Frequently Asked Questions About Estate Planning, Probate And Planned Giving

For more information or personalized advice from an experienced lawyer, call John Ratterree II, Attorney at Law in Atlanta, Georgia, at 404-256-1185.

1. Why Do I Need A Will?

A will allows you to decide where you want your assets to go, on what schedule and under what circumstances. If you do not write a will (which may be as simple or as complex as you choose to make it), you are delegating the distribution of your assets to the government.

If you have a long-time “significant other,” not your spouse (and Georgia abolished common law marriage in 1997), a will may be essential to pass your estate to that person. A will permits you to appoint a guardian for your minor children when both parents are deceased, appoint an executor to wrap up your estate and a trustee to administer the trusts you have created, to nominate the successors to those offices, and to relieve those persons of having to post fiduciary bonds or file inventories with the probate court. A will allows you to set the terms and powers of your executor or trustee, and to determine their compensation for serving.

2. Why Do I Need A Lawyer’s Help?

The problem with self-done wills, packages and inexpertly drawn documents is not so much that they won’t work, but that they will. You need to be certain that the instrument is effective, to be sure, but you need to be aware of what it is going to do. Did you think of everything?

If you and your spouse leave it “all to my spouse, if alive, then to my children,” as many forms might: (a) are they the surviving spouse’s children as well as the first spouse’s; and (b) do you need to use both spouses’ unified credit to avoid paying around 40 percent or more in estate taxes; and (c) in a catastrophe, do you risk handing over too much money too soon to distraught late adolescents?

3. What If I Change States, Marry, Divorce, Or Have Another Child?

Unless your will says that it anticipates marriage, marriage will revoke your old will. Divorce used to do this as well, but the “modern trend” from state to state is to salvage the will, reading the ex-spouse out of it. Still, this should be verified, not assumed; better yet, you should draw up a new will revoking the old one explicitly.

The birth of a child should also be anticipated, if possible. The general rule is that after-born children will be treated equally with the children mentioned in the will, but this doesn’t provide for there not having been children mentioned, nor for desired differences between the older children’s treatment and the treatment of a young child.

4. What Does A Codicil Do?

Things dictated in your will should be changed by a codicil (or by a new will, if repeated codicils start to become cumbersome), but there are ways to give discretion in your will to a trusted person so that some practical changes can be made by suggesting how that discretion should be used and avoiding (in practical terms) the need to do a codicil for each change.

A codicil is also a re-publication of your will, so the codicil should consider what changes have taken place in your circumstances and in the law since your last will or codicil in order to do the “housekeeping” to bring the re-published will up to date.

5. What Is A “Living Will”?

Living wills are designed to allow you to refuse extraordinary medical procedures in the event you have been injured (or your health has failed), and you are going to die anyway of a “terminal condition.” The living will should be combined with a Durable Power of Attorney for Health Care (which can be one document in Georgia) to allow someone you designate to make whatever health care decisions you could have made (except for “pulling the plug” on a pregnant woman or involuntarily committing you to a psychiatric facility) had you been able to voice your wishes.

I also recommend to clients that they give a copy of their Living Will/Health Care Power to their primary physician. You should verify that your physician will respect your wishes before you get into an extreme situation.

6. What Is The “Unified Credit”?

Everyone is given a personal credit against gift and estate tax owed. The credit doesn’t diminish by the “annual exclusion” gifts, marital gifts or charitable gifts that don’t generate any tax liability to be offset. The credit can be used on lifetime gifts; what is left over at death is available to shelter the estate. Any credit not used after that is lost, hence the desire to use the credit of the first spouse to die if the second credit is not enough to shelter the estate at the second death. There is a generation-skipping transfer tax on transfers to lower generations — currently, a flat 55 percent — and that has a $1million exemption. This system is separate from the regular estate tax system.

7. What Is The Annual Exclusion?

Each living person can give $11,000 per calendar year to anybody he or she wants — and as many people as he or she wants — without owing gift tax. Only outright gifts count, unless special trust terms are included. In some cases, grandparents may make direct payments of tuition to schools and medical expenses to providers without cutting into this amount. Outright gifts between spouses or to charity don’t come under this system because they have their own exclusion. Use of this exclusion over time can be a very effective estate planning ingredient — and you get to watch your recipients enjoying their good fortune.

8. What Is A “Living Trust”?

As distinguished from a “living will,” these are marketing terms for a revocable intervivos trust. Unlike an irrevocable trust, this living trust is taxed to the grantor for income and estate purposes, and no gift is made at the time of creation. It can be useful in states where probate is difficult or where fees are based upon the size of the estate. It is desirable where real property is owned in another state and there are no other shortcuts to ancillary probate in that second state. It is desirable where privacy is a concern — a probated will is a public document, but a trust is not — or where a “running start” might deter a will contest.

9. What Does An Insurance Trust Do?

An insurance trust, sometimes called an ILIT, is simply one type of irrevocable intervivos trust. Some irrevocable trusts are designed to be income taxed to the grantor, but an ILIT tries to cut all strings between the grantor and the trust. The grantor donates an insurance policy (then waits three years to die) or the trustee takes out a life insurance policy on the grantor (or grantor and spouse). When, upon the grantor’s death, the policy goes from the sum of premium payments to its death benefit, that growth is not estate-taxed. It is also not considered taxable income to anyone.

10. What Does An Irrevocable Trust Do?

As distinguished from a revocable trust, an irrevocable trust creates another “person” immediately. The settlor of the trust usually gives up control over the assets in the trust. Gifts can be given at their current value. The appreciation between the funding of the trust and the date of the settlor’s death will not be subject to estate tax (or GST tax, if applicable). A trust created under will is usually an irrevocable trust, since the grantor is deceased.

11. How Do Grantor Retained Trusts Work?

A GRAT is an annuity trust: A percentage of the initial contribution is paid out to the grantor each year during the trust. By comparing the annuity tables for the Grantor’s life (or the term of years) with the IRS tables, the value of the retained interest can be determined; that amount, subtracted from the total gift to the trust, gives the amount considered transferred to the donee (and subject to immediate gift tax).

12. How Do Charitable Remainder Trusts Work?

A remainder trust is tax-exempt, because at the death of the settlor or the end of the term, the balance of the trust will go to a charity. Accordingly, the trust can receive property at its fair market value and can generate a tax deduction for the present value of the remainder. The immediate tax deduction may be sufficient to pay for an insurance policy to replace for the heirs, in whole or in part, the remainder going to the charity. However, there should be genuine charitable intent since it is probably not possible to fully avoid real net value after taxes going to the remainderman; there have been anti- abuse rules put in place to prevent the use of the CRT merely to wash assets of tax liability.

13. What About A Charitable Lead Trust?

While not tax exempt itself, this trust provides that the immediate interest will go to charity (generating a deduction as it goes). It may be a good way to leverage down the transfer value of assets that the donee isn’t expected to actually use for some time (think of a trust fund for presently-young descendants).

14. What Does A Family Limited Partnership Do?

The family limited partnership is a standard estate planning technique. It is for one or more family members (usually the older generation) to serve as general partners (or to set up a corporate general partner).

There will generally be tax advantages to the older generation being able to transfer its limited partnership interests to lower generations. Over time, much of the older generation’s limited partnership interest can be moved in this way. As limited partners, the recipients are exposed only to the loss of their shares, not to general liability for the debts of the entity (as the general partner is).

This is an advantage when dealing with children or young adults who may not yet have the maturity to handle the wealth being passed to them. Also, while limited partners are liable for taxes on their shares of the entity’s pass-through income, the actual payment of money is at the discretion of partnership management (the general partner/older generation). Not only can this be useful to persuade the children to cooperate in long-term family planning, but it makes the limited partnership shares unattractive for the children’s creditors to levy on.

15. What Happens In Probate?

Probate is the term when the deceased has a will. There is an executor who has the power and exemptions granted in the will. Most probate is done in solemn form so as to get closure fairly promptly rather than having the estate remain in limbo for some time. Nonetheless, the estate may remain open for some time while clearance is being gotten from the taxing authorities, and during this time the executor is responsible for managing the assets of the estate and paying taxes for the estate’s income. In some simple cases where there are no debts and the heirs are in agreement as to the disposition (and there is no will), there may be No Administration Necessary filed.

Probate begins when the will is presented to the court. People are given a chance to object. If an heir is a minor or not legally competent, a guardian ad litem may have to be appointed to act for them. The executor will advertise to tell debtors and creditors of the deceased. The executor will collect the assets of the deceased which do not pass outside of probate and may have to file an inventory with the court, unless relieved, or post a fiduciary bond, unless also relieved.

The executor will file the final income tax returns for the deceased. The executor must determine if estate taxes are owed or if there is another reason to file an estate tax return. The executor will also be responsible for paying the debts of the estate: administration, funeral and last illness and the debts and taxes of the deceased. If there is not enough money, the executor will liquidate assets to cover these costs: the residuary, the general bequests (sums of money) and the specific bequests (in-kind property), in that order. Thereafter, the executor will distribute assets to the beneficiaries as set out in the will.

16. What About Non-Probate Assets?

Some assets will pass by operation of law: joint tenancy with right of survivorship, for example. Other assets, such as life insurance or retirement plans, may pass by operation of contract: The trustee or company has a contractual agreement to pay the listed beneficiary (if any).

These non-probate assets, however, may be part of the taxable estate. This may require that a guardian be appointed to hold the assets for the recipient. Some assets, such as IRAs, may have complex rules and elections as to how the benefit will be paid out.

17. Why Use An LLC Or Subchapter S Corporation?

Both entities offer limited liability and some management advantages, and both permit the income and losses to pass through to the owners’ tax returns rather than being trapped inside the entity itself: generating double tax or thwarting the timely use of available deductions