children from a prior marriage who you wish to eventually inherit your home, but want your current spouse to be able to live in your home following your death. You can provide in your estate plan for your spouse to receive a life estate in your home, with your children as the remaindermen. But consider the consequences:

Say that you’re considerably older than your spouse. You die at age 82, and your spouse is 63. At this time, your children are nearing retirement age. If your spouse lives for another 20 years, your children will be elderly by the time they inherit your home. By then, they may have little need for an inheritance.

Your spouse may neglect the property, causing your children to have to pay insurance, taxes, and repairs and possibly having to take your spouse to court.

You may create acrimony between your spouse and your children, who see your spouse as standing in the way of their inheritance.

Your spouse may remarry. Do you want to subsidize your spouse’s new family?

Tip.eps An alternative? Keep your house in a trust for five to ten years, or whatever other time period you desire, and let your spouse have full use and enjoyment of it during that period. Then have your trust convey your house to your children.

Danger of subjecting an asset to Medicaid spend-down rules

Medicare is a federal health insurance program that provides payment for certain hospital and medical expenses for people aged 65 and older. But as you age, you face a huge potential expense that Medicare doesn’t ordinarily cover: long-term care.

If you’re wealthy enough, lucky enough, or hold sufficient long-term care insurance, you may not need to worry about the cost of your long-term care. But most people, even those with some insurance, can face significant financial hardship from the high cost of residential care.

This is where Medicaid comes in. Medicaid is an additional federal program that covers medical costs, including the cost of long-term care, if you’re financially unable to pay for that care yourself.

But before you can qualify for Medicaid, spend-down rules apply. If you have too much income or too many assets, you won’t qualify for Medicaid until your income or assets are spent down to a qualifying level. The goal here is to make you pay for your own care before the government takes over, while still protecting you and your family from becoming impoverished by the costs of long-term care. Note that spend-down rules don’t require that your assets be spent on your medical care, but you do face restrictions on how you can spend your excess money without affecting your qualification for Medicaid.

What if you give your assets away instead of spending them? Can you qualify for Medicaid? That’s where look back rules kick in. When you apply for Medicaid benefits to pay for long-term care, the government examines your financial transactions over the past five years to determine whether you’ve transferred assets out of your estate. If you have, the government will impose a penalty period before you can qualify for Medicaid benefits. Any gifts, including payment of tuition for an adult child, charitable donations, and even Christmas presents, can trigger a penalty period for long-term care benefits.

You benefit from a modest Medicaid exemption for income and savings. But you may benefit from a large exemption in the form of your home. If you’re in a nursing home but are expected to return to your own home, your home is exempt from the spend-down rules. Note that if you stay in a nursing home for six months or longer, Medicaid assumes that you won’t return home. Also, if you’re married, as long as your spouse remains in your home, it’s exempt from spend-down rules.

So how do you accidentally lose your exemptions? Usually in one of two ways:

You don’t understand the exemptions and believe that the government will take your house no matter what. You transfer title to an heir, probably your children. Your home is no longer yours, and the government will apply spend-down rules to its fair market value.

You aren’t even thinking about Medicaid. You decide that the easiest way to leave your home to your heirs is to add them to the title, giving them outright ownership. The transfer of an interest in your home for less than fair market value during the look-back period can trigger spend-down rules or penalties.

Traditionally, people often used life estates to try to avoid Medicaid spend-down rules. The value of a life estate isn’t counted toward your assets when you apply for Medicaid benefits. But states are eager to recover Medicaid expenses and are increasingly imposing liens against the property a Medicaid recipient has placed into a life estate.

One more thing to consider: Even when an exemption applies during your lifetime, the state may seek to recoup its costs by imposing a lien against your property after your death.

Your best approach is to engage in estate planning long before you end up in long-term care. If you plan for your long-term care needs and implement an asset protection strategy before the Medicaid look-back period begins, you can minimize the effect of spend-down rules and recoupment policies on your estate.

Tip.eps If you believe you or your spouse will require Medicaid benefits later in life, you can consult a lawyer who specializes in Medicaid planning. Your lawyer can help you create a strategy to minimize the effects of Medicaid’s spend-down and look-back rules, as well as helping you avoid or minimize liens Medicaid may attempt to assert against your estate after you die.

Potential for increased tax exposure

Most people won’t pay federal estate tax. The current estate tax exemption is $2 million, and the estate tax is scheduled to be totally repealed in 2010. But the law repealing estate taxes is scheduled to expire at the end of 2010. Most people expect that Congress will pass a new law sometime in 2009 that restores an estate tax, but with an exemption set somewhere between $1.5 million and $4 million.

Warning(bomb).eps The estate tax is substantial. Above the exemption, the current estate tax rate is 45 percent. If your estate is large enough to pay estate taxes and you do no advance planning, the government may turn out to be your biggest beneficiary.

Realizing What Happens If You Don’t Have an Estate Plan

Are there drawbacks to not planning your estate? Yes, and some of them are big.

If you have a large estate, you will maximize your estate tax liability (see the preceding section). But in addition to the possibility that you’ll increase the government’s cut, you have two huge reasons to have an estate plan:

If you don’t plan your estate, the government will decide who inherits your assets.

If you don’t designate a custodian for your minor children, the state will pick somebody for you.

You may enjoy many smaller benefits as well, including picking the person who will administer your estate and providing instructions for your funeral and memorial service. If you don’t draft a will, others will make those choices for you.

Following the laws of intestate succession

If you don’t make an estate plan for yourself, the state has already made one for you. State laws of intestate succession define who inherits the property of people who die without a will. Typically, your surviving spouse will receive half of your estate, with the remainder divided between your children. If you have no surviving spouse or children, your estate is distributed by formula to other surviving members of your family.

In some cases, the state’s plan for your assets may be very similar to your own. In others, it will be wildly different. But the only way to be certain that your estate is distributed the way you want is to create an estate plan.

Even if you plan your estate, intestate succession laws may apply to some of your assets in the following situations:

You forget to include an asset in your estate plan.

You direct an asset to an heir through your living trust, but forget to transfer ownership