GENERAL ESTATE PLANNING QUESTIONS

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1 What is estate planning? GENERAL ESTATE PLANNING QUESTIONS Estate planning is a process to consider alternatives for, to think through, and to set up legally effective arrangements that would meet your specific wishes if something happens to you or those you care about. Good estate planning is more than just a simple Will. Estate planning also typically minimizes potential taxes and fees, and sets up contingency planning to make sure your wishes regarding health care treatment are followed. On the financial side, a good estate plan coordinates what would happen with your home, your investments, your business, your life insurance, your employee benefits (such as a 401K plan), and other property in the event you became disabled or if you die. On the personal side, a good estate plan includes directions to carry out your wishes regarding health care matters, so that if you ever are unable to give the directions yourself, someone you select would do that for you, and know when you would want them to authorize heroic measures and when you would prefer they pull the plug. What is an estate? The term "estate" consists of all the property a person owns or controls, whether in his or her sole name, held in a partnership, in a joint ownership arrangement, or through a trust, and all other monies that would be generated on the person's death, such as through life insurance. It includes: (1) real property and things attached to it (houses, buildings, barns, etc.); (2) all personal property (including automobiles, bank accounts, stocks and bonds, mutual funds, stock options, cash, furniture, jewelry, art, collectibles, etc.); (3) all businesses and business interests (sole proprietorships, partnerships, corporations, joint ventures, and the goodwill, inventory, tools and equipment, accounts receivable, and other business property, etc.); (4) powers of appointment (the right to direct who gets someone else's property); (5) life insurance and annuity contracts, pension benefits, IRAs, 403(b)s, etc.; (6) all debts and obligations owed to others; and (7) all claims you have against others, such as for the pain and suffering from an auto accident.

2 Why might I need asset protection? If you are "wealthy", "comfortable" or even if you just have some positive net worth, most likely you are concerned about keeping what you have, and preventing others from taking it. This concern is real, as there are people who will take advantage of any opportunity to take what you have. If you are a physician you are aware of horror stories about colleagues who lost everything after being held liable for medical malpractice in amounts far beyond their malpractice insurance. Asset protection planning enables you to employ legal techniques to prevent anyone from taking your assets. However, there are limitations as to what you can and cannot do. Your degree of exposure to risk of liability, the type of assets you own, and your total net worth are essential factors to consider when you and your lawyer develop a strategy for asset protection. Your occupation can be one indicator of the risk of liability for example, a pyrotechnics engineer has tremendous occupational exposure. Statistics can help you decide your risk factor, and help you to assess what kind of asset protection you need. Insurance is the most common asset protection technique. By "transferring" the risk to an insurance company, you can usually protect your assets. But even if you buy insurance, it might not cover all possible risks that you face, or the amount you buy might not be sufficient, or the insurance company may be able to deny the claim (perhaps it could claim there were misstatements made in your application), or the insurance company may become insolvent. Asset protection planning helps you prepare for these "wild-card risks". What sorts of instructions are made as part of an estate plan? An estate plan consists of one or more documents that set forth instructions. Some documents are used to control health care decisions, others control your property in the event of your incapacity, and still other documents will control the distribution of your property in the event of your death. What are some typical estate planning documents? Several of the following documents are typically used as part of the estate planning process: (1) A Will, sometimes called a "Last Will and Testament", to transfer property you hold in your name to the person(s) and/or organization(s) you want to have it. A

3 Will also typically names someone you select to be your Personal Representative (or "Executor") to carry out your instructions and names a Guardian if you have minor children. A Will only becomes effective upon your death, and after it is admitted to probate. (2) A "Durable Power of Attorney for Health Care" or Health Care Proxy appoints a person you designate to make decisions regarding your health care treatment in the event that you are unable to provide "informed consent". (3) A "Living Will" or "Directive to Physicians" is an advance directive which gives doctors and hospitals your instructions regarding the nature and extent of the care you want should you suffer permanent incapacity, such as an irreversible coma. (4) A "Durable Power of Attorney for Property" appoints a person you designate to act for you and handle financial matters should you be unable or perhaps unavailable to do so. (5) A "Living Trust" can be used to hold legal title to and provide a mechanism to manage your property. You can select the person or persons you want often even yourself as the Trustee(s) to carry out the instructions you want in the Trust and name one or more Successor Trustees to take over if you cannot. Unlike a Will, a Trust usually becomes effective immediately, continues in force during your lifetime even in the event of your incapacity, and continues after your death. Most Trusts are "revocable" which allows the person who creates the Trust to make future changes, modifications and even to terminate it. However, if the Trust is "irrevocable", changes, modifications and termination are very difficult (and sometime impossible), although such Trusts often carry some tax benefits. Trusts also help you avoid or minimize the expenses, delays and publicity of probate. (6) A "Family Limited Partnership" can be used to own and manage your property, in a similar manner to a Trust, but allowing additional tax planning techniques to be employed. Family Limited Partnerships are typically used for those who have large estates and thus have a need for specialized estate planning in order to minimize federal and state estate/death/inheritance taxes as well as provide elements of asset protection. Who should have a will? Anyone who cares how his/her property is distributed upon his/her death, or who would handle matters for those he or she leaves behind, or be guardian for minor children. After all, "you can't take it with you".

4 Who should have an estate plan? You should have an estate plan if: (1) you are the parent of minor children (2) you have property that you care about (3) you care about your health care treatment. If you do not have minor children, do not care about your property, and have no concerns about your health care treatment, then you do not need an estate plan. But if you meet any of these categories above, you should have an estate plan. When should I start my estate plan? The only time that you can prepare and implement an estate plan is while you are alive and have legal capacity to enter into a contract. If you are unable to manage your own affairs or suffer from some other disability which affects your legal capacity, your estate plan may be effectively challenged by those who assert that you lacked capacity at the time the documents were created, that you were subjected to fraud, coercion or undue influence during the creation and implementation of your plan. The best time to start an estate plan is now, while you have the capacity to do so. What is probate? Probate is the process by which legal title of property is transferred from the decedent's estate to his/her beneficiaries. Since you can't take it with you, the court determines who gets it. If a person dies with a Will ("testate"), the probate court determines if the Will is valid, hears any objections to the Will, orders that creditors be paid and supervises the process to assure that property remaining is distributed in accordance with the terms and conditions of the Will. If a person dies without a Will ("intestate"), the probate court appoints a person to receive all claims against the estate, pay creditors and then distribute all remaining property in accordance with the laws of the state. The major difference between dying testate and dying intestate is that an intestate estate is distributed to beneficiaries in accordance with the distribution plan established by state law; a testate estate (after payment of debts, taxes and costs of administration) is distributed in accordance with the instructions provided by the decedent in his/her Will.

5 How can my estate plan lower the federal transfer tax liability? Everyone gets a credit against Federal estate and gift taxes of $555,800, in 2004 and 2005, which is equivalent to transferring $1.5 million tax free to your heirs. (The estate tax exemption will eventually shelter an estate taxable base up to $3.5 million in 2009; the estate tax is totally eliminated in 2010 but reinstated in 2011 at an exemption level of $1,000,000.) For those who are married, there is an unlimited marital deduction. All estate taxes can be avoided upon the death of the first spouse to die. But the surviving spouse would have to remarry and give his/her entire estate to the new spouse in order to get another unlimited marital deduction. Most people would rather their children or other relatives benefit from the estate, rather than a new spouse and his/her family. An estate plan can take advantage of certain tax avoidance techniques for those who have accumulated some wealth; this gives more of your property to your intended beneficiaries, instead of giving it to the federal government. Some of these techniques include: (1) a tax by-pass trust to hold property for your children, while still providing for your surviving spouse during his/her lifetime; (2) distribution of share in a Family Limited Partnership to take advantage of minority and lack of marketability valuation discounts; (3) a gift program to take advantage of the current $11,000 per year per person gift tax exclusion so as to prevent a greater tax in the future in the form of an estate tax; (4) an irrevocable trust to handle and manage property outside of your estate, so that the property is not part of your estate at the time of death. Tax planning as part of estate planning can, depending on the size of one's estate, save hundreds of thousands to millions dollars - if it is done right. What about fill-in the blanks forms? They should carry an Attorney General's warning. Some thoughts to keep in mind before filing out "fill-in-the-blanks forms: (1) Fill-in-the-blank forms vary widely. Too many are just poorly written and plain awful.

6 (2) Even if the fill-in-the-blank form is tailored to your state, it will likely not meet your personal requirements. The forms usually are designed for people with very limited assets and no potential for litigation (such as a family that will go along with anything the person decides, even if it cuts out some family members). Fill-in-the-blank Wills are not right for families who have special circumstances, such as owning an out-of-state vacation home, or having a disabled child or grandchild, or a beneficiary who has received public assistance, etc. (3) Fill-in-the-blank forms rarely deal with possible Federal or state estate taxes, or their impact if both spouses die at or about the same time. As Federal estate taxes are from 7% to 50% of your total estate, and start at $675,000 for persons dying in 2000 (that limit increases to $1,000,000 in 2002 and will be at $3.5 million by 2009) that can take quite a bite out of your estate. And for Federal estate tax purposes the value of your estate is not only the property you own that passes by Will, it also includes property that passes by joint tenancy, plus the face amount of all life insurance, plus the value of your IRA, 401(k) and other retirement plans which typically pass under beneficiary designations and not the Will. Thus, instead of having a coordinated estate plan, use of a fill-in-the-blanks form could divide your assets in proportions that you (and your beneficiaries) would regard as unfair while penalizing them with major tax consequences. (4) Even with the best possible fill-in-the-blank forms, the crucial step most likely to be done incorrectly is the execution of the Will. A Will is not valid unless properly executed in accordance with the laws of your state of residence (or the state in which it was made). Some states require that in order to make a valid Will there must be three witnesses, all present at the same time who see you signing the Will, who then sign it immediately afterwards as witnesses. Texas law requires two witnesses. If even one of the necessary witnesses was not present, the Will would not be valid. If one of the witnesses is also a beneficiary, that witness may be disqualified from taking anything under the Will. (5) Fill-in-the-blank form Wills typically take longer to probate because judges frequently question the process used in their execution, requiring the witnesses who saw you sign the Will to appear in court. That creates expense, delay, and added legal bills. And if any person who would benefit if the Will is thrown out starts a Will contest, if the Will were not properly signed and witnessed, it would not be admitted to probate. In other words, you may think you prepared a valid Will, but it would not be worth the paper it is written on, and that would not be known until after your death. Does it make sense to use an attorney? Is it expensive? Only an attorney who regularly practices in the fields of wills, trusts, probate and estate planning is able to provide you with really sound legal advice as you put your estate plan into place. Attorneys are subject to regulation by state bar organizations, many of which

7 have continuing education requirements and mandatory liability insurance in case the lawyer makes a mistake. When you speak with an attorney, you can get answers to your questions including a better idea of how much it would cost. Often the expense incurred in retaining an attorney to prepare and help you put an estate plan into place is worth hundreds of times what you and your family would pay with no planning or poor planning. It would also avoid the financial and emotional nightmares that can occur with a poorly drafted (or improper) plan. Can I leave my pension to my spouse or to my child? In general, if you are married, your spouse is entitled to a portion of your pension if you die first. There is some cost to that, however, that usually serves to reduce the monthly retirement payments you would have received if the benefits were to be paid just during your lifetime. If you and your spouse agree, you can waive this survivor benefit protection, and/or sometimes name some other person(s) (such as a child) as your beneficiary. Consult with your plan administrator and review the plan summary carefully to find out your rights and responsibilities in this area. What should I keep in mind when I select the executor of my will? Who makes sense to choose as an executor is a crucial decision since his or her job can be a thankless one. Fingers start pointing quickly at the executor if things don't go the way family members expect. Since the executor is bound to carry out the terms of your will and obey the laws of the state, pick someone who is organized and likes numbers. An attorney or accountant are obvious choices, though their services can be taped if there are complex legal, tax, and accounting issues involved. Consider an executor that has a personal interest in your family, is familiar with your affairs (but not have a conflict of interest), has people skills, and the competence and maturity to do the job well. I think my deceased brother had life insurance or an annuity naming me as a beneficiary. How do I go about finding it? If you suspect a policy or annuity exists, and you and the executor of the estate cannot locate it: (1) Check the deceased's papers, address books and lists of important telephone numbers. Look for life insurance policies and annuities and the names of insurance agents or companies.

8 (2) Contact every insurance company with which the deceased had a relationship or policy, even if you're not sure it is still in force -- some types of policies may remain in force long after the deceased stopped paying premium. (3) Check with the employee benefits office at the deceased's last place of employment, and all former places of employment where the deceased was employed for any length of time. If the deceased was a union member, also check with the union welfare office. If the deceased belonged to any organizations (such as clubs or religious organizations) ask if they sponsored any life insurance programs and if so, if the deceased had a policy with or through them. (4) Check the deceased's bank and brokerage firm records, including check registers, canceled checks, deposit slips, and bank books, for the last few years to see if any checks may have been written, or funds withdrawn to pay life insurance premiums, or payments received from insurance companies. Very often there will be a handwritten notation as to policy payments or receipts from dividends or policy surrenders. (5) Check the deceased's mail for at least a year after death for premium notices, which usually are sent annually. While if a policy or annuity has been paid up, in which case, there may not be any notice of premium payments due, the company may still send an annual notice regarding the status of the policy or annuity, or it may pay or send notice of a dividend. And if the deceased had an agent, a birthday card or calendar from the agent would mean you should call. (6) Review the deceased's income tax returns for the past few years. Look for interest income from and interest expenses paid to life insurance companies. Life insurance companies pay interest on accumulations on permanent policies and annuities charge interest on policy loans. (7) Check with the state's unclaimed property office to see if any unclaimed money from life insurance policies may have been turned over to the state. If, after a number of years, an insurance company holding the unclaimed money cannot find the rightful owner, it turns the money over to the state. (8) Look around the neighborhood to see if there are any local insurance agencies. While it is a long shot, you may want to drop in and ask if the deceased had a policy. (9) Of course, you may wish to contact life insurance companies directly to see if a policy exists. The state insurance department should have a list of all life insurance companies licensed to do business in the state in which the deceased may have purchased a policy.

9 If I give a power of attorney to someone, can I still act for myself? Does it matter if I give a general or limited power of attorney? First of all giving power of attorney to a third party -- the "attorney-in-fact" - does NOT divest the person who granted the power of his or her own rights to act for himself or herself. This applies whether the power granted is a General or Limited power of attorney. The principal the person who grants the power of attorney, let's call him or her X even can name 10 separate people, each as a power of attorney. While EACH of the named attorneys-in-fact would have the power to act for X, X still retains the power to act for him or herself so long as he or she is mentally competent. If the power is not a durable power of attorney, it becomes ineffective upon the principal losing competence. With a General Power of Attorney, X gives the named attorney in fact very broad powers to act for him or her in virtually any manner or thing that X could have acted for him or herself. With a Limited Power of Attorney, X typically gives the person named only certain specific powers and the person named can do only those things set forth in the power itself, such as sign a lease, or execute a deed, or act from May 1 to June 30 (or any specified period of time). If the person named attorney-in-fact starts acting in a manner X does not like, or X just changes his or her mind, X can generally REVOKE the power at any time, orally or in writing, and then the person named as the attorney-in-fact loses all legal right to act. People and institutions relying on the power of attorney often require the person named as attorney-in-fact to certify that he or she still has the power and that it is in effect and has not been revoked; the attorney-in-fact would be committing fraud by acting on the basis of the power that was revoked.