The Washington Post

Leave a Paper Trail to Save A Ton of Grief

By Albert B. Crenshaw
Washington Post Staff Writer

Although the oldest of the infamous baby boom generation turn 58 this year, and the youngest turn 40, most of them, it would seem, aren't planning to die.

At least that's one conclusion that can be drawn from the fact that most of them don't have wills, medical directives, trusts, estate plans or other documents that suggest contemplation of the hereafter.

This is good news for tax collectors and probate court officials, but not for heirs, surviving spouses and other family members who will be left to sort out the affairs of those who discover too late that they are not immortal.

At a minimum, failure to plan for one's demise can cause serious headaches for survivors, who must track down the decedent's assets and liabilities, and try to guess what their late relative would have wanted done with them.

At worst, it can cause heavy taxes and, in all too many cases, a family feud that poisons relationships for years.

One reason people don't plan is "there's a feeling the kids will work it out, so why should I have to do this. In many cases the kids don't work it out, and the attorneys end up having to work it out. Once the attorneys get involved, the relationship between the siblings is never the same," said estate planning attorney and author Les Kotzer.

The law abhors a vacuum and, even if there is no dispute, will step in to assign ownership of property and guardianship of minor children and make other decisions for a person who dies without making them himself.

The old saw that if you don't make a will the state will make one for you is quite true, said (another attorney).

"They get to decide who gets your property. It might be what you'd do anyway," but why take the chance? he said.

In fact, middle- and upper-middle-class families of today face a host of important and complicated decisions as they seek to ensure that their wishes concerning their persons and their property be carried out properly and with as little hassle as possible for their heirs. In addition to the obvious issues of bequests and taxes, families today are well advised to anticipate a number of medical issues, including when to allow "heroic" efforts to preserve life and when to "pull the plug."

The steps to accomplish this can be organized into three basic categories: personal matters, property transfers and tax considerations. These overlap, of course, but offer a systematic way of thinking about the necessary decisions and how they fit together. And the process is a good time for a family to involve the children, maybe for the first time, in financial and other decisions, explaining to them what assets and liabilities the parents have and what they would like to have happen after they are gone.

Personal Matters

• Wills: Even with the growing popularity of trusts and more "modern" devices, these remain the basic documents for end-of-life planning.

The old Hollywood scene of the family gathered around the lawyer to see who gets what may be gone -- if it ever existed -- but for today's family a parent's or grandparent's will continues to play important roles, some having to do with property, some not.

First, even if a family uses more complicated mechanisms such as revocable trusts to manage and bequeath property, family members should still have wills, for a number of reasons, said Frederick J. Tansill, an estate planning attorney in McLean. For example, a "pour-over" provision in a will can take care of property that through oversight or other reasons didn't get placed into a trust.

Another key reason for having a will is to provide for the care of minor children. Suppose, for example, both parents are killed in a car accident: Who takes care of the orphans? State law will specify, absent a will, but the parents usually know who they think would do the best job, and they can use their wills to make that designation.

In fact, Tansill advised going at least "two deep" in designating children's guardians -- a first choice and a second -- in case something unexpected happens. For example, suppose you name your sister, but later she and her husband divorce. She may not be in a position to take on another child or children and it's useful to have a fallback.

Wills also can be used to handle lots of seemingly small, but often emotionally freighted, chores. A will can make minor cash bequests -- for example, to a longtime domestic employee. It can also specify the disposition of personal property, making decisions that otherwise risk creating friction among children over beloved items. In fact, said Kotzer, co-author of the book "The Family Fight, Planning to Avoid It," besides money, "people fight over memories."

"Don't assume goodwill" among your kids, Kotzer said. If you want to be sure a certain child gets a certain painting, or piece of jewelry or furniture, say so in writing. He said property bequests can be written and bound into the will, or written out in a nonbinding memo. Making them part of the will is binding, he said, "but it means you've got to change your will every time something is lost or stolen," so if clarity is all that's needed, a memo may suffice.

But, he cautioned, either way frequent updates are needed, especially if items see sharp changes in value.

Can you do this yourself? Simple wills are indeed the stuff of self-help. Books, computer software programs and Web sites offer standard will forms. Just be sure to ascertain the specific requirements of your local jurisdiction when it comes to number and residence requirements of witnesses, notarizing, etc. For anything the least bit tricky, working with a lawyer experienced in wills and estates is advisable.

• Advance medical directives: In addition to planning for death, families today should plan for incapacity. This means preparing and signing documents that designate someone to make medical decisions for you when you can't, such as permission to operate or administer treatments, and also to decide how hard medical personnel should struggle to keep you alive should you suffer a terminal illness or be rendered comatose.

Generally, there are two documents that cover these questions -- a health care power of attorney and a living will -- though a growing number of states, including Virginia, have combined them into one, typically called an advance medical directive. Most states have approved forms for these powers, and generally they are quite straightforward. However, some states include a menu of options, leaving it to the signer to cross them off or leave them in, which Tansill said some people find confusing.

Tansill said that in his experience few people want heroic measures to preserve their lives in hopeless situations. "I think most people worry more about being in a nursing home in a vegetative state for years. It absorbs all the family's assets. They get no benefit, and there's a huge anger in the family. It terrifies them," and their attitude is "for God's sake, discontinue [life support] if that happens."

He said doctors and hospitals rarely object to carrying out these wishes, and in fact are often the ones to come to the family and say the situation is hopeless and it might be best to end the struggle.

He added that the legal battles that end up in the newspapers, such as the recent one in Florida and another a few years ago in Virginia, arise when people fail to execute the document, leaving decisions to family members who may disagree, or creating openings for politicians to become involved.

Such disputes occur "where the people don't do it and don't choose anyone. You have an absolute right to die if you signed the document," Tansill said.

Can you do this yourself? The necessary forms and instructions are readily available on the Internet from state offices and bar and medical associations. If you find the options confusing, your doctor may be able to explain some of them.

Property

Some 40 years ago, a book titled "How to Avoid Probate," by Norman F. Dacey, achieved enormous popularity. It warned about the legal morass that then surrounded the probating of wills in many states. Probate is a court-supervised process for the transfer of assets under a will. It is supposedly meant to prevent fraud and protect the interests of heirs and legitimate creditors.

But the probate process that got and perhaps deserved the black eye that Dacey's book gave it has been greatly simplified in many jurisdictions, including those in the Washington area. Therefore many attorneys say that the costs and headaches of more complicated estate planning may not outweigh those of probate for modest-size estates. In such cases, bequeathing one's property via a will can do an adequate job, making more elaborate, and expensive, devices, such as trusts, unnecessary.

• Beneficiaries and joint ownership: Keep in mind that certain types of property pass outside of probate anyway. Insurance death benefits go directly to the policy beneficiary, as do retirement plan assets. The key here is to make sure you have properly designated beneficiaries and keep them up to date. If you fail to do that, assets can end up in your probate estate after all -- or perhaps worse, go to someone, such as an ex-spouse, you don't want to have them.

Property held jointly with another person, such as a spouse or children, passes directly to that person at your death. This feature allows couples with simple situations to hold a house and other assets jointly and have them pass to the survivor outside of probate.

However, joint ownership has pitfalls. The rights of a surviving joint owner prevail, even if the dead person's will says otherwise. Kotzer recalled a case of a man whose father and uncle had inherited a farm from their dad, and being young and single at the time, they had taken it in joint ownership and left it that way. Now the man's father had died, and he discovered that instead of inheriting half the farm, as the father's will had provided, it had all gone to his uncle.

Putting property in joint ownership with a second spouse can effectively disinherit children from the first marriage, he added.

Also, remember that assets that pass outside of probate may still be part of your taxable estate. Federal estate taxes are levied when an estate's net assets top $1.5 million -- that amount is scheduled to change over the years -- and state estate taxes can begin at much lower amounts. The District, for example, taxes estates larger than $675,000. So if your assets are approaching these thresholds, you have to take taxes into consideration.

Can you do this yourself? For families of modest means, joint ownership and beneficiary designation, combined with a simple will, can do the job. Property such as bank accounts can easily be placed in joint title to pass to the survivor automatically. However, real estate not already in joint ownership will require a change of title. That can be done by a title company or lawyer, depending on the jurisdiction, but may result in fees and/or taxes. Also, if there is a mortgage, you should talk to the lender. The lender may object if it thinks its security is threatened -- and in an extreme case could call in the loan.

• Durable power of attorney: As with health questions, families need to prepare in case a member becomes incapable of making decisions involving property.

One mechanism that deals with such situations is the durable general power of attorney. This is a legal document that authorizes someone else to make decisions. That person, called your attorney-in-fact, can pay bills, deposit checks and carry out other routine transactions while you are incapacitated. You can write into the document as much or as little power as you like. Typically, when the attorney-in-fact is a spouse or other trusted family member, the powers would be quite broad. But if you wish, you can limit the authority, and also put in time limits.

If you become disabled and have not executed a durable power of attorney, your family may be forced to go to court to get authority over your affairs -- at a considerable cost of time and money.

But durable powers of attorney generally are meant for temporary incapacity. They "can be made to work over a long period of time, but they are awkward and cumbersome to deal with," Tansill said. Thus people with degenerative diseases or a bad family history of Alzheimer's or other such ailments may wish to set up a revocable trust, he said. As an alternative, he said, it's possible to write into the power of attorney the authority for the attorney-in-fact to create a standby trust for the person. "If we are just using a will, we reserve this power to create a trust," he said.

Can you do this yourself? While durable powers of attorney are simple in concept and printed forms are readily available, it's a good idea to consult an attorney to make sure you grant your attorney-in-fact neither too much nor too little power. And there are pitfalls. For example, many title insurers won't issue title insurance on real estate in transactions carried out by someone with a general power of attorney. If you contemplate, say, that your house might have to be sold, the power should name the property and specify that the attorney-in-fact has the authority to sell it.

Trusts

"A will, a durable general power of attorney, an advance medical directive -- those are the three documents everybody should have," Tansill said. Beyond that, it depends on your situation.

Much attention in recent years has been give to revocable trusts, also known as living or inter vivos trusts. They are widely touted as devices to avoid probate, which they can do, and to cut taxes, for which, in many cases, they are unnecessary.

A revocable trust is a legal entity that holds title to property. However, it remains under the control of the person who created it -- the "grantor" or "settlor," in legalese -- and can be changed or revoked. Income generated by assets in such a trust is still taxed to the grantor, so it does nothing to reduce income taxes.

Revocable trusts are, however, convenient vehicles for managing assets. The trust can have co-trustees, one of whom can be the grantor, so that the grantor can continue to manage and control the assets. However, if he or she becomes incapable of that, a co-trustee, often the spouse, can take over easily.

Similarly, at the death of the grantor, trust assets pass to beneficiaries outside of probate. This provides not only simplicity but privacy. Probate assets, by contrast, are listed publicly if anyone is nosy enough to look.

Who should have a revocable trust? There's no good rule of thumb, Tansill said. Young couples with few assets don't need them, but "the older you are, the richer you are, the more you need a revocable trust," he said.

Can you do this yourself? Forms are available that may be legally adequate, but face it, if you really need a trust, you also need an experienced estate-planning lawyer.

Taxes

Estate taxes are harsh, complicated -- and affect very few Americans.

Federal law exempts from tax estates that are below a certain value. That threshold is $1.5 million this year and next, and, sad to say, very few Americans are worth that much when they die.

In addition, the law allows spouses to bequeath an unlimited amount to one another free of tax.

But while most people don't have to fret about estate taxes, they are a peril for many of those who live in expensive areas of the country. In Washington, for example, a house in a nice neighborhood plus some life insurance can easily propel a family into potential tax problems.

An elementary and widely recommended estate-planning strategy is to make sure both spouses take full advantage of the individual exemption. Leaving everything to the widow, for example, results in no tax at the husband's death, but it also vaporizes his exemption (which is technically a tax credit), so that at the widow's death she has only her single exemption to apply to the estate total.

The math is simple: Under current law, a couple that preserves both exemptions can pass $3 million to their heirs tax-free; if they allow one of the exemptions to go unused, the tax-free total is only $1.5 million.

A standard technique is to arrange for the first person to die to leave an amount equal to his exemption to a trust and the rest to the widow. This can be done via revocable trusts set up before death or testamentary trusts set up under the will -- but should be done with the advice of an experienced estate-planning attorney.

Congress has made the matter more difficult by constantly changing the rules.

While the exemption is $1.5 million for 2004 and 2005, it goes to $2 million in 2006 and to $3.5 million in 2009. The estate tax is then scheduled to vanish altogether in 2010, but unless Congress acts it will pop back into existence in 2011 and the exemption will drop back to $1 million.

Given this environment, estate plans should be very flexible, and updated often.

Tax planning for large estates also frequently involves making gifts to heirs and others before death. Gifts can be taxable (to the giver), but the estate tax exemption actually can be applied to gifts as well, and sophisticated estate plans will sometimes make use of this feature -- for example, to convey an asset that is likely to appreciate greatly later on.

The law also allows anyone to give anyone else up to $11,000 a year without tax. Thus, a couple can give $22,000 a year to each child or grandchild tax-free, and wealthy families often engage in a systematic gift-giving program over the years to move money or other assets out of reach of the estate tax. But there are some wrinkles.

For one, gifts of appreciated assets, such as stock or a house, keep their old "basis" (essentially their purchase cost, used in computing taxable gain), so if the recipient sells the asset he or she has to pay capital gains tax, just as the giver would. By contrast, the basis of inherited assets is "stepped up" to the value as of the day so that heirs pay capital gains tax only on any appreciation that takes place while they own the asset.

On the other hand, it is possible to combine the annual exclusion with the very favorable tax treatment accorded life insurance to move a lot of money to heirs tax-free.

Life insurance death benefits are not subject to income tax for a recipient, and are subject to estate tax only if the policy was owned by the dead person. If the deceased did not own the policy, the payoff can be tax-free.

To capitalize on this, experts often recommend that families establish a separate irrevocable trust to own a big policy to benefit a child or children. The parents can use their $11,000 annual exclusion to make gifts to the trust to pay the premiums. For technical reasons, the beneficiaries must be offered the $11,000 as cash in hand, but if they waive their right to the money, which they are advised to do, the money goes to pay the premium and eventually to provide a tax-free payoff. This waiver by the children is called a Crummey power, after the clever folks, and their lawyers, who devised it.

There are numerous other estate-tax games, such as family limited partnerships and various forms of charitable foundations and trusts, but they are quite specialized and require expert legal draftsmanship. If you're at this level, typically beginning at several million dollars and going up -- way up -- get a good attorney.

Note, too, that if you plan to leave large sums to grandchildren, special "generation-skipping" taxes apply. This makes planning for multiple generations another reason to get a lawyer.

Finally, one other estate-tax twist: the states.

Until Congress changed the law in 2001, many states linked their own estate taxes so as to take advantage of a special federal credit that reduced the federal tax by the amount of the state tax so there was effectively no cost to the estate. States got revenue, but the estate felt no pain.

But since the change many states have "decoupled" their tax from the federal, and now tax estates on their own. The District now taxes estates of $675,000 or more; many other states, including Maryland, use $1 million as the threshold. But in all cases where the state exemption is lower than the federal, a couple who fund a trust at the first death up to the full federal exemption will end up holding more money than is exempt from state tax and therefore owe state estate tax.

Virginia so far has opted not to tax estates that aren't subject to federal estate tax -- another reason for the wealthy to regard the Old Dominion as a better place to die.

Can you do this yourself? Isn't this what lawyers were born to do?

Records

Besides a careful estate plan, the greatest favor parents can do for their offspring is to leave them complete lists and records.

All too often, said Kotzer, "people leave their children a will but no road map. We've had people come in and drop a plastic bag on our desk" for the lawyers to sort out.

Not only does that eat up estate assets if "the lawyer has to be a private investigator," but it leaves heirs vulnerable to third parties, who might, for example, try to claim they are still owed money on a note that the parents have actually paid off, Kotzer added.

So leave them what they need to know. Answer big questions like who their guardian will be, and who the lawyer is, where to find him/her, and where you keep your will.

And answer small ones, like your Social Security numbers, where the safe-deposit box key is, which bank the box is in, and which branch, and the box's number. Also such things as computer passwords and alarm codes.

List assets and liabilities, insurance policies, bank accounts, brokerage accounts and brokers' names.

In fact, the number of items that an heir might need to know is so lengthy that a cottage industry has sprung up in publishing and software, providing questionnaires that serve as reminders and can be used to create lists.

Can you do this yourself? You have to.