Estate Planning & Probate
Last Will & Testament
A last will and testament is an essential component of any estate plan, even one that is primarily based upon a revocable living trust. A will is basically a set of instructions about what to do with your “probate” property when you pass away. Probate property consists of any property you own at the time of your death that does not pass to someone else by virtue of a contract, deed, trust, or other means. A will also lets you make other important arrangements following your death, such as designating who will care for your minor children and their property.
The first question that many people have about estate planning is “what happens if I don’t have a will?” If you die without a will, then your property will pass according to “intestate successsion.” The Georgia code basically lays out a blueprint for how property is distributed depending upon the relationship and number of people surviving you. Unfortunately, this distribution scheme is not always practical, tax efficient, or in keeping with your wishes. For example, if you pass away without a will leaving a spouse and two minor children, Georgia law requires that your estate be divided between all three of them equally. This distribution would apply regardless of whether your spouse requires a greater share of the property for support, regardless of whether your children’s receipt of property might require the appointment of a conservator, and regardless of whether it ignores other plans you might have had for your property (such as a charitable bequest).
If the other parent of your minor children is still alive when you pass away, that other parent will assume all parental rights over the children. However, if the other parent is already deceased, or if you both pass away together in an accident, then the court will decide who to appoint as your children’s guardian. If you have not drafted a will that nominates a testamentary guardian for your children, then the court will not necessary appoint who you would have wanted. Most people do not want the courts deciding how their property should be distributed or who will care for their children when they pass away, therefore, a will should be considered an absolute necessity.
Out of a concern for costs, many people turn to do-it-yourself will forms that you can buy at the office supply store or through web-based “legal” services. While these forms may have all of the requirements to create a legally binding will, most people should at least consult with an attorney before simply filling in the blanks on a stock document. The estate planning process is filled with boundless options, opportunities, and pitfalls, and only a qualified attorney can guide you through.
Advance directives allow you to appoint someone you trust to make personal and financial decisions for you. In Georgia, there are two statutory forms that many people use for their advance directives (they are called statutory forms because the text of the forms is printed in the Georgia Code). These forms are the Advance Directive for Health Care and Durable Financial Power of Attorney (this will be replaced by a new statutory power of attorney form effective July 1st, 2017).
The Advance Directive for Health Care allows you to appoint a health care agent and successor agents who can make health care decisions for you if you are not able to communicate with your healthcare providers. The document also allows you to place resctrictions on your agents’ authority (such as prohibiting them from consenting to an organ donation). The document also allows you to give instructions about whether you want to receive life-sustaining treatment if you have a terminal condition from which you are expected to pass away within a short time or if you are in a permanent state of unconscious from which you are not expected to recover. These end-of-life instructions used to be the subject of a separate statutory form called a “living will.”
The financial power of attorney allows you to appoint an agent to make financial decisions on your behalf. In the document, you can specify whether you want your agent to have these powers as soon as you sign the document or only upon the occurrence of a future event (such as if you become incapacitated). The revisions to this statutory document that will become effective on July 1st bring more clarity to when third parties can rely upon the document and allow for the appointment of a succesor agent.
Both power of attorney forms are considered “durable,” which means that the agent you appoint will continue to have decision-making authority even after a court has determined you are legally incapacitated. These two statutory documents should be considered as essential as having a last will and testament. Our office drafts both statutory power of attorney forms for each client as part of every estate planning package.
Revocable Living Trust
One of the main benefits of an RLT is that it avoids the need for an extensive probate of your estate when you pass away(which is the court-supervised process of marshalling a person’s assets, paying their debts, and distributing the remaining property according to their will). While Georgians are lucky in that our probate process is relatively quick and less costly compared to other states, there are inherent risks associated with any probate case. Many estate planning attorneys describe the probate process as “a case that you file against yourself, with your own money, for the benefit of your creditors.” In other words, when your estate is probated, your creditors (and even possibly disgruntled family members) have an open forum to assert claims against your property, challenge the validity of your will, and generally disrupt the distribution of wealth to your loved ones. Sadly, your probate estate could potentially be tied up for years in a costly legal battle. However, with an RLT the disposition of your property has already been made when you fund the trust, so no further legal intervention is necessary.
A related advantage to an RLT is that it avoids the need for a guardianship or conservatorship. A guardianship and conservatorship are two other court-supervised actions to determine who will make personal decisions for you and manage your property in case you have been determined unable to do so yourself. Similar to probate, these actions come with associated costs and the risk of protracted litigation. The RLT avoids the need for such actions by appointing a successor trustee and giving that trustee express instructions for how to manage your assets and provide for your care when you are no longer able to do so.
It is important to bear in mind what an RLT does not do to avoid any false expectations. An RLT does not provide any income or estate tax advantages. Because the RLT is, by it terms, revocable, all of the income from the trust flows through to the grantor (and is taxed to them personally) and all of the property within the trust will be included within the grantor’s gross taxable estate when they pass away. An RLT also does not provide any asset protection for the original grantor. The grantor’s creditors can still potentially attach property within the RLT if they obtain a judgment against the grantor just as if the property was still titled in the grantor’s name. An RLT can, however, provide asset protection for subsequent beneficiaries of the trust (such as children) through the use of spendthrift provisions or other discretionary powers given to the trustee.
In a CRT, an individual will fund a trust and give non-charitable beneficiaries (like themselves or their family members) the right to receive the benefit of that trust for a certain period or time (usually measured by the lives of the beneficiaries or a definite term of years). After that time period has expired, a designated charity will receive the remainder of the trust. For instance, a CRT could be funded with $1,000,000, and the donor’s spouse could have the right to receive a 7% annuity from the trust ($70,000 per year) for a period of 15 years, at which point the remainder could be left to their church.
CRTs are especially advantageous because they are tax-exempt entities. This means that a grantor can take highly appreciated assets, place them in the CRT, and the CRT can sell them with no income tax consequences. To return to the previous example, if the $1,000,000 initial funding of the CRT were in the form of stocks that had a $500,000 basis in the hands of the donor, then (assuming the donor is in the highest marginal bracket) the CRT could help the donor avoid a potential $100,000 in capital gains tax. The trust would then reinvest the proceeds of this sale in other assets that match with the payout schedule of the CRT and the donor’s other criteria.
Upon funding the CRT, assuming all requirements imposed by the IRS are satisfied, the donor also receives an upfront income tax deduction for the residual benefit that the charity will ulimately receive. From the previous example, the donor’s church would have a residual interest of $126,897. Assuming that the grantor is in the heighest marginal income tax bracket, the CRT could save over $50,000 in income taxes.
The protection afforded to contingent beneficiaries of retirement funds depends upon the type of retirement plan and the relationship of the contingent beneficiary to the original plan owner. Some types of retirement plans have the strongest anti-alienation protections under federal law, such as many employer-provided 401(k) accounts. These accounts are completely excluded from bankruptcy proceedings (regardless of value) and exempt from the claims of most creditors with few exceptions. Other types of plans, such as IRAs and Roth IRAs, are not excluded from bankruptcy entirely but have a high exemption limit. These plans also have protections from creditors under most state laws.
If the contingent beneficiary is the original owner’s spouse, that spouse can choose to “roll over” the retirement fund and continue making contributions to it as if it were their own. In that case, the spouse “steps into the shoes” of the original owner and the retirement fund maintains all of the same protections from creditors and bankruptcy.
The biggest difficulties arise when someone other than a spouse is the contingent beneficiary of a non-excluded plan, such as an IRA. Under these circumstances the beneficiary inherits the plan and cannot roll it over. The beneficiary must take distributions from the inherited plan, based upon their age, but can also withdraw the entire amount at one time without penalty.
The United States Supreme Court has ruled unanimously that this sort of inherited IRA is not a “retirement fund” within the meaning of the bankruptcy code, so it is not entitled to the exemption. It also follows that the inherited IRA would not be protected from the claims of other creditors as it would in the hands of the original owner. Unfortunately, if an IRA is left to a non-spouse beneficiary (or to a spouse who chooses not to roll it over) the money that the original plan owner worked hard to save for could be lost in an instant.
In order to provide the highest level of protection for these inherited retirement funds it is essential that you draft a retirement trust (also referred to as a standalone retirement trust) and name the trust as a contingent beneficiary. In turn, the beneficiaries of the trust can be your spouse, children, and whoever else you choose, so they will ultimately receive the benefits. These beneficiaries can be assigned separate shares of the retirements funds, meaning that their distribution amounts will be based on their own age and you can set rules for those distributions. For example, you can specify that some beneficiaries of the trust will receive all of their distributions while others can have limitations imposed. Of course, the rules applicable to a retirement trust are highly complex, so please contact our office for assistance.
Asset protection can be divided into two general categories: protecting your property for the benefit of someone else (such as a spouse or children) and protecting property for your own benefit. The first category of asset protection is more readily achievable than the second. For example, you can establish a trust for the benefit of your family and impose restrictions on the distributions of that trust that would make it inaccessible to satisfy any future judgement against those beneficiaries.
Placing your own property outside of the reach of your own potential creditors, while still maintaining some beneficial interest in that property, is a more difficult proposition. Some states expressly recognize a person’s ability to create a trust that could accomplish this goal (which are referred to as “domestic asset protection trusts” or “self-settled spendthrift trusts”). Currently , Georgia does not recognize such a trust. Moreover, no Georgia appellate court appears to have considered whether one of these domestic asset protections trusts, created in a state that does recognize them, should be subject to the claims of creditors in Georgia.