Estate Planning Information James Fife Attorneys Arlington Virginia

Northern Virginia Business Law Firm
Estate Planning Attorney in Arlington and Washington, D.C.

In the estate planning process, an individual typically selects one or more arrangements that provide for management of the individual's estate during his or her life and disposition of the estate on death. Those arrangements may include, but are not limited to, durable powers of attorney, wills, trusts established under wills, revocable, living trusts, credit shelter trusts, trusts for minors, irrevocable life insurance trusts and various other types of trusts.

Estate planning requires collaboration between an individual and an attorney in the planning and execution of a series of steps. Important steps normally include collection and review of relevant information, identification of the objectives to be accomplished, formulation of an estate plan and the preparation and execution of documents required to implement the estate plan.

An individual's attorney must take into account all information that may assist the attorney in selecting and designing the components to be included in the individual's estate plan. Relevant information includes information about the individual's estate, the persons selected by the individual to receive assets on his or her death and the individual's estate planning objectives.

For purposes of estate planning, an individual's estate consists of all assets that the individual owns. Assets that comprise an estate may include real estate, tangible personal property and intangible personal property. Tangible personal property consists of ownership rights in a physical object, other than real estate, and includes items such as jewelry, art collections, automobiles and furniture. Intangible personal property consists of the right to demand and receive money or property and includes bank accounts, stocks, bonds, insurance policies and annuities.

Each asset that is part of an individual's estate may be classified as a probate asset or a nonprobate asset. A probate asset is an asset that will pass to beneficiaries through the process of estate administration. If the individual who dies (the "decedent") has made a will, the provisions of the will determine the beneficiaries who will receive the individual's probate assets on his death. If the decedent has not made a will, provisions of state law determine which persons are entitled to receive the probate assets and each person's share of the probate assets. A decedent's probate assets include assets titled in the decedent's name alone and the decedent's interest in property that he or she held as a tenant in common. Probate assets also include life insurance proceeds or retirement benefits if the decedent has signed a document designating his or her estate as the beneficiary of the insurance proceeds or retirement benefits.

Nonprobate assets are not subject to estate administration and do not pass to beneficiaries under the decedent's will or under rules established by state law. The contract or other arrangement governing rights relating to a nonprobate asset determine who will receive the asset on the decedent's death. Nonprobate assets include the decedent's interest in real property that he or she held as a joint tenant with right of survivorship, a bank account payable on death to a specified beneficiary and assets that the decedent held under a revocable, living trust. Life insurance proceeds and retirement benefits payable to a specified individual designated by the decedent are also considered nonprobate assets.

An attorney's review of information about an individual's estate enables the attorney to assess the suitability of beneficiary designations and the forms of ownership in which an individual holds specific assets. After reviewing that information, the attorney might recommend that the individual make appropriate changes in beneficiary designations or in forms of ownership pertaining to specific assets.

In an appropriate situation, for example, an attorney may advise an individual to convert a joint bank account owned by two account holders into an bank account owned by a single account owner. An attorney might also, in some cases, advise a person who has designated minor children as beneficiaries of a life insurance policy to sign a new beneficiary designation that makes his or her estate the beneficiary.

Identifying an individual's objectives is a critical step in developing an effective estate plan. Success in the estate planning process for an individual is measured by the extent to which the estate plan accomplishes the individual's objectives.

Objectives that estate planning may accomplish for an individual are illustrated by the following ten objectives:

Implementation of an individual's estate plan requires execution of appropriate documents. Individuals generally use a will as the document governing the distribution of assets to beneficiaries on death.

An individual's will should address a number of different issues. The preparation of an individual's will may require an analysis of alternative, possible sets of circumstances that could arise at the time of the individual's death.

An individual needs an understanding of basic characteristics of wills to make informed decisions about issues that his or her will should address. One important characteristic of wills is that wills are revocable. In other words, an individual who writes a will (the "testator") may generally revoke his will at any time because a will does not become effective until the individual's death. However, an individual who is mentally impaired and unable to comprehend essential components of a will does not have the legal capacity to revoke a will or make a new will.

The power of a will to control the disposition of an individual's assets may be limited, depending on the forms of ownership in which his or her assets are held. An individual's will effectively governs the disposition of the testator's probate assets only. Accordingly, the provisions of a will are not relevant in directing the distribution of nonprobate assets.

Wills perform a number of functions, which include providing for gifts of property to appropriate beneficiaries. A gift under a will may take the form of a bequest, which is a gift of personal property, or a devise, which is a gift of real estate.

Wills frequently include separate provisions for gifts of different categories of property. Wills may include provisions for bequests of tangible personal property, provisions for devises of real estate and provisions for gifts of specific amounts of cash.

A will should also include a residuary clause. A residuary clause is a provision that distributes all property that is not distributed under other provisions of the will, which usually appear in the will before the residuary clause.

An individual in the process of identifying persons to receive assets on his or her death should consider not only primary beneficiaries but also persons who the individual would want to receive assets if the primary beneficiaries do not survive. Consideration of alternative or contingent beneficiaries allows a person to write a will that is more likely to remain viable despite changes in circumstances. A person whose will names primary and contingent beneficiaries will not face the necessity of writing a new will merely as a result of the death of primary beneficiaries.

Wills frequently include provisions designed to create trusts in certain circumstances. The term "testamentary trust" refers to a trust created under a will. If the will requires creation of a testamentary trust, the executor acting under the will must transfer specified assets to the trustee. The trustee receiving the assets must then administer the assets under provisions of the will that govern the trust.

Other important provisions include provisions relating to the executor of the will and the trustee of any testamentary trust. The will should nominate one or more persons to act as executor or as co-executors and one or more persons to act as trustee or as co-trustees. The will should also nominate a successor executor and a successor trustee who can serve if a person nominated to act as executor or as trustee is unable to serve.

A trust is an arrangement under which one person, referred to as the "trustee," holds title to certain assets and manages and distributes the assets for the benefit, use and enjoyment of one or more specific individuals. Persons entitled to benefit from trust assets are referred to as "beneficiaries." The person who creates the trust provides the directions that govern the management and distribution of trust property.

A person may establish a trust that becomes effective during his or her lifetime or a testamentary trust, which becomes effective following his or her death. A living trust is a trust that becomes effective during the lifetime of the person who creates the trust.

A wide variety of trusts are used for estate planning purposes. Trusts utilized in estate planning include many kinds of testamentary trusts and numerous types of living trusts. A living trust may take the form of a revocable trust, which may be revoked by the person creating the trust, or an irrevocable trust, which may not be revoked.

Trusts play a useful role in planning to minimize or avoid income and estate taxes. An individual may reduce his family's income tax liability in certain situations by creating a trust that shifts taxable income to a child. Estate planning tools for married persons include a credit shelter or bypass trust, which allows a married couple to protect the maximum amount of their assets from exposure to estate tax. Irrevocable life insurance trusts facilitate reduction or avoidance of estate tax for persons with life insurance coverage because insurance held in the trust is not subject to estate tax. In many cases, charitable remainder trusts are useful in assisting individuals to minimize income and estate tax liability.

Trusts may also be used to achieve a number of estate planning objectives unrelated to reducing tax liability. A trust may be a suitable arrangement for providing effective management of assets when the trust beneficiary is a minor, is disabled or is considered incapable of making wise decisions in regard to managing or investing assets. An individual may also transfer assets to a trust as a means of avoiding probate, i.e., avoiding the application of estate administration procedures to those assets on the individual's death.

A person may create a living trust by transferring property to a person who agrees to serve as trustee and comply with the terms of the trust. The person who creates the trust may be referred to as the "settlor" or the "grantor."

The transfer of property to a trust causes a change in the legal characteristics of ownership rights in the property. Before the settlor transfers property to the trust, he or she owns all of the rights, and has all of the obligations, associated with the property. When the property is transferred into trust, the rights of ownership in the property are divided into 2 different interests: the legal interest, held by the trustee, and the equitable interest, held by the beneficiary.

The trustee has the power and authority to control the management and disposition of the property. The trustee normally has the power to sell trust assets, the power to purchase investment assets with trust funds and the power to distribute trust assets to the beneficiary in accordance with the terms of the trust. The trustee is obligated to exercise his or her powers for the benefit of the beneficiary.

The beneficiary has rights relating to the use, possession and enjoyment of the trust property. Trust provisions require or permit the trustee to distribute trust funds directly to the beneficiary or make payments of trust funds in a way that benefits the beneficiary. A beneficiary is generally entitled to sue a trustee who acts improperly and take other action that may be necessary to protect trust assets.

In general, an individual may use either of two alternative approaches in creating a comprehensive plan for the disposition of assets on his or her death. First, an individual may adopt a plan that relies on a will to provide for the disposition of assets on death. Second, an individual's estate plan may rely primarily on a revocable, living trust to provide for disposition of the assets.

A revocable, living trust may enable an individual to achieve important estate planning objectives. As an initial matter, a revocable, living trust may provide an effective mechanism for managing the settlor's assets if he or she becomes incapacitated. In addition, the transfer of assets to a revocable, living trust generally results in avoidance of the estate administration process as to the assets held in trust on the individual's death. The use of a revocable, living trust also generally enables an individual to maintain the privacy of the provisions governing the distribution of his or her assets on death because state law does not normally require the filing of the trust document among the records of the court.

A person may create a revocable, living trust by declaring that he or she, as trustee, holds property in trust or by transferring property to another person as trustee. The document used to create the trust may be known as a "declaration of trust" when the settlor names himself or herself as trustee. The document may be referred to as a "trust agreement" when the settlor names another person as trustee.

The settlor of a revocable, living trust has the power to reacquire the assets that are held in trust. The settlor may revoke the trust and regain possession and title to the trust property upon revocation. In most cases, the settlor may also direct the trustee to distribute all or any part of the assets to the settlor.

In estate plans that utilize revocable, living trusts, the settlor frequently appoints himself or herself as the trustee of the trust. As the trustee, the settlor retains direct, ongoing control over the management of the assets that are held in trust.

A revocable, living trust cannot necessarily address all of the issues that may arise on the individual's death. For example, on the individual's death, the trustee of the individual's revocable, living trust has authority only over the assets held in the trust at the individual's death, not over assets that the individual held in his own name. A will is necessary to provide for the disposition of assets owned directly by the individual.

Because a living trust is unable to address all issues, estate plans that include revocable, living trusts normally also include pour-over wills. A pour-over will typically requires the executor to distribute all or substantially all assets of the estate to the trustee of the revocable trust. In turn, the trustee of the revocable trust distributes the assets to the beneficiaries of the trust.

An individual frequently must decide whether to use a will or a revocable, living trust as the primary estate planning document that provides for the disposition of his or her assets on death. In deciding whether to utilize a revocable, living trust, it is advisable for an individual to identify the costs that will be incurred and the benefits that will accrue as a result of adopting a plan based on a living trust. The individual should then compare the costs and benefits of a plan that uses a living trust with the costs and benefits of a plan that relies on a will. When a person is considering the use of a revocable, living trust, a sound decision will require an analysis that takes into account the unique circumstances present in that person's situation.

Contact James D. Fife today to schedule an appointment about business planning for your new company or reorganization of an existing business entity.

James D. Fife
Attorney at Law
3444 Fairfax Drive, Suite 106
Arlington, VA 22201
Phone: (703) 527-9013
Fax: (703) 527-9014
Email

The Law Office of James D. Fife provides business law services, as well as estate planning and probate administration, to clients in Arlington, Virginia and the Washington, D.C. area.

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