Trying to plan your North Carolina estate? Get the answers you need to protect your family.

Jackie Bedard has compiled a list of the most frequently asked questions in response those who need help protecting their families with North Carolina estate plans.
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  • What is a Financial Durable Power of Attorney and Are They All the Same?

    A Financial Durable Power of Attorney (often referred to simply as a Durable Power of Attorney) allows you to appoint a person, referred to as your “agent,” to make financial decisions on your behalf, access your financial records, and take appropriate action to handle your legal and financial affairs.

    Why Do I Need a Financial Durable Power of Attorney?

    Imagine that someday, you become incapacitated.  Maybe you were in an accident or had a stroke, or maybe it’s just many years from now and you’ve fall victim to Alzheimer’s or dementia.  Contrary to popular belief, your spouse or child cannot not just manage your assets on your behalf.  Instead, they would need to go down to the court house and initial an expensive and time consuming guardianship proceeding, asking the judge to appoint them as your guardian so they can manage your affairs on your behalf.  A guardianship proceeding can be avoided by having an properly executed and thorough Durable Financial Power of Attorney in place designating who you would want to manage your affairs in the event that you could not.

    A Financial Durable Power of Attorney will allow your agent to use your assets to pay for the day-to-day expenses of you and your family, such as paying the mortgage or rent, utilities, medical bills, and so on.  It will also allow your agent to collect, on your behalf, any income which you may be entitled to such as Social Security, disability insurance benefits, or other benefits.  The Durable Power of Attorney will also allow your agent o file and pay your taxes, manage your stocks, bonds, retirement accounts and so on. 

    What Are Some Issues with Powers of Attorney?

    It ultimately depends on the exact powers and provisions included within the document, but I tell my clients to imagine that a Financial Durable Power of Attorney is a “blank check.”  It permits the person you name to step in your shoes and do just about anything on your behalf, but at the same time, does not include specific instructions from you as to how you want them to manage things.  This is why some clients instead opt to set up a revocable living trust that includes detailed disability instructions.

    On the flip side, an issue that commonly arises in the world of elder law and nursing home planning, is that many people have Financial Durable Power of Attorneys that are not powerful enough!  Again, your agent can only do those things that you specifically authorized within the Power of Attorney document. 

    For example, let’s say that you are in the advanced stages of Alzheimer’s or dementia and your family is no longer capable of providing you with adequate care at home, so they consult with an elder law attorney about their options of paying for nursing home care.  Frequently, the plan recommended by the elder law attorney will include the establishment of one or more trusts to help you qualify for financial assistance from Medicaid, veterans benefits or other programs to pay for the cost of the nursing home.  Imagine your spouse or child’s frustration when they are told that your power of attorney doesn’t permit them to set up the trust on your behalf!  This could be a mistake that costs your family tens or hundreds of thousands of dollars!

    To learn more about common estate planning issues, check out our free guide, Estate Planning Pitfalls: The 12 Most Common Threats to Your Estate & Your Family's Future, or to discuss your estate planning concerns, please call our office at 919-443-3035 or contact us online.

  • How much does a will cost? How much does a living trust cost?

    By far, for new callers to our office, one of the most common questions we receive is “How much does a will cost?” or “How much does a living trust cost?”

    I believe this question at its core largely arises because most people don’t know what other questions to ask and how to distinguish from one lawyer from the next. I completely understand, and we've created a resource to help with this, which I'll share with you at the end of this Q & A. But first, I'd like you to consider the following example:

    If you were having stomach pains, would you expect to call up your doctor and ask, "Doc, I have a stomach ache. How much will it cost to get rid of it?" Or, "I just need a simple appendectomy. How much do you charge for that?"

    Of course not! You would want them to take the time to meet with you, understand your symptoms, develop a diagnosis, and discuss treatment options with you. When you have to choose a doctor, you do it based on their proven abilities, their bedside manner, and their reputation. You should beware of anyone who can quote you a price without taking the time to get to know you, your concerns, and your vision for the future.

    Order Takers and Dictators

    Unfortunately, there are a lot of lawyers who fall into the category of either "order taker" or "dictator." Order takers have you do your own diagnosis and write your own prescription. Dictators give you a prescription without learning anything about you. Neither of them take the time to listen. That's just not how our firm works.

    We have spent years developing a process we call The Vision Method. It centers around the idea that your planning should be designed according to you, your family, and your vision for the future. Your first meeting with our firm--your Vision Meeting--is about getting to know who you are and what you want to achieve.

    That means that until that meeting, we don't know enough about you to present you with planning options. That said, here are some things to consider...

    Considerations For Your Estate Plan

    First, it is entirely possible that you just need a "simple will."  I strongly urge you to attend one of our seminars or read our report, Estate Planning Pitfalls to discover what we believe even the bare essential plans should do, as well as some objectives your plan can accomplish you might not have known about.

    Second, you should know that all wills are not the same, nor are all living trusts, nor are powers of attorney or any of the other documents included in your estate plan. Please read what I'm about to say carefully: I've reviewed literally thousands of prior documents that clients have brought in from other attorneys. Some of them were pretty good. But a lot of them weren't worth the paper they were printed on.

    To put it bluntly, they got ripped off. We've seen plans that made some obvious and very serious omissions, plans that didn't take the clients' unique family situations into account, and plans that used complicated techniques that were outdated, no longer necessary, and, frankly, unlikely to work.

    Unfortunately, you don't know what you don't know. And worse, no one finds out until it's too late. And that's when we see things like family members never talking to one another again because Mom or Dad left such a mess to clean up when they died.

    I want you to consider the value of knowing that your plan is done right. Consider the value of accomplishing exactly what you envision for your family after you're gone.

    "Sounds Expensive..."

    If that sounds expensive, I can assure you that the cost of doing it twice--or of doing it wrong and not finding out until it's too late--the cost of doing it wrong is much more expensive in the long run.

    Our firm will never be the cheapest firm in the area. We are not the firm with 2-page form or template documents. The race to the bottom leads to cutting corners, and we have been doing this long enough to know that cutting corners does not get people where they want to go. We have hired an excellent team of talented individuals. We have put a lot of time and money into educating our team and the community at large. We are constantly working to improve our abilities and our work product. We know what it takes to do a good job. So whenever we encounter another firm competing on price, we can’t help but wonder what they might be leaving out...

    Most of our estate plans are available on a flat fee basis, but the fees may vary depending on the specific items and provisions of the plan and the goals achieved by the plan. Thus, we have plans that range from over $1,000 to the tens of thousands of dollars. 

    Our fees are not dependent on the size of the estate. We have had clients with net worths in the millions whose goals led them to choose our bare essentials plans. We have had clients opt to pay thousands of dollars now to protect tens or hundreds of thousands down the road.

    So how do you figure out what you really need, what good planning can do, and what value is provided? It starts with education, through the resources available here on our website and in our seminars. If you have questions, or when you are ready to schedule your one-on-one Vision Meeting, call us at 919-443-3035 or contact us online. We are here to help explore your planning objectives, identify your specific needs and goals, then we’ll match that up with the right estate plan for you and your family.

    About that resource to help you differentiate one firm from another: we've put together a six-step process and a scorecard, which you can access here for our upcoming report, How to Choose a Will or Trust Lawyer: A Guide for Finding, Interviewing, and Choosing an Estate Planning Attorney So You Can Avoid Getting Ripped Off and Leaving Your Friends and Family with a Great Big Mess When You Die.

     

  • What is a Health Care Power of Attorney? Is It the Only Health Care Directive That I Need?

    Health Care PuzzleIn North Carolina, a Health Care Power of Attorney (some states call it a health care proxy or advance medical directive) is critical if you want to protect your own future well-being and reduce the likelihood of stress and family conflict over your future health care. 

    What Does a Health Care Power of Attorney Do?

    A North Carolina Health Care Power of Attorney allows you to name the person (your agent) that you want to make your health care decisions if you are unable to make those decisions yourself. Generally, you would name your first choice to serve as your health care agent and then would also nominate one or more back-ups in case your first choice is unable to serve. The Health Care Power of Attorney then provides specific powers for what health care and medical decisions your agent has authority to make in the event that you become incapacitated.

    Why Is it Important to Have a Health Care Power of Attorney?

    Do you recognize the name Terri Schiavo?  In 1990 Terri suffered cardiac arrest that resulted in Terri going into a persistent vegetative state due to brain damage from lack of oxygen. Terri was placed on artificial life support, including a feeding tube. Terri's husband and parents then fought their way through the court system for years over who had the legal authority to make Terri's health care decisions and whether or not she would have wanted life-sustaining treatments under the circumstances. The case went through 14 appeals and was not resolved until 15 years later, when in 2005 the case was resolved. Terri's feeding tube was removed on March 18, 2005 and she passed away on March 31, 2005. 

    Terri's case was in the national news of years and sparked a public discussion regarding the importance of health care directives and a health care power of attorney that clearly identifies who the health care decision maker is and what decisions that person is authorized to make. In short, if you don’t want to “famous” like Terri, I strongly encourage you to have a properly executed Health Care Power of Attorney that clearly sets out who is authorized to make your medical decisions. 

    But Is a Health Care Power of Attorney Enough? Are There Other Health Care Directives That I Need?

    Arguably, no.  Anyone I've ever spoken with who has served as a health care agent for a loved one has some sort of story to share about how stressful it was and how uncertain they felt about their loved one's wishes.  Making life or death decisions is not easy, especially when your loved one wants to honor your wishes. 

    These days, it's common for a Health Care Agent to serve as your agent for months or years. If you become incapacitated from an accident, stroke, or debilitating long-term illness such as dementia, Alzheimer's disease, or Parkinson's disease, your Health Care Agent may be called upon to serve as your agent for years and make numerous decisions about your living environment, long-term care needs, and end-of-life care decisions.

    Serving as Health Care Agent can be an emotionally difficult role. We find that often, the Health Care Agent doesn't truly know what your wishes are. These are uncomfortable topics to think about and discuss. We find that many people have only made generic statements to their family members along the lines of "I don't want to be kept alive by machines" or "Don't put me in a nursing home." Unfortunately, the health care world is not usually so black and white. There is a whole spectrum of health care decisions and caregiving needs that could arise and those vague statements don't really give your Health Care Agent any meaningful guidance to work with.

    What Else Should I Do?

    In our office, we supplement the Health Care Power of Attorney with several items. Many of our clients have expressed a desire to make things as easy as possible for their family, but when it comes to providing guidance about their health care wishes, they find themselves at a bit of a loss. That's why we've developed several supporting tools to make this easier for you and for your future Health Care Agent.

    HIPAA Authorization

    A separate HIPAA Authorization is recommended to ensure that your family doesn't get the 'silent treatment' due to cumbersome HIPAA medical privacy laws. Doctors, hospitals, and other health care providers are prohibited by law from sharing your information with others--including your spouse or family members--without specific written authorization to do so.

    Living Will

    Our Living Will addresses multiple potential end-of-life scenarios and allows you to specify under each scenario treatments that would or would not want ranging from treatments that are considered by most to be quite invasive to non-invasive treatments like antibiotics and simple diagnostics.

    Letter of Instruction to My Health Care Agent

    Our Letter of Instruction to My Health Care Agent provides you with a tool to think through other potential health care scenarios including your thoughts regarding surgery, chemotherapy, alternative or experimental medicine, right to die laws, family visitation, dementia directives, and long-term care wishes.

    Personal Care Plan

    Our Personal Care Plan tells future potential caregivers about you as a person. All the things that can be easy to take for granted while we're healthy, but can suddenly become important if you can no longer express your wishes. For example, if you were to have aphasia after a stroke, you may be fully cognizant but may have difficulties communicating with your caregivers. The Personal Care Plan addresses things such as what you like to eat and drink, hobbies, what you like to watch on television, what music you enjoy, and similar.

    Personal Planning Portfolio

    Our Personal Planning Portfolio then assembles this guidance along with instructions for the Health Care Agent explaining their role and their duties and answering frequently asked questions that they may have.

    Ideally, a well-rounded estate plan should also address long-term care planning. If you were to need long-term care due to an extended disability or illness, what kind of care would you want? How would you afford to pay for it?

    Although it may be uncomfortable to think about some of these issues, we strongly encourage you to share some detailed guidance with your Health Care Agent regarding your health care preferences.  Don't leave your loved ones with the little nagging voice in the back of their head asking, “Am I doing the right thing?” That voice can haunt them for years.

    Get Started on Your Planning & Peace of Mind

    We can guide you through the steps of creating a comprehensive health care plan and make the process as easy as possible for you and your family. A great place to start if you're looking to learn more is to attend one of our free public seminars or request our report, Estate Planning Pitfalls: The Twelve Most Common Threats To Your Estate & Your Family’s Future. If you'd like to discuss other ways to get started, call us at 919-443-3035 or complete our online contact form.

     

  • What Is a Living Will?

    Life Support Do Not UnplugA North Carolina Living Will (also known as an “Advance Directive for a Desire for a Natural Death”) is a document in which you provide instructions to your Health Care Agent and health care providers regarding whether or not you want life support and life-sustaining measures in an end-of-life scenario. While it is intended to tell your Health Care Agent how you want to be cared for while you are living, many think of it as the “pull the plug” document.

    It is important to understand that a Living Will is not a substitute for having a Health Care Power of Attorney that nominates a Health Care Agent to make health care decisions on your behalf if you are incapacitated.

    Do I Have to Have a Living Will?

    No, legally it is not required, but it is strongly recommended. For most individuals, their North Carolina Health Care Power of Attorney authorizes their Health Care Agent to make decisions regarding end-of-life care and termination of life support. However, while the Health Care Power of Attorney may authorize your Health Care Agent to make such decisions, typically, it does not provide your Health Care Agent with meaningful guidance regarding your wishes.

    Shortcomings of the North Carolina Statutory Living Will

    We are often asked why we do not use the North Carolina Statutory Living Will (also referred to as the North Carolina Advance Directive for a Desire for a Natural Death). We feel that the statutory form has several shortcomings:

    • It is confusing to complete and we find that many complete the form incorrectly;
    • It often does not provide any additional guidance beyond what was already stated in the Health Care Power of Attorney. For example, we find that most people complete the form to indicate that the Health Care Agent “may” withdraw life support—something that they’re already authorized to do under the Health Care Power of Attorney.
    • It doesn’t really provide meaningful guidance. The North Carolina Statutory Living Will is extremely broad and only addresses very specific treatments under very specific end-of-life circumstances such as if you have an incurable or irreversible condition that will result in death within a short period of time, if you become unconscious and to a high degree of medical certainty you are not expected to regain consciousness, or you suffer from advanced dementia.
    • It doesn’t provide meaningful guidance to your Health Care Agent about the multitude of other health care decisions, treatment options, long-term care scenarios, and similar that they may face.

    Why We Use a Custom Health Care Power of Attorney, Living Will, and Other Supporting Documents

    Our office uses custom Health Care Power of Attorney and Living Will documents along with several accompanying tools to provide your Health Care Agent, health care providers, and your family with meaningful guidance about your health care wishes. These documents have been carefully curated over time to keep up with the changing world of medicine and address unique issues relating to dementia, end-of-life, dying with dignity laws, and more. Unfortunately, the statutory forms and other common form documents such as Five Wishes fail to expand upon these issues.

    Health Care Power of Attorney

    A Health Care Power of Attorney allows you to nominate a Health Care Agent to make health care decisions on your behalf if you should become incapacitated. A well-drafted Health Care Power of Attorney should address modern medicine and laws by addressing issues such as right-to-die laws, dementia directives, discharging from hospital against medical orders, and more.

    Living Will

    Our Living Will is based on recommendations from the Harvard Medical Journal and addresses several potential end-of-life care scenarios, allowing you to provide different instructions for your care wishes depending upon the severity of the situation. Rather than simply addressing CPR, mechanical breathing, and artificial nutrition and hydration, it also addresses other life-sustaining treatment options that you may or may not want, ranging from treatments that are considered by most to be quite invasive to non-invasive treatments like antibiotics and simple diagnostics. It also includes a Glossary of health care terms so you and your Health Care Agent understand the distinction between different treatment options.

    HIPAA Authorization

    The federal Health Insurance Portability & Accountability Act (HIPAA) is well-meaning law to protect our private health care information. However, the laws are so strictly enforced that it prohibits health care providers from sharing your medical information with anyone—including your spouse or family in an emergency. As a result, it has become more important than ever to have a HIPAA Authorization clearly communicating who your health care providers are authorized to communicate with about your health care—this includes not only your Health Care Agent, but those that may be handling your medical bills and insurance such as your Durable Power of Attorney or Trustee.

    Letter of Instruction to My Health Care Agent

    Our Letter of Instruction to My Health Care Agent provides you with a tool to think through other potential health care considerations including wishes regarding surgery, chemotherapy, alternative or experimental medicine, dying with dignity laws, family visitation, dementia directives, and long-term care wishes.

    Personal Care Plan

    Our Personal Care Plan tells future potential caregivers about you as a person including the little day-to-day preferences that can be easy to take for granted while we're healthy, but can suddenly become important if you can no longer communicate your wishes. For example, if you were to suffer a stroke and end up with aphasia, you may be fully aware of your surroundings but may have not be able to communicate your wishes to your caregivers. The Personal Care Plan addresses things such as what you like to eat and drink, hobbies, what you like to watch on television, what music you enjoy, and similar.

    Personal Planning Portfolio

    Our Personal Planning Portfolio also includes instructions for your Health Care Agent explaining their role and their duties and answering frequently asked questions that they may have such as when a Do Not Resuscitate (DNR) may be appropriate.

    Ideally, a comprehensive estate plan should include long-term care planning. In the event that you should need long-term care, your plan should provide your Health Care Agent and family with clear instructions about your long-term care preferences and a plan for how to pay for such care.

    Although it’s not pleasant to consider one’s potential future incapacitation, we strongly encourage you to share some detailed guidance with your Health Care Agent regarding your health care preferences. This will allow you to preserve as much independence and dignity as possible and will reduce stress and family disputes.

    Get Started on Your Planning & Peace of Mind

    We can guide you through the steps of creating a comprehensive health care plan and make the process as easy as possible for you and your family. A great place to start if you're looking to learn more is to attend one of our free public seminars or request our report, Estate Planning Pitfalls: The Twelve Most Common Threats To Your Estate & Your Family’s Future. If you'd like to discuss other ways to get started, call us at (919) 443-3035 or complete our online contact form.

     

  • How can I protect my children and their inheritance from lawsuits, creditors, bankruptcy and divorce?

    Did you know that it’s relative easy for you to leave your assets to your children so that they are protected from future lawsuits, creditors, bankruptcy and divorce? 

    For example, let’s say one day your child causes a bad car accident in which a person is left permanently disabled.  A few months later, a lawsuit is filed against your child for hundreds of thousands of dollars—your child’s entire inheritance. 

    Or, maybe your child receives his inheritance at age 25 and he or she is married.  A year or so later, the marriage is in shambles and his wife files for divorce and walks out the door with half of everything—including your son’s inheritance.

    Wouldn’t you feel better knowing that when that lawsuit or divorce came along, your child’s inheritance would be protected from it?  This is something we can accomplish with appropriate trust planning provisions. 
    Click here to read more about Asset Protection Planning.

  • What is the gift tax? How much can I gift without being subject to gift tax? How much can I gift during my lifetime?

    Estate Planning PitfallsBelow, we address how the gift tax rules work and the current exemptions. However, I want to caution you to first ask yourself what your objective is in making gifts. Sometimes well-meaning professionals, family members, and friends provide advice without being aware of the whole picture, including your unique circumstances and your overall estate. There are a few common traps that we see people fall into:

    Gift Tax Trap #1: Future Nursing Home Care & Medicaid Eligibility

    Just because the IRS allows you to make a gift, does NOT mean that Medicaid will allow the gift. Thus, if you are concerned about the possibility of future nursing home costs, you should consult with an elder law attorney before making major gifts. For Medicaid eligibility of help with nursing home bills, there are significant penalties for gifts made within 5 years of needing nursing home care. To read more, check out The Ultimate Guide to Paying for Nursing Home Care in North Carolina.

    Gift Tax Trap #2: Outdated Tax Planning Advice

    We still frequently meet with people that are working off of outdated advice. A long time ago their tax preparer advised them to make annual gifts to their family members in order to reduce the overall size of their estate and minimize potential estate taxes upon their death. The reality is that for many, this is no longer necessary (see below) and potentially can backfire dramatically if you eventually need nursing home care (see trap #1 above).

    Gift Tax Trap #3: Liquidating Appreciated Assets

    If part of the process of making your gift involves liquidating an asset that has significantly increased in value since you purchased it--for example, a house or a stock portfolio--you may be subjecting yourself to capital gains taxes that could be avoided if the property conveyed through your estate planning instead.

    If any of these concerns apply to you, you owe it to yourself to contact an attorney--one with extensive experience with Estate Planning and Elder Law matters in your state.

    Now, back to how the Gift Tax works...

    Who Pays Gift Tax?

    The gift tax is a tax on the transfer of assets from one person to another.  The gift tax is a tax that is paid by the gift giver (referred to as the “donor”) rather than the gift recipient (referred to as the “donee”).  Also, a gift does not constitute income for the recipient and is not subject to income tax.

    What Is the Annual Gift Tax Exclusion Amount?

    The gift tax law provisions for an annual gift tax exclusion—i.e., an amount that you can give away per person, without having to file a gift tax return or owing any gift taxes.  As of 2019, the annual gift tax exclusion is $15,000 per person, per year (and the law provides that it be increased periodically to keep up with inflation).  So, for example, if you are a parent with three children, you could make a gift of $15,000 to each child and not owe any gift taxes.

    Furthermore, if you are married, a husband and wife can agree to “split gifts”—i.e., half of the gift will be allocated to each spouse.  So, for example, if you are married and have three children, if your spouse agrees to gift splitting, you can gift up to $30,000 per child and it does not matter whether the assets came just from you or from both you and your spouse.

    What Is the Lifetime Gift Tax Exclusion Amount?

    In addition to the annual gift tax exclusion, there is also a lifetime gift tax exemption.  Note that while the annual exclusion is per donee (i.e., gift recipient), the exemption is per donor—in other words you, as the gift giver, only receive one lifetime exemption.   

    It’s also important to understand how this exemption interacts with estate taxes.  Under our federal estate tax system, every person is permitted to pass on a certain amount without being subject to estate taxes—this is referred to as the estate tax exemption, or in our office, we like to call it the estate tax “coupon.”

    The lifetime gift tax exemption and the estate tax exemption are linked together, such that if you use a portion of your lifetime gift tax exemption, your estate tax exemption will be decreased dollar for dollar.

    In 2019, the lifetime gift tax exemption and estate tax exemption are both $11.4 million (though this is set to expire on December 31, 2025 and is always subject to change by Congress. The tax rate on gifts above $11.4 million is 40%.  For example, if your total estate is $12.4 Million, your estate tax exemption can be used to shelter the first $11.4M from estate tax (assuming you didn’t use your exemption during lifetime—see below). The remaining $1M would be taxed at 40% resulting in a $400,000 estate tax bill.

    Estate Tax & Gift Tax Are Linked

    The Estate Tax Exemption and the Lifetime Gift Tax Exemption are linked together. Any portion of your Lifetime Gift Tax Exemption used will reduce your available Estate Tax Exemption upon death. For example, if you use $2M of your lifetime gift tax exclusion during your lifetime, then upon death your estate tax exemption amount will be reduced by $2M. 

    Does North Carolina Have a State-Level Gift Tax or Estate Tax?

    No. North Carolina repealed the state-level estate tax effective January 1, 2013.

    Need to Discuss Your Tax & Asset Protection Planning?

    In our years of experience working with thousands of individuals in the Wake County area, we find that asset protection planning is particularly important if any of the following apply:

    • You own a home and have an estimated net worth of $1M or more;
    • You own vacation property;
    • You own rental property;
    • You are high income-earning professionals;
    • You are high income-earning business owners;
    • You own a business with significant value.

    Don’t leave yourself or your loved ones stuck dealing with the financial aftermath of avoidable taxes, a lawsuit, long-term care costs, or an unexpected tragedy can bring to your family. Contact Carolina Family Estate Planning today at (919) 443-3035 or fill out our online form to speak with someone about registering for a seminar or a Vision Meeting. You may also wish request a free copy Jackie Bedard’s book, Estate Planning Pitfalls: The Twelve Most Common Threats To Your Estate & Your Family’s Future.

  • What is an estate tax? How much can I leave without being subject to estate tax?

    The federal estate tax is a tax imposed on the transfer of assets and property upon death.  Think of it as an ‘everything’ tax—as in, everything you own will be counted including bank accounts, brokerage accounts, retirement accounts, real estate, personal property and automobiles, business interests, stocks and bonds and death benefits of any life insurance policies. 


    Life insurance benefits, in particular, tend to frequently be overlooked.  Many people are told that life insurance proceeds are tax-free.  And in some ways this is true, but it is also misleading.  The beneficiary of your life insurance policy will not have to pay any income taxes on the death benefits that he or she receives, but the death benefits will count as part of your gross taxable estate.

    So, for example, if you have a $1 million life insurance policy, you already have at least a $1 million gross taxable estate before we even start factoring in your bank accounts, real estate, retirement and other assets.

    Every person is allowed an estate tax exemption, or in our office we call it your estate tax “coupon.”  It is the amount that you can pass on without paying any estate taxes.  Over the past few years, the estate tax exemption and the estate tax rate applied to amounts in excess of the exemption has been fluctuating pretty significantly:

    Year

    Estate Tax Exemption

    Top Estate Tax Rate

    1997

    $600,000

    55%

    1998

    $625,000

    55%

    1999

    $650,000

    55%

    2000

    $675,000

    55%

    2001

    $675,000

    55%

    2002

    $1,000,000

    50%

    2003

    $1,000,000

    49%

    2004

    $1,500,000

    48%

    2005

    $1,500,000

    47%

    2006

    $2,000,000

    46%

    2007

    $2,000,000

    45%

    2008

    $2,000,000

    45%

    2009

    $3,500,000

    45%

    2010*

    $5,000,000 or $0*

    35% or 0%*

    2011

    $5,000,000

    35%

    2012

    $5,120,000

    35%

    2013

    $1,000,000

    55%


    *Estate of decedents who died during 2010 have the choice of using either the $5,000,000 estate tax exemption/35% estate tax rate or $0 estate tax exemption/0% estate tax rate but they must use special modified carryover basis rules that impact income tax consequences.

    So let’s go through an example to show you how this works.  Let’s assume you are single and when you add up your home, bank accounts, retirement accounts, and a life insurance policy, you estimate that your total gross estate is $1.5 million.  Under the current rules, if you were to die in 2012, your estate would not owe any estate taxes because you are under the $5.12 million estate tax exemption.  However, if you were to die in 2013, you would owe $275,000 in estate taxes! 

    Here’s what the calculation would look like:

    $1,500,000 total estate ˗ $1,000,000 estate tax exemption = $500,000 taxable estate

    $500,000 taxable estate × 55% tax rate = $275,000 estate tax liability

  • I’ve heard there’s an unlimited marital deduction for estate tax purposes, why can’t I just leave everything to my spouse and not worry about estate taxes?

    You heard correctly that there is an unlimited marital deduction, but to rely on it can potentially be disastrous depending upon your circumstances. 


    First, let’s look at the unlimited marital deduction—if you are a U.S. citizen you can leave an unlimited amount to your surviving spouse without owing estate taxes.  So, for example, if Bill Gates were to die today and leave all of his billions of dollars of wealth to his wife Melinda, his estate could make use of the unlimited marital deduction and not pay any estate taxes.  So far, it sounds pretty good, right?  The problem is that everything will then be counted in the surviving spouse’s estate and will be subject to taxes.

    Let’s go through an example.  First, let’s assume that it’s 2013 and the estate tax exemption is $1 million.  For our example, Bob and Susan are a married couple with $2 million total with $1.5 million being attributed to Bob’s retirement accounts, life insurance, etc. and the remaining $500,000 being attributed to the Susan.

    Bob dies, leaving everything outright to Susan.  He estate claims the unlimited marital deduction and no estate taxes are owned.  Susan now has the full $2 million in her name.  A few years later Susan dies and the entire $2 million is counted in her estate, but she only has a $1 million estate tax exemption. The end result?  Susan’s estate pays $550,000 in taxes unnecessarily!!!

    The good news is that a solid estate plan can include provisions to make sure that both spouses get full use of their estate tax exemptions so that as a couple, they can pass on more to their children without running into estate tax problems. 

    The key is that Bob should have left his assets to Susan in a special type of trust that would have permitted Bob’s estate to utilize his estate tax exemption and keep the funds from later counting as part of Susan’s estate.  Different attorneys and financial advisors call these trusts by different names.  In other offices, you might hear terms such as “credit shelter trust” or “bypass trust.” 

    Your surviving spouse can be the beneficiary of the trust, but it ensures that the assets in the trust will not have to be counted upon the surviving spouse’s death.  If Bob and Susan had an estate plan that included such a provision, they could have easily avoided $550,000 in unnecessary estate taxes.