Many today have the misconception that only “wealthy” families need to be concerned about estate planning. Nothing could be farther from the truth. Actually, smaller estates, or families with smaller incomes, have more to lose from not doing proper planning. Probate court costs, legal fees, and taxes (both state and federal) can cause heavy financial burdens on families who have failed to plan or have planned inadequately. Most of these problems, however, are avoidable through careful estate planning. Every household, especially Christian households, should make estate planning a priority.

Estate planning can be divided into three phases: (1) planning for lifetime incapacity or disability; (2) planning for the distribution of assets after death, including honoring the Lord with your substance by giving generously to the Lord’s work; and (3) planning for the after-death management of assets on behalf of minor, handicapped, or immature beneficiaries.

Phase 1: Lifetime Incapacity or Disability

In planning for lifetime incapacity or disability, management is the key issue. An incapacitated or incompetent person is one who is unable to manage his or her medical, legal, financial, or personal affairs. The incompetent person needs someone to step in and manage those affairs for him or her. Finding a manager may be handled in one of two ways: First, through the public probate system. Second, through private estate plan documents referred to as advanced directives or powers of attorney. This is a crucial choice that each individual must make.

If a person becomes incompetent and does not have the proper legal documents, the probate court system is the only alternative. The probate court procedure is called guardianship. A spouse, family member, or someone close to the incompetent person will have to petition the local probate court to appoint a guardian. The court, if the petition is approved, gives the guardian legal authority to manage the incompetent person’s affairs. Generally, this guardianship procedure is time consuming and can add up to significant legal fees and court expenses. It is not unusual for the guardianship procedure to cost from $2,000.00 to $3,000.00 or more depending on the jurisdiction and the specific facts of the case. As a result, the preferred choice is to plan ahead with private legal documents that are designed to avoid the guardianship procedure.

By choosing private legal documents before incapacity instead defaulting to the probate court guardianship procedure, a person may plan in advance by appointing his or her own private power of attorney to manage financial, legal, and medical affairs. This means the family can avoid probate court involvement and most, if not all, related legal fees.

While a variety of powers of attorney are available, the two most common for estate planning are the general Durable Power of Attorney and the Durable Power of Attorney for Health Care. The general Durable Power of Attorney grants broad legal and financial authority, usually to a spouse or adult child, for the private management of the incapacitated person’s affairs. The Durable Power of Attorney for Health Care grants the authority to a health care agent—again, usually the spouse or an adult child—to manage the incapacitated person’s medical affairs. Both documents are available to the general public at minimal cost. Through these private legal documents, a person may avoid the guardianship process and costs associated with it. Wise choices in these matters can provide confidence that an individual’s desires are carried out and that God will be honored through thoughtful and cost-effective planning.

Phase 2: Distribution of Assets after Death

The next phase of estate planning is the preparation before death for the transfer of the estate assets upon death to the desired beneficiaries. Common goals include tax avoidance, probate avoidance, transferring the estate assets as expeditiously and inexpensively as possible, and the giving of charitable gifts to ministries of significance to the deceased.

Estate planning provides two broad alternatives to accomplish these goals: the traditional last will and testament and the revocable living trust. With few exceptions, a last will and testament must be probated. Depending on the circumstances as well as the size and type of assets, the probate procedure can be expensive and time consuming. Further, the probate process and all information about the estate is open to the public. Because of these factors, the increasingly popular alternative is the revocable living trust. Besides avoiding probate, the revocable living trust is private and not open to public scrutiny.

Though similar to a will, a revocable living trust has several key differences. A will is not effective until death and the admission of the will to probate. The revocable living trust, on the other hand, is effective during life and after death, if needed, for the benefit of minor, immature, or handicapped children—all without probate court involvement. The time involved for administration of a living trust is also significantly shorter than that of the probate procedure for a will. The probate of a will may easily take as long as one to three years. A living trust, in contrast, is usually administered and distributed in six to ten weeks for smaller estates. Larger estates may take longer depending primarily on estate tax filing requirements and, perhaps, the sale of larger assets. To determine whether a will or living trust may be beneficial for your particular family, you should consult a competent estate planning attorney since a variety of factors must be considered in each situation. Be aware that attorneys vary in style and philosophy. If probate avoidance is a priority, be sure to consult an attorney who has a probate avoidance philosophy.

Another goal of estate planning is the avoidance of state and federal taxes. Usually, the tax involved is the estate tax, commonly referred to as “the death tax.” Because each state has its own estate tax and/or inheritance tax structure, consult the law in your particular state to determine whether it differs from the federal tax system. Generally, in regard to federal estate tax, each U.S. citizen is entitled to give a maximum of $2,000,000 tax-free to his or her heirs at death, during life, or a combination of the two. (Note, however, that unless the U.S. Congress passes new legislation, the exempt amount is scheduled to decrease to $1,000,000 January 1, 2011.)  Smaller lifetime gifts—currently $12,000 or less per year per donee—are not counted against these figures. These annual lifetime gifts are called the annual gift exclusion. Married couples can each take advantage of the $12,000 annual exclusion for a total of $24,000 per year per donee. This method is called gift splitting.  If upon your death, your estate exceeds the applicable exempt amount allowed on the federal level, federal estate tax is due on the excess starting at the rate of 37 percent. As with income tax, estate tax rates are graduated and increase with the size of the estate to a maximum federal estate tax of 50 percent. In addition, each family must determine if the state law will impose a state estate tax, and if so, at what level. For example, Wisconsin residents only receive a $675,000.00 exemption. Any excess over this amount is taxed by the State of Wisconsin.

Through proper estate planning, a married couple can pass double the $2,000,000 exempt amount (or a total of $4.0 million federal tax-free). But, remember, the couple must then check their state law to determine the amount allowable without tax ($675,000 / $1,350,000 for Wisconsin residents). The technique most often used to enable this “doubling” of the exemption is a “bypass” trust mechanism, or commonly referred to as an “A-B” trust plan. A simple “all to my spouse” estate plan is not sufficient.

For example, in Wisconsin, if a husband dies and leaves the entire estate of $1,350,000 to his surviving wife by way of joint tenancy transfers or beneficiary designations, the husband’s $675,000 exemption is considered “used” by the state and therefore the wife only retains her $675,000 exemption for her death. Thus, the state estate tax would have to be paid on the amount over her $675,000 exemption when the wife dies. This could be a fairly sizable tax-bite for the children to pay on the death of the second spouse.  So, it is essential that each family properly evaluate their estate planning needs and this necessarily requires the knowledge of the tax laws of the state in which they reside.  However, well planned charitable giving can also serve to reduce or eliminate estate taxes on death.

In many cases Christians during their lifetime have not considered the blessings God has given them in the increased value of their home, stocks, mutual funds, and retirement plans. Rarely do Christians tithe or give to the Lord from this part of “all their increase” as commanded in Proverbs 3:9.  But giving the firstfruits of this increase at death can not only be a wonderful benefit to the Lord’s work but also a clarion testimony to your heirs concerning your faith and commitment to the Lord, who of course is the source of all that we possess. We have the opportunity and privilege, by our giving, of setting in motion and facilitating the work of God after we are gone that may continue “winning friends” for eternity as the Lord Jesus encouraged us to do in Luke 16’s parable of the unjust steward. A very practical by-product of this kind of giving are incredible tax benefits to the deceased’s estate and to the heirs that are left behind.

Phase 3: Management of One’s Assets after Death

The third phase of estate planning concerns the management of person’s assets after death on behalf of minor, immature, or handicapped children or grandchildren. With the use of a living trust, this phase of management can also be done privately without the costs and legal fees associated with court procedures required if a last will and testament is used as the estate plan. By using a trust mechanism for children and/or grandchildren, terms can be included to protect assets from spending improprieties, lawsuits, creditors, and divorce. These benefits cannot be overstated and should not be underestimated. The truth is, most children are ill-prepared to handle the financial responsibilities of a large inheritance, not to mention the emotional and social pressures that accompany it. In short, you can protect your children from internal temptations and from external pressures. A trustee can play an important role by helping your children maintain a proper perspective on this new-found “wealth” and by preventing them from making unwise, even tragic mistakes.

Whether for possible incapacity, the transfer of assets on one’s death, or the management of assets on behalf of minor, immature, or handicapped beneficiaries, proper planning can avoid most, if not all, of the delays, costs, and court involvement associated with the public probate system. In other words, individuals can arrange, by proper estate planning, to have their estates administered during periods of incapacity or, at death, by their families, privately and with minimal expense. The savings to the family can be significant. Upon realizing these savings, families can often be encouraged to give a portion of their estate to their local church, Christian school, and other ministries.     

U.S. government studies estimate that in the next 20 years close to $10 trillion will pass from one generation to the next. Biblical principles of stewardship demand that Christians be taught the importance of estate planning and the support of God’s work through their estates. 

Attorney Joseph Helm
McLario, Helm & Bertling Law Offices
N88 W16783 Main St. Menomonee Falls, WI 53051
262-251-4210    www.mclario.com   This e-mail address is being protected from spambots. You need JavaScript enabled to view it