ABOUT ESTATE PLANNING

1. Myths and Misconceptions ABOUT ESTATE PLANNING ALAN JAY ACKERMAN ATORNEY AT LAW TOLL FREE 1-888-AJA-LAWS 2 Penn Plaza Suite 1500 New York, NY 10121 (212) 292-4936 Two Penn Center Plaza Suite 200 1500 JFK Boulevard Philadelphia PA 19102 (215) 854-6373 New York Law Edition

2. “I don’t need a Will. If I die it’ll all go to my wife!” IS THAT WHAT REALLY HAPPENS?

3. Maybe! …… and Maybe Not! • If, when you die, you don’t have any issue (children, grandchildren, etc.) and you also don’t have any living parent, then your spouse will inherit your entire probate estate. • If, when you die, you have issue, and they are all also the issue of your spouse, your spouse will inherit the first $50,000 of your probate estate, and the remainder of the probate estate will be one half to your spouse and one half to your issue. If your issue are under the age of 18 the Court will appoint a Guardian for the children’s share. The Court may or may not appoint your spouse. Even if your spouse is appointed, he/she will need to post a bond, submit annual accountings, and be forced to live with restrictions on permitted investments.

4. “I wrote a Will leaving everything to my three children. Since my husband died, my daughter Anne, who lives close by, has been a huge help to me. I put my bank accounts in joint names with her so she can sign checks for me in case I get sick. Isn’t that a good idea?” NO!

5. A Will controls how assets will pass from your Probate Estate. When assets are held in Joint Names, those assets pass by “Operation of Law” at the moment that a joint owner dies. In this case all of the joint bank accounts are Anne’s property at the moment her mother dies. Even though mother left a will leaving her assets 1/3rd to each of her three children, Anne’s siblings are entitled to nothing under the law.

6. The Right Way to Plan When we are concerned about having our child, or another trusted person, act on our behalf in the event we are incapacitated, the proper way to proceed is to execute a GENERAL POWER OF ATTORNEY. This is a legal document that permits another person, under certain circumstances, to act on your behalf and do anything for you that you could have done for yourself. The General Power can be narrow or it can be broad in scope. Your attorney will draft the document to meet your needs and wants. Certain financial institutions, such as banks and securities firms, will also want you to complete a Power of Attorney over a specific account with the form furnished by their own legal department. A well drafted Power of Attorney can also serve to diminish the need for loved one’s to Petition for a Court appointed guardian in the event of incapacity.

7. Who Gets The House????? “Mom and Dad left the house to my brother and I. We’ve rented it out and it’s a great investment property. My brother died last month. I say that the house is now mine, but my nephews claim that the house is half theirs? Who’s right???

8. The Magic Words……….. First we need to look at the Deed. Do the magic words… “as Joint Tenants with Right of Survivorship” appear, or does the Deed read “as Tenants in Common?” If a property is titled as Joint Tenants WROS then the surviving owner take title to the property. On the other hand, if the title says Tenants in Common, that ownership interest will be determined by the will of the owner that died, or if he or she did not have a will, by the laws of intestacy. Should the current owners have inherited the property under a Will and no new deed was made at that time, we have to look at the Will to see if the Will stated how the title was to be held.

9. “I’m leaving my annuity policies to my kids. I’ve named them as beneficiaries so it’s just like life insurance. Right?” Sorry, but that is NOT correct. Unlike life insurance….. Your children will need to pay Federal Income Taxes on the amount by which the annuity policy proceeds exceed the amount you paid for the annuity. The lesson to be learned…. Don’t die with an annuity. If you own an annuity you need to take the funds out while you’re living.

10. “Thanks for the advice about the Annuity Policies. It’s great to know that I have Life Insurance and that’s always tax free!!” Not so fast!!!! Under most circumstances the death benefits of a life insurance policy are free from the Federal Income Tax, under Section 101 of the Internal Revenue Code. But, you have to be VERY CAREFUL of potential dangers in certain circumstances.

11. J&B, Inc. Jack and Bob are the owners of J&B, Inc. They were concerned about what would happen if one of them were to die. The survivor would want to have total control of the business, and the partner to die would want his family to have the fair value of his half of the business. Jack and Bob brought in their lawyer to draft a comprehensive Business Continuation Agreement, and then they called their life insurance agent to apply for policies of life insurance to cover the costs of the business buyout. The agent had J&B, Inc. apply for and own the policies and named the deceased insured /partner’s estate as the beneficiary to be sure that his family got the money. Good planning! Right?

12. Thank you for making ME a beneficiary!!!!!!! Since a business entity owned the policy of insurance, it should have been the beneficiary, and then the corporation would have properly used the funds to purchase the business interest from the estate of the partner that died. When the Estate was made the direct beneficiary, the life insurance proceeds became a DIVIDEND from J&B, Inc. to the Estate. The Estate has to pay Federal Income Taxes on the life insurance because it’s not considered to be life insurance, but it considered by the IRS to be a Dividend. Careful planning is critical in planning with life insurance.

13. If you’ve found you Pot of Gold in life, and enjoyed great success, there’s another tax that requires careful legal planning: the Federal Estate Tax. This is a tax imposed on the transfer of property from one generation to the next. At this time there is an Applicable Credit Amount (exemption) of $2 Million. Let’s assume that John lives in a house in West Chester County that he purchased in the late 1960s for $25,000 that is now worth $750,000. The family home in Stone Harbor NJ is now ballooned to over $1,500,000. In addition he has an IRA worth over $500,000. John also has a $1 Million life insurance policy. Almost half of that $1 Million will go to our favorite uncle!!!! This can be avoided by having life insurance policies owned by an Irrevocable Life Insurance Trust (ILIT). Again, careful planning has to be taken to shield life insurance from taxation.

14. “If anything happens to my husband and myself, my sister will take care of my children.” If you have minor children the ONLY way to assure who will have custody of your children should you and your spouse pass on is to name the guardians under your Will. In the absence of such a provision your children would enter the system and your sister, or whoever it is that you wished to become guardian, will need to petition the Court. There is no guarantee that the closest relative will be granted custody.

15. Dying Too Young or Living Too Long One of the most valuable management tools for flexible and effective Estate Planning is the Revocable Inter-Vivos Trust, more commonly known as the Living Trust. Young adults with children are faced with the problems of what happens to their sons and daughters if they die too soon. Often the family assets are modest but there are large life insurance policies that have been purchased for the children’s benefit. The problem is that minor children cannot inherit the proceeds. If they are named as beneficiaries the Courts will intervene and set the funds aside in special accounts during their minority. Guardians will need Court approval for each expenditure they seek to make for the children. A Living Trust has YOUR specific instructions on how you want your children raised. A professional trustee can manage large sums of money and make distributions to the Guardians without Court approval. For those of us fortunate to live to our golden years, the Living Trust provides a superb management tool to place out assets under one umbrella. We name a Successor Trustee to manage the Trust in the event we become incapacitated or upon our death. In this way we avoid the pain of forcing our loved ones to have us declared legally incapacitated and placed under a court appointed Guardianship.

16. An Effective Tax Planning Tool Today we live with uncertainty due to the “sunset” provisions of the Tax Reduction Act of 2001. We do not know if the Federal Estate Tax will revert to it’s pre-2001 levels, as will be the case if the present law simply expires, or if the Federal Estate tax will be modified significantly. Your Living Trust can be drafted with various forms of disclaimer provisions that can provide total flexibility for the Trust to stay current with changing tax laws. Who’s the Trustee? While you are alive and well, YOU can be the Trustee of your Living Trust. You can name one or more individuals, a bank, or a combination of individuals and a bank, to act as Trustee if you become incapacitated or to serve after your death.

17. “After all I’ve seen and heard I know I really need a Living Will. I’m going to get one written for me today and make sure to give a copy to my doctor!”

18. “Living Wills” (Advance Healthcare Directives) are not the same as a Healthcare Power of Attorney Advance Healthcare Directives are more commonly known as “Living Wills.” However, they have nothing to do with living and they are not wills. This document serves only to give guidance on how you choose to die. Unless a patient is terminal or in hospice, a Living Will should not be presented to any hospital or healthcare professional. To provide legal guidance and decision making for all the medical emergencies and major illnesses we may face during our lifetime, a properly drafted Healthcare Power of Attorney is essential. This will be needed to give your Healthcare Agent (the person you appoint to make decisions when you are not able) access to your medical records, permit that person to hire and discharge doctors, admit you to hospitals, and take all and take all steps to provide for your care. This document is an ESSENTIAL part of everyone’s life and can be the difference between you receiving the proper healthcare or becoming an unfortunate statistic.

19. Make sure that your Estate Plan accurately reflects the wishes of your family, and that it has been created and executed in accordance with all state property laws and designed to minimize state inheritance, and federal estate and income taxes. Don’t let your family fall victim to a Myth or Misconception about Estate Planning. Alan Jay Ackerman Attorney at Law