ESTATE Planning 

"CARING FOR SICK OR DISABLED PEOPLE AND  THEIR PROPERTY"

OR

"THE LAW OF CONSERVATORSHIPS AND GUARDIANSHIPS"

Although many people believe they will be able to handle their personal and financial affairs throughout their lifetime, this is not always true. Accidents, illnesses, advanced age and other circumstances may cause a person to become unable to take care of his personal and financial matters. Some people are fortunate enough to have advance warning or foresight to plan for the time when they will need help to care for their personal and financial needs. Others, such as accident victims, are not so fortunate as to be able to plan ahead.

For the person who can plan ahead, a durable power of attorney, a durable power of attorney for health care, living will or a living trust arrangement may provide the help they need. If you can plan ahead, it is important to choose the best method for your own particular situation, if you want more information about trusts, call back and ask for LAWLINE number #2402 entitled "What is a Trust?".

For the person who has not made advance plans, a court appointed guardianship or conservatorship may be the only way to get the necessary help in caring for personal and financial needs. A conservator or guardian is someone appointed by the court to take care of someone's personal needs or their property when they are not yet adults or have become unable, through age, injury, or illness, to take care of themselves. A court will also appoint a conservator or guardian for someone who is likely to be cheated or taken advantage of by others because of illness or age.

What is the difference between a guardian and a conservator? Guardians are appointed to take care of minors (children under the age of 18) and conservators are appointed to take care of disabled adults. Other than the different terminology, the duties of both guardians and conservators are basically the same. The person who is placed in the care of a guardian or conservator is often referred to as the "ward."

A guardian or conservator may be appointed to take care of someone's day-to-day personal needs - a "guardian or conservator of the person" - or to take care of financial affairs - "guardian or conservator of the estate". A guardian or conservator is most often a family member or friend and, in most instances, will be responsible for both the estate and the person of the ward. If a guardian or conservator is needed just for the estate, a financial institution such as a bank may be appointed.

The conservatorship or guardianship can be a temporary arrangement - that is, a person may be seriously injured in an accident and need someone to care for his affairs until he recovers. It can also be a permanent arrangement - as in the case of a person of advanced age who is unable to continue managing personal and financial affairs.

A guardianship or conservatorship is obtained by filing a "petition" with the court. Anyone can petition the court for the appointment of a conservator or guardian and nominate a specific person or persons to serve as conservator or guardian.

Before a conservatorship can be established for a disabled or elderly ward, the ward must be proven unable to manage their own affairs. If someone is attempting to have a conservator or guardian appointed for you and you feel that you do not want or need a conservator or guardian, you should immediately contact an attorney who can assist you in protesting the appointment. If you do not protest, you may lose important rights and privileges with respect to managing your affairs.

In some instances, the guardian or conservator will be entitled to a fee and the court will decide the amount of money the conservator or guardian will be paid. The court will also set limits on the duties and powers of the guardian or conservator according to the needs of the person for whom the guardian is responsible. The conservator or guardian is required by law, in most cases, to file an annual report of all receipts and all payments on behalf of the sick or disabled person.

A conservatorship or guardianship may not be the best solution for every case. A living trust, power of attorney or other arrangement may be better. The problem with other arrangements, however, is that a disabled person may not be legally competent to create a trust or other arrangement at the time it becomes necessary.

The important thing to remember is that future difficulties may be avoided by planning in advance for the possibility of disability. One important feature of the conservatorship and guardianship law in Tennessee is that you are allowed to declare in advance, in a written document, who you would like to serve as your conservator or as the guardian for your minor children. If you are concerned with making these types of decisions now, you should consult an attorney for advice on which method of planning will best suit your individual needs.

WHAT IF I DON'T HAVE A WILL?

When you die without a will your property passes to certain people as designated by state law. If you do not make a will, you give up the opportunity to designate the person who will manage your affairs after death and the right to determine who will receive your property. If you have minor children, that is, children under the age of 18 in Tennessee, a will affords you the opportunity to name the person or persons you wish to become their guardian or guardians. In the absence of such a designation, either in a will or other written document, the appointment of a guardian for your children will be decided by the appropriate court.

There are two common misconceptions about dying without a will. First, even if you do not leave a will, it is rare that your property will pass to the state. This only happens if you have no close relatives who survive you. Second, unless you have minor children or a large estate, the handling of your estate is not necessarily more complicated or involved because there is no will, although it may be somewhat more costly. Lengthy and complicated proceedings and litigation most often arise from an improperly drawn will, rather than from dying without a will.

It is important to realize that not all of your property becomes part of your "estate" for purposes of inheritance. As a general rule, only the property which is owned solely by you will pass through your estate. Property jointly owned by you and your spouse will pass automatically to your spouse; property held as joint tenants with right of survivorship will pass to the surviving joint tenant. Anytime there is joint ownership, the surviving joint owner will receive the property regardless of whether you have a will. However, holding title to property in joint tenancy can create other problems, especially in larger estates. If you want to know more about joint tenancy, call back and ask for LAWLINE number 2401 "What is joint tenancy with right of survivorship?".

Another common form of property which will not be controlled by a will is life insurance. Life insurance proceeds will be paid to the person named as beneficiary in the policy. The only exception is when your estate is named as beneficiary or if no beneficiary is named at all.

The rules on who receives your property when there is no will are derived from very old law that was written when the most common and most highly valued form of property was land. The rules were intended to divide property in the way that the decedent would have intended in most cases. If you are survived by a spouse but no children or other descendants, the surviving spouse receives the entire estate. If you are survived by a spouse and children, each will receive a share of your estate. For example, if a spouse and one child survive, each would receive one-half; if a spouse and two children survive, each would receive one-third; if a spouse and more than two children survive, the spouse would receive one-third and the children would divide the other two-third share equally.

If you have no surviving spouse, your estate passes to your descendants, that is children, grandchildren, etc. if you have neither a surviving spouse or descendants, your estate passes to your next closest relatives. First, to your parents, if they are living; then to brothers and sisters, with a share to the descendants of any deceased brother or sister; then to grandparents or the descendants of your grandparents - aunts, uncles, or first cousins. Only if none of the people described above survive you will any part of your property pass to the state.

Also, the mere fact of not having a will does not, in most cases, increase the amount of taxes due at your death. As a general rule, only estates that are valued in excess of $675,000 or the then current unified credit will be subject to taxation. The amount of the unified credit will be increasing over the next several years to $1,000,000. A will or trust can, however, reduce or eliminate the amount of estate tax due at your death.

When you die without a will and there is property in your estate to be administered, the court will appoint someone as the "personal representative of the estate" to handle the affairs of the estate. One of the things you lose by not having a will is the ability to provide guidance to the person who will be handling your estate. Without a will, the court will require the personal representative to post a bond and the cost of the bond will be paid out of the estate. Although the court's appointment may be in line with your wishes, only by making a will can you appoint the person you want to administer your estate and excuse that person from making bond.

The duties of the personal representative include gathering together the assets, filing a list of the assets with the court, paying all creditors' bills, paying all taxes, accounting for the handling of the estate's assets and distributing the estate to the beneficiaries. With a will, you can select the person you wish to handle these matters and give certain powers and authority to them so that administering your estate is simpler and less expensive. The law concerning wills, estates, probate and taxes due at death, is quite complicated and you should obtain qualified advice on these matters.

If you decide to make a will, it is best to make it a formal will with the advice and assistance of an attorney. Attorneys with experience in drafting wills can help you think of problems which might otherwise go unnoticed and make sure that the will is prepared and executed according to the requirements of state law. For example, in Tennessee, a formal will must be witnessed by two adult individuals who are not beneficiaries of the estate. Also, the failure to mention certain heirs, such as a spouse or child in a will, may result in the court disregarding the terms of the will and providing a distribution to that person as though he or she had been accidentally forgotten by the decedent.

Finally, with larger estates, a properly planned will and trust arrangement can save thousands of dollars in unnecessary estate taxes. Even if your estate is not large, however, a professionally drafted will is generally an inexpensive estate planning tool and should be used in most cases.

GIFTS TO MINORS (STOCKS, BONDS, OTHER SECURITIES AND CASH)

In many instances, companies and brokerages will not issue stocks, bonds or other securities to minors under the age of eighteen (18). There are also many instances, such as the death of a relative, when minors become entitled to receive substantial amounts of cash or other property. Before allowing a minor to receive such property, courts will often require some type of guardianship or custodial arrangement.

One way minors can own securities (and many other types of property) is under the uniform transfers to minors act (UTMA). This act allows the establishment of a custodial arrangement where an adult (or a trust company), the "custodian" keeps and manages the minor's property until the minor reaches a certain age. Then, under the terms of the act, the property must be given to the minor. The current law requires the custodian to turn the property over to the minor upon their reaching age twenty one (21). [Note: under certain circumstances the trust can remain in effect until the minor reaches age twenty five (25); however, an attorney should be consulted as there are consequences associated with terminating a trust after age 21.]

To make a gift of securities or other property under the uniform transfers to minors act, you must designate the custodian and signify the creation of the custodial arrangement by using the words: "to Joe Jones, Sr., as custodian for Joe Jones, Jr., under the Tennessee Uniform Transfers to Minors Act." The words sound confusing and unnecessary but they are required to avoid confusion with other ownership arrangements and to give the minor the protection of the act. Stock may be registered in this manner, bank accounts can be opened with this language or the designation can be made in some other document. The language can also be used in a will so that minor beneficiaries can receive property not valuable enough to justify the creation of a formal trust.

Remember, however, that use of this language creates an irrevocable gift that can never be taken back. Anytime the amount of property is substantial, the gift should be examined with respect to the possibility of creating gift tax liability or a reduction in exemptions for estate tax purposes. At the same time, if you name yourself as custodian, any property held as custodian may be included in your estate for estate tax purposes.

The act allows the custodian to manage and invest the minor's property but requires the custodian to exercise the same standard of care as a reasonably prudent person. The custodian may use the minor's property for the support, education and benefit of the minor. If the custodian refuses, the minor or other interested person can petition the court for an order requiring the custodian to use so much of the property for the minor's benefit as the court finds advisable. Custodians are also required to keep the minor's property separate and to maintain accurate records of all transactions.

When the minor reaches the designated age, the custodian must transfer the property to the minor, who is now, legally, an adult. This is one disadvantage of the custodial arrangement in comparison to a trust. A formal trust can provide that distribution of the property will not occur until a later age, when the minor is better capable of managing his money. In many instances, a trust will provide periodic distributions as the minor gets older. As a general rule, formal trusts are more flexible than a custodial arrangement under the act but are more complicated and expensive.

So long as he did not appoint himself, a custodian is entitled to receive a reasonable fee and reimbursement for any expenses he incurs. A custodian may resign and designate his successor or, if a custodian dies and the minor has reached the age of fourteen (14), the minor can appoint a successor. If there is reason to believe that a custodian is misusing or mismanaging the minor's property, a petition can be filed asking the court to remove the custodian and designate a successor.

The uniform transfers to minors act is a very valuable way of providing minors with the ability to receive and own property. The custodial arrangement is not difficult or expensive to create and offers the minor some protection. However, it may not be the best alternative in every case and is not designed to cover every possible situation. For instance, homes, land or other real property cannot be transferred in this manner.

If you are interested in transferring property of substantial value to a minor, you should consult an attorney experienced in the area of custodial arrangements and trusts.

WHAT IS JOINT TENANCY WITH RIGHT OF SURVIVORSHIP?

Joint tenancy with right of survivorship is one of several ways that two or more people can own an interest in the same property at the same time. This type of ownership applies to both personal property - furniture, cars, boats, bank accounts, CD's - and to real property - homes, buildings and land. Other ways more than one person can own an interest in the same property include trusts, partnerships and as "tenants in common." A married couple may hold property as "tenants by the entirety", which is similar but not the same as joint tenancy with right of survivorship. You may wish to investigate which type of ownership is best suited to your needs.

Joint tenancy with right of survivorship is different from any other way for two or more people to own property because it gives all joint tenants what is known as the "right of survivorship". This means that, if one of the joint tenants dies, his share automatically goes to the other joint tenants who survive him. In some states the survivorship position is created automatically when the property is acquired by two or more people. This is not the case in Tennessee. If you want to create a joint tenancy with right of survivorship in Tennessee, you must specify in the document creating the parties' ownership in the property that the owners are joint tenants with right of survivorship.

One advantage to joint tenancy with right of survivorship is that, upon the death of one joint tenant, no probate administration is required to transfer the property since the property automatically passes to the surviving joint tenants. Probate is the legal process for changing ownership of property from someone who has died to the beneficiaries named in a will or surviving relatives who are to receive the property. Many people put their property in joint tenancy with right of survivorship just because they want to avoid the expense and delay of probate. However, in some situations, other legal proceedings will be required to properly terminate a joint tenancy with right of survivorship interest - including the determination of inheritance taxes due, clearing the property of inheritance tax liens and placing it of record name in the survivors. If the value of the property is substantial, these procedures may be just as expensive and take just as long as probate.

Joint tenancy with right of survivorship is not a way to avoid paying taxes. Federal estate taxes and state inheritance taxes must still be paid on interests received by survivorship in joint tenancy with right of survivorship. In some instances, the creation of joint tenancy with right of survivorship may result in having to pay gift taxes.

Joint tenancy with right of survivorship also has other advantages and disadvantages.

Each case is different, however, and before you make up your mind, you should talk to a lawyer who can advise you in deciding which form of ownership is best for your needs.

WHAT TAXES HAVE TO BE PAID WHEN SOMEONE DIES?

There are two major types of "transfer taxes", that is taxes on the transfer of wealth, that might apply when someone dies. Generally speaking, the same taxes are applicable whether or not there is a will.

The first transfer tax is called the "federal estate tax", which is a tax paid according to the net value of the decedent's "estate." The decedent's estate consists of all property, regardless of type, in which the decedent held any interest at the time of death. The estate will include jointly-held property, insurance proceeds on the decedent's life, real estate, personal property, cash, business interests, etc. the value of the assets on the date of the decedent's death is generally the value that controls the amount of tax paid by the decedent's estate.

The federal estate tax will have to be paid only if the net value of the estate, after allowance for certain deductions such as funeral expenses and debts, exceeds the amount of unified credit. This large exemption will be increased over the next several years to $3,500,000 and, as a result, many estates pass free of federal estate taxes.

One very favorable change to the federal estate tax law has been the advent of the unlimited "marital deduction" for property passing to the surviving spouse. In other words, if the decedent's estate passes to the decedent's surviving spouse, the estate is allowed a 100% deduction, and this marital deduction is in addition to the unified credit exemption discussed above. If the surviving spouse receives all of the deceased spouse's property, there will be no tax on the first death because of the marital deduction. However, there will be an estate tax on the second death if the estate is still worth more than the unified credit at that time.

The unlimited marital deduction can cause unsuspecting couples to pay unnecessary estate taxes. The unified credit exemption applies to each person and, therefore, if all property is passed to the surviving spouse under the marital deduction, the first spouse's exemption is wasted. To the extent a husband and wife have a combined estate in excess of the unified credit, careful estate planning can take advantage of both exemptions and significantly reduce or even eliminate the imposition of death taxes.

The second transfer tax is one imposed by the state of Tennessee, called the "Tennessee inheritance tax". In many respects, the Tennessee inheritance tax is similar to the federal estate tax discussed earlier. Tennessee also allows an exemption similar to the unified credit up to $1,000,000 and the unlimited marital deduction for property passing between spouses.

What happens if you try to avoid the death taxes by giving away all of your property before you die? Another tax is the "gift tax" which is imposed on the transfer of property during life. Just like with the estate tax, there is a federal and state gift tax. However, the gift tax is not imposed on small gifts, so long as the amount given to any one person during any one year does not exceed an amount known as the "annual exclusion."

For federal gift tax purposes, an individual may give up to $12,000 to as many persons as he or she desires each year without paying any federal gift tax. A husband and wife may agree to "split gifts" and make gifts of $24,000 to as many individuals as they desire during each year. If you and your spouse intend to make split gifts, you will need to seek the advice of a tax professional as there are requirements imposed by the Internal Revenue Service in order to receive the deduction.

For purposes of the Tennessee gift tax, there is a distinction in rates imposed according to the "class" into which the intended beneficiary falls. "Class A" beneficiaries includes spouses, sons, daughters, lineal ancestors and descendants, brothers, sisters, step-children, and sons and daughters-in-law. Class A beneficiaries enjoy lower rates of tax that "Class B" beneficiaries which includes aunts, uncles, nieces, nephews, more distant relatives and non-relatives. InTennessee, the $10,000 (or $20,000 "split gift") exclusion exists only for gifts to class A beneficiaries. The exclusion for class B beneficiaries is only $3,000 per person, per year.

It is important to keep in mind that, to the extent gifts to a person exceed the amounts discussed above, there will be a gift tax imposed. Thus, transfers made during life must be examined to determine the gift tax impact.

Again, just as with the estate tax, proper planning in order to maximize the benefit of the annual exclusion can reduce or eliminate the payment of gift tax.

Another tax which should not be forgotten is the federal generation-skipping tax. The federal generation-skipping tax is a harsh, flat-rate tax of 55% (or the highest federal estate tax rate in effect at the time) imposed upon transfers during life or at death to individuals who are two or more generation levels below that of the transferor. The most common situation is when property is passed to grandchildren. However, since there is an exemption available to each transferor, the generation-skipping tax will only apply to estates worth more than the exemption. Proper planning with an attorney who is experienced in estate planning will reduce or eliminate the generation-skipping tax in most instances.

The transfer tax laws just described point out the need for proper tax and estate planning to pass the maximum amount of your estate to the intended beneficiaries and to reduce the burden of these taxes, both during life and at death.

WHAT IS A TRUST?

The legal definition of a trust is: a relationship in which a trustor transfers assets to a trustee who then manages and controls these assets for the benefit of the beneficiary. In simple terms, a trust is a relationship in which a person, called a trustor, transfers something of value to another person, called a trustee. The trustee then manages and controls the property placed in the trust for the benefit of a third person, called a beneficiary. In managing the property, the trustee must comply with the terms of the trust and with other requirements established by state law.

Trusts are most commonly created under the terms of a will or in a separate written document known as a "trust agreement." A trust which does not become effective until the trustor has died is known as a "testamentary" trust. A trust created while the trustor is alive is known as a "living trust." Trusts can also be either "revocable" or "irrevocable." Property placed in a revocable trust can be removed by the trustor at any time, at the trustor's discretion. However, placing property in an irrevocable trust is the same as making a gift - you are giving up ownership and control forever.

What are the uses of a trust? Trusts have several uses and they can be of much benefit when they are properly set up. One common use is to provide flexible control of assets for the benefit of minor children. This often avoids the necessity of having to have a guardian appointed to manage property inherited by minor children since they cannot legally handle their own financial affairs until they reach the age of 18.

Often parents want their children to be even older before they are given full use of their inheritance. It is not difficult to imagine the difficulty most 18-year olds would have with managing a large sum of money given to them in one lump sum. By establishing a trust, parents can select a trustee and specifically instruct them on how to use the assets for the benefit of the children. They can also allow the trustee much more flexibility in managing those assets than a court appointed guardian would have. For instance, the trust may provide that a larger share of trust benefits may be directed toward the care of a disabled child with special needs. This kind of trust is most often included in a will and does not become effective until both parents have died. It is usually set up to provide for the support, care and education of the children until they have reached the age when the trust assets must be distributed outright.

In some instances a trust can serve as an alternative to a will. For example, an older person may create what is called a "living, revocable trust" by transferring most of his assets to the trust and then simply collect the income for the remainder of his lifetime. Such trusts are often revocable because trustors are reluctant to give up the right to change or even cancel the trust at any time. A major benefit of this type of trust is that, if the trustor becomes disabled, his assets are kept in the trust and managed by the trustee for his benefit which eliminates the need for a court appointed conservator. Upon the death of the trustor, the trustee distributes the assets to the ultimate beneficiaries as directed by the trust agreement.

Living trusts are often advertised as a much better alternative than having your estate subjected to probate. This is true in some cases, especially in states where probate is unusually lengthy and expensive. In Tennessee, however, the fear of probate should probably not be the deciding factor in your decision to create a living trust. A living trust does not eliminate the need for a will and probate unless every asset the trustor owned is transferred to the trustee prior to death.

For larger estates, a major disadvantage of living trusts is that all assets held in a living, revocable trust will be subject to federal and state death taxes. On the other hand, trusts can be used to reduce both estate and income taxes in many situations.

Like another person or entity which has income, a trust will have to pay income tax on any income earned, such as interest or rent on the property held in the trust. However, under certain conditions, the income tax becomes payable by the trust or by the beneficiaries of the trust, rather than by the person who created the trust. The savings occurs when the trust or the beneficiary has a lower tax rate than the trustor. Consider the example of a man who is supporting a retired, elderly parent. The parent will usually have a low income and thus a lower income tax rate than the man supporting him. By placing an income-earning asset in an irrevocable trust which pays the income to the parent, the income will be taxed at the parent's lower rate.

Often trusts can help avoid unnecessary death taxes, especially with married couples. A trust of this kind generally works as follows: the first spouse to pass away leaves a portion of their combined estate in a trust, giving the surviving spouse the income benefit of that trust for the rest of his or her life. The assets placed in the trust are not subject to tax because their value is less than the amount at which the government begins to assess the estate tax. When the surviving spouse dies, only that portion of the estate which was not placed in trust will be subject to estate tax. If everything is properly arranged, the couple's assets can pass to their children when the last parent dies with significantly less estate tax having been paid.

There are many other ways in which trusts can reduce estate taxes, dependent upon the particular circumstances. If your estate is worth in excess of $1,000,000, including life insurance, it would be well worth your time to consult an attorney with estate planning experience.

Many type of trusts and "trust-like" arrangements can be found. For instance, "trustee" bank accounts can be beneficial in appropriate circumstances. However, one should be careful about opening bank accounts "as trustee" without a formal trust agreement.

Establishing a trust for the greatest benefit of all involved requires careful planning and drafting. If you are considering placing assets in some type of trust arrangement, you should consult an attorney with experience in the area of trusts.