Frequently Asked Questions in Estate Planning

What is a will?

A will is a written instrument by which you provide for the disposition of your property after your death. In Oklahoma, you can only create a will if you are over 18 years of age and of sound mind.

A will is completely revocable and amendable prior to death. It does not become finalized until the Testator (creator) dies. The will has no inherent power unto itself (meaning you cannot just take a will to a bank and have them transfer assets according to the way it is written). The will must be submitted to Probate Court after the Testator dies for anyone to respect how the will disposes of property.

What is a trust?

Much in the same way as a will, a Trust is a written instrument guiding the management and disposition of property. Most trusts are written so they can be amendable and revocable during the lifetime of the creator.

Unlike a will, the Trust is a document that has its own legal significance, if it is created properly. The Trustor (creator) appoints a Trustee (manager) to manage the Trust property for the beneficiaries. The Trust is the contract that says what management duties the Trustee has and what/when distributions are made to the beneficiaries. The Trust typically does not have to be presented to a Court and as such all dispositions in it remain private.

What if I die without a will or a trust?

If you die without a will or trust, then you have essentially allowed the State to write your estate plan for you. The laws of your state of residence will say that any property held by you in joint tenancy with another person will pass to that surviving joint tenant. Other property where you have contractually designated a beneficiary will pass to the designated beneficiary (think life insurance). Any property that does not pass by joint tenancy or beneficiary designation will pass under the intestate laws of your state.

To state it simply, under Oklahoma law, the state assumes that if you die without a will that you intended to split your property among your closest living relatives. This will typically means that a spouse will have to share property with decedent’s children or parents.

What is a durable power of attorney?

A durable power of attorney is a written document where an individual names someone to act on his/her behalf. The power of attorney is often used to help ensure the wishes you describe in your Trust or Will can be followed through if you lose legal capacity. By naming an agent under your durable power of attorney, the agent can continue to transact business or make medical decisions for you.

What is a living will?

A living will is part of a document called an Advance Directive for Health Care. In the living will portion of such document, if you (1) have a terminal condition, or (2) become persistently unconscious, or (3) have an end-stage condition, you may direct that your life not be extended by life-sustaining treatment. Your directions go into effect if your attending physician and another physician determine that you are no longer able to make decisions regarding your medical treatment. As part of this living will, you may also make an election whether you desire the artificial administration of food and water under these circumstances if you are unable to take food and water by mouth.

What is a revocable or living trust and what are its advantages instead of a will?

A revocable or living trust is a written document providing for the management of your property which becomes effective while you are living, unlike a will which takes effect after your death. A trust is set up for a trustee to manage your property for your benefit during your lifetime or in the event of your incapacity. Ordinarily you serve as the sole trustee until you die or become incapacitated. After your death, the trust document will provide for your successor trustee to distribute any remaining property to those persons or entities you have chosen (just as in a will) or provide for the continued management of your property by that successor trustee for many years, with the ultimate distribution as you direct. The primary advantage of a revocable trust over a will is that upon your death, the administration of your estate in probate court is avoided and the distribution of your property is governed by your trust outside of the probate court system.

This normally results in a quicker and less costly distribution of your property to the people you have selected. In addition, a revocable trust is a private document which is not recorded at the courthouse or anywhere else. In this regard a trust is unlike a will which, if probated, normally requires a list of your property and its value to be public record at the courthouse. When a revocable trust is fully funded, by conveying all of your property into your trust during your lifetime, no probate of your estate is required.

Can I dispose of my property as I wish with a will or trust?

To a certain extent you can, but there are limitations. The main limitation is that there are spousal elections required under Oklahoma law. These spousal elections prevent a person from totally disinheriting a spouse. This is true whether you have a will or a trust. You can specifically disinherit children or grandchildren, but they have to be specifically named otherwise a probate court could interpret that you just forgot about them (pretermitted heirs) and allow them to take an intestate share.

Is joint tenancy a substitute for a will or a trust?

The short answer is “Possibly, but you need to be well-informed, if that is your choice.” Joint tenancy is an easy way to avoid probate and to get property to the joint owner automatically after one’s death, but joint tenancy has complications during life. With joint ownership, the property is open to creditor claims for all the owners, so if you name a child as joint owner, then that child has tax debts, the property could be forced to be sold for those debts. In addition, as a joint owner, the child would have access to at least his share of the property (real estate) or the entire account (any financial account). This would mean they could force you to sell your share of land, or worse yet, they could completely drain a checking or savings account and you would have no legal recourse.

I am worried about the estate tax. How much will the government take from my life savings before allowing it to pass to my children?

As of now (early 2012) the estate tax is just a tax imposed upon the vastly wealthy and the uninformed. Oklahoma repealed its estate tax effective in 2010 and it is not likely to be re-enacted, in my opinion. The federal government still imposes an estate tax, but it is only for estates that exceed $5,000,000, if the taxpayer dies before January 1, 2013. Using those numbers and past filings, that is less than 0.003% of United States citizens. If laws are not changed, in 2013 that exemption will revert to $1,000,000 before an estate is subject to taxation. This would affect around 8% of United States citizens.

If you are currently worth more than $5,000,000 and you plan to die this year, your estate will incur a flat tax of 35% of all amounts exceeding $5,000,000 before it can be passed to your children.

The law currently in effect states, if you do not die until 2013 and your estate exceeds $1,000,000, your estate will incur a progressive tax rate from 45% to 55% of all amounts exceeding $1,000,000 before it can be passed to your children.

Is it true I can give away $10,000 dollars without penalty?

It all depends upon what penalty you seek to avoid, and the $10,000 amount is outdated, anyway. This question looks to several different areas of law that I hope to clarify here. The $10,000 amount was originally based on gift tax law. This amount has been inflation adjusted since 2001, so the current annual gift tax exclusion is $13,000. The Internal Revenue Code states any person can give any other person $13,000 on an annual basis and the gift does not have to be reported by either the donor or the recipient. The Code states that any amount in excess of the exclusion amount must be reported by the donor on a Form 709 Reporting of Gifts and will lower the donor’s Unified Credit. Once the donor has given away more than his or her Unified Credit (currently $5,000,000), the donor has to pay gift taxes.

However, the above amount is a gift tax exclusion, so it does not consider effects if you are applying for need-based governmental benefits, e.g., Medicaid. Under the Deficit Reduction Act of 2005, Congress imposes a penalty on any uncompensated transfer made within the previous five years by a person applying for Medicaid. The penalty is imposed on all transfers, regardless of the amount, if there is not any corresponding consideration received. So, if you are looking to qualify for governmental assistance, you should not just give money away, but you should contact an elderlaw attorney to set up a plan to qualify for assistance.