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Estate Tax Planning & Living Wills

Estate Tax Planning & Living Wills

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We like to think of a will not in terms of you are leaving the earth, but what you are leaving on the earth for those you care about. Improperly done estate succession planning can cost the survivors over fifty percent of the estate. Most people come to us and say, “What do I need to do so that my estate is prepared for my death?”

What is a Living Will?

A Living Will is a legal document that instructs health-care providers about the wishes of a person regarding medical procedures should they become incapacitated. Advanced medical directives are the legal mechanisms to assure that the patient's wishes are carried out in the final days of their life.

This document can be very general or very specific. They can include directives such as these: transfusions of blood and blood products, cardiopulmonary resuscitation (CPR), diagnostic tests, dialysis, administration of drugs, tissue and organ donation, use of a respirator and surgery.

Many people want to do the online or "do it yourself "(DIY) Living Will. Our opinion is that this document should be given great attention and care and should be a piece of the puzzle in an estate plan.

Each state has different laws about this power of attorney, however federal law ensures that patients admitted to hospitals, nursing homes and the like through the Patient Self-Determination Act (PSDA), have the right to be informed and prepared with medical directives.

States have different names for medical directives and the rights of the patient may vary as well.

Health Care Proxy - This is a legal document in which an individual designates another person to make health care decisions if he or she is rendered incapable of making their wishes known. The health care proxy has, in essence, the same rights to request or refuse treatment that the individual would have if capable of making and communicating decisions.

Durable Power of Attorney - This is another type of advance directive. Individuals may draft legal documents providing power of attorney to others in the case of incapacitating medical condition. The durable power of attorney allows an individual to make bank transactions, sign Social Security checks, apply for disability, or simply write checks to pay the utility bill while an individual is medically incapacitated.

For married couples, wills should continue traditional unified credit planning, whereby the exemption amount of the first spouse to die is placed in a "credit shelter" trust for the benefit of the surviving spouse. This allows the couple to shelter two exemption amounts from estate tax rather than only one after both spouses have died.

This advice is subject to the following caveats: In a second marriage, it is usually common for the unified credit disposition to favor your children with the balance of the estate passing to the spouse.

In order to avoid a disproportionate allocation of assets to the children, the will could provide for a ceiling on the amount passing to them. Alternatively, the will could leave in the executor's hands the decision about how the assets would be divided among the children after paying the estate tax. The will could provide for a disposition of the entire residue to a Qualified Terminable Interest Property (QTIP) marital trust, which gives the executor discretion to decide that some of the property passing to the QTIP trust should instead pass to the children. Though this approach has the advantage of being flexible, it may be difficult to find an executor willing to exercise this authority.

If your will leaves a full estate tax exemption to a credit shelter trust, the estate may be subject to state estate taxes if the exemption from the state estate tax is lower than the exemption from federal tax. You should then consider leaving an amount equal to the lower of the state estate tax exemption and the federal estate tax exemption to the credit shelter trust.

The balance of the estate could be left to a QTIP marital trust. This produces a zero state estate tax. Moreover, if the will is correctly drawn, the executor can be given discretion to move money from the QTIP trust back into the credit shelter trust at the time of the decedent's death in order to bring the size of the credit shelter trust up to an amount equal to the federal estate tax exemption, provided that the state estate tax is paid

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