Charlotte, North Carolina:   While many people focus on getting out of debt or getting organized for the New Year, estate planning is an equally important personal finance goal that should make every adult’s to-do list.

That’s because according to Charlotte estate planning lawyer, Sabrina Winters, far too many area residents are without plans to protect their family, wishes and assets should something unexpectedly happen to them.  A recent lawyers.com survey further reveals that only 35% of adults have a basic will or other estate planning documents in place should death or incapacity occur.

“Contrary to popular belief, estate planning isn’t just for the rich,” says Winters .  “At a bare minimum, every adult needs a basic will, power of attorney and health care directives in place to avoid a legal and financial stresses and obstacles if something unexpectedly happens to them,” she adds.

So what are these documents and how do they help you in a time of emergency?  Winters explains the following:

• Will- A will is a document that specifies what should happen to your assets if you pass away.  A will may also contain guardian nominations to dictate who will care for your minor children if something unexpectedly happens to you.

• Trust- A trust is a legal entity that can hold title to property. With your assets securely placed in a living trust, you can minimize your financial exposure to lawsuits, divorce and bankruptcy while alive.  Upon death, a trust (if created and funded properly) will keep your affairs private and out of the probate court.  It also allows a great deal of control for people who do not want their inheritance going outright to their heirs if something unexpectedly happens.

• Power of Attorney- A power of attorney or POA gives explicit permission for someone to access your personal accounts, pay your bills and handle all other financial and legal affairs if you are incapacitated in an accident but do not die.   Under the current privacy laws, even a spouse may have a hard time accessing personal information without such documentation in place.

• Advanced Health Care Directive- Also known as a living will, this document specifies your healthcare wishes if you are incapacitated in an accident and unable to speak for yourself.  Such wishes may range from whether you want certain medications administered to when (if at all) to start life support in critical situations.   This document also allows you to appoint the person best suited to carry out such wishes should incapacity occur.

“Accidents and serious illness happen every day without warning,” says Sabrina.  “That’s why it’s so important for any adult who has not tackled their estate planning to add it to their resolutions this year.  It will save their family from potential headaches and unexpected costs should the unthinkable happen”.

About Sabrina Winters:  Winters is a wife, a mom, a business owner and the Senior Attorney at Sabrina Winters, Attorney at Law, PLLC…an Estate Planning and Probate law firm located in the beautiful Ballantyne area of Charlotte, North Carolina.  Winters has been assisting clients in all areas of Estate Planning for over a decade.  Some of her services include:  Wills, Trusts, Probate,Tax Planning, Planning for Children and Succession Planning for business owner

Huh?

Let me explain…

While the estate tax lapse seems to be in the forefront of the news this year, there is also a lesser-known gap that is offering many people a tax-free way to pass on some of their wealth to their grandchildren.

The Generation-Skipping Transfer Tax, (GST), has also been repealed for 2010.  What this means to grandparents is that you can leave outright gifts to your grandchildren as long as those gifts meet certain conditions.  The definition of a “gift” is fairly broad, but one way to take advantage of this is to set up a partnership and then give away units to your grandchildren. This will mean that you can put funds into a family limited partnership and transfer them tax-free but also transfer it in a way to keep the kids from getting control of the assets all at once and possibly squandering them.

The GST is different than income, estate and gift taxes.  The purpose of this tax is to keep people from transferring property many generations down with the intent and purpose of never paying any tax.  So, the GST is imposed if the transfer avoids gift or estate tax.

Example…

Dad dies with a large estate and leaves his property in a trust with the income payable to his children.  At his death, his trust assets go to his children.  Dad’s estate would then owe estate tax.

But when his children die, the trust property would not be taxable in their name so the family will have avoided paying for a generation of estate tax. In this instance, the GST would apply.

It is important to point out that the GST applies to anyone, not just family, so this would apply to unrelated beneficiaries as long as they were at least 37 and one-half years younger than the deceased.

There are limits to what you can exempt in generation skipping gifts and you are only allowed to use them in certain circumstances.  So, it is important to talk to an experienced Charlotte estate and tax-planning attorney when considering this.

So, as you are making your holiday list and checking it twice you might want to consider this for your grandchildren (naughty or nice!)  This will be a gift they will remember (and thank you for!) for the rest of their lives!

Checking Accounts/Savings Accounts/CD’s/Stocks/Mutual Funds: The name of the current owner on these assets will change to the name of the Trust.  You will probably  have to do this in person for checking accounts and savings accounts as the bank will want you to sign a new signature card.  Instead of signing the checks as Joe Smith you will sign them as Joe Smith, Trustee.  Before doing this with your CD accounts, check with the bank if they will impose a penalty if you transfer it before the period has run.

L ife Insurance: You will remain as the named owner on the Life Insurance Policy.  You will request that the Revocable Living Trust be named as the beneficiary.

Annuity:  It is recommended that if you are married that the spouse remain as the primary beneficiary and if you have children, they should be named as secondary beneficiaries.  This is due to the fact that there are certain options available to a spouse that are not available to a Living Trust.

IRA: If between a husband and wife, then  the ownership must remain in the name of one of the spouses and the primary beneficiary as the surviving spouse.  The Revocable Living Trust can be made the secondary beneficiary.  You MUST check with your CPA to determine if there are any income tax consequences to these changes.

Personal Property: Typically any property that does not have a physical title (such as household furnishings, jewelry, clothes, etc.) is handled by a document called “Assignment of Furniture, Furnishings and Personal Effects”.  This document is signed at the time your Revocable Living Trust is signed.  Not only does it transfer the assets you currently have into the Revocable Living Trust but it also transfers any future property of that nature.

Real Property:  The deed will be re-recorded with the name of the Revocable Living Trust as the owner.  You should contact you insurance company prior to making this change to determine if they will allow a Revocable Living Trust to be a secondary insured on the policy.  You should check with your mortgage company as well.

However, this exclusion is not automatic.  The gift must be given in such a way as to constitute a “present interest”.  A direct, outright gift, or gift in custodianship qualifies.  But, a gift in trust will not qualify unless the beneficiary has the right to withdraw the gifted amount from the trust.  Even a minor beneficiary must be given the legal right to withdraw, though that right would not be exercised as a practical matter.

While Trusts are not needed to get the tax benefit, they are commonly used.  That is, you could leave the exemption amount directly to the children and the rest to your spouse.  But, Trusts can provide money management, ceditor protection, ongoing tax benefits and flexibility.  For Example, the credit shelter trust could pay all income to your spouse and your souuse could have the right to withdraw 5% of the principal per year, without causing that trust to be inlcude din the spouse’s estate. The Trustee could also have the discretion to use principal for your spouse’s health, education, maintenance and support.  Or, the Trustee could be given additional options to benefit your children.

Assets that are included in determining the value of your Estate may surprise you.  Your gross estate for Federal estate tax purposes is a broad concept.  It is not limited to probate property or by state tax exemptions.  It includes all your property of every kind and nature, tangible and intangible, however acquired or owned, whether inside or outside the country.   Ultimately, the first step in Estate Planning is taking an inventory of everything you own, such as:

1.  cash, checking and savings accounts, CDs and money market funds;

2.  stocks, bonds, mutual funds;

3.  life insurance, employee benefits and annuities;

4.  your home (regardless of homestead exemptions) and any other real estate, land and buildings,

furniture and fixtures;

5.  business interests such as proprietorships, partnerships, limited liability companies, close corporations

and farm interests;

6.  notes, accounts and claims receivable;

7.  interests in Trusts and powers of appointment;

8.  antiques, art work, collections, cars, boats, planes and personal effects

Most people do not have to be concerned with Federal Estate Taxes because most people do not have estates large enough to be subject to those taxes.  The current Federal Estate tax exemption in 2009 is $3,500,000.  But, if your networth (basically the value of the assets above minus any debt) exceeds $3,500,000, or may in the near future then estate taxes should be factored into your plans.

To put it simply, if you pass away in 2008 and the value of your estate exceeds $2,000,000, anything over $2,000,000 will be taxed at the rate of 45%.  If you pass away in 2009 and the value of your estate exceeds $3,500,000, anything over $3,500,000 will be taxed at the rate of 45%.  Passing away in 2010 provides the greatest benefit; your estate can be of any amount and it will not be taxed.  More than likely in 2011 the excluded amount will be back down to $1,000,000; affecting many more clients.

How does the Federal Government determine the value of your estate? They will look at every asset that you own whether you own it in your name alone or together with someone else.  The assets include (but are not limited to) your home, rental property, stock accounts, checking accounts, savings accounts, IRAs and 401Ks.  In addition, they will take into account the value of any life insurance you own.  Yes, I know, this really isn’t your money, but that does not matter, and that discussion I will leave for another Blog all its’ own!

There are numerous methods that can be used to protect an Estate from being taxed. Avoiding taxes is legal; evading taxes is not!  If you are married, you are permitted to pass all your property to your spouse without incurring any Estate tax, regardless of the amount that is passed. Any potential Estate Tax will be imposed on the estate of the second spouse to die.  Trust me, when the children hear this they are all on board spending the extra money today to have the proper documents in place!

For example, a married couple can take advantage of what is called an AB Trust (or also known as a Credit Shelter Trust).  Without getting too detailed, when the first spouse passes away, a certain amount of assets is placed into a trust for the benefit of the surviving spouse.  The remaining assets pass directly to the surving spouse.  When the second spouse passes away the trust assets are left to the children.  This allows for legally avoiding an Estate Tax.

It is so important to speak with an attorney to make certain that you utilize any resources and methods that will allow for the maximum amount of your assets to pass to your family.