As we head into the end of the year, I thought it might be a good time to review just why estate planning is so important for everyone.
Estate planning is something most Americans avoid and often never get around to. The excuses range from “Estate planning is too confusing” to “I don’t have anything to leave behind” to “I will get around to it next year.” Having an estate plan, however, offers one’s family members peace of mind during a difficult period.
The four main documents in an estate plan are: Will, Trust, Durable Power of Attorney for Finances, and Advance Directive for Health Care.
A Will is a legal instrument permitting a person to make decisions on how their estate will be distributed after death. With no Will, the person dies intestate and State laws dictate distribution of the estate. Wills do not avoid probate; however, they will ensure your assets are distributed to the people and in the manner you desire.
One of the simplest ways to avoid probate is through a Trust. In a conventional Trust, the three main “players” (Settlor, Beneficiary, and Trustee) are initially the same person. The Settlor never changes and is the only person who can change the Trust document. If the Settlor becomes unable to handle their own financial affairs the successor Trustee (chosen by the Settlor) takes over management of the Trust for the benefit of the Settlor, with the remainder beneficiaries receiving an interest in the Trust only after the Settlor’s death (the same way that a person’s estate passes to their beneficiaries under a Will).
The Durable Power of Attorney for Finances (DPA) names the person responsible for managing your personal finances in the event you are unable to manage them yourself. Even in a Trust-centered plan, the DPA plays an important role, governing the assets held outside the Trust.
An Advance Directive for Health Care combines a power of attorney for health care and a living will into one document. It allows you to name an agent to speak with the doctors and make health care decisions for you if you are unable to make them on your own.
Estate plans are designed to grow and develop with us and should be reviewed periodically. I recommend reviewing plans annually – changes may not be needed each year but reviewing the plan will help keep it fresh in your mind, as well as help ensure any necessary changes are caught and addressed quickly.
When properly drafted, an estate plan is a powerful tool not only in the event of person’s death, but also during one’s life. Engaging the services of a professional who specializes in this area of law to assist you in drawing up your estate plan will help ensure your plan works effectively under any circumstances.
Clients often ask me how their estate plan may be affected by estate taxes. Currently, no Federal Estate Tax is imposed on estates under $11,580,000 (per person), affecting approximately 2,000 people (or 0.0006% of the population) in the U.S. Under the Tax Cuts and Jobs Act (TCJA), enacted in December 2017, this exemption amount remains in place, with annual adjustments for inflation, until 2025, at which time it is slated to expire and return to the $5 million exemption amount in place prior passage of the TCJA, assuming no new laws are put in place first. While I have no crystal ball, based on what has happened before, we will see a reduction of the exemption amount, but not all the way back down to $5 million.
Oregon (one of 12 states, plus the District of Columbia, with an estate tax separate from the Federal Estate Tax) imposes an estate tax on estates over $1 million. There is no adjustment to the exemption amount, and nothing to suggest that the laws will change any time soon.
Oregon imposes this tax on all estates over $1,000,000, regardless of the decedent’s state of residency. For an Oregon resident, this includes all property except real property located outside Oregon and any personal property not taxed by another state or country. Deductions (i.e. funeral expenses, the decedent’s debts, mortgages) will lower the taxable estate. As an example, take an estate of $1,450,000 ($800,000 in real property located in Oregon, and $650,000 in personal property), with $20,000 in deductions. The gross estate is $1,450,000 and the taxable estate is $1,430,000 ($1,450,000 – $20,000 = $1,430,000), resulting in an Oregon Estate Tax of $43,000.
For a non-Oregon resident, only real and tangible property located in Oregon is included in the gross estate and the estate tax is prorated. Using the same estate as above, only the $800,000 real property located in Oregon is subject to the tax, and the estate tax is computed as follows: [$800,000/$1,450,000 = 0.551724] x $43,000 = $23,724, resulting in an Oregon Estate Tax of $23,724.
Residency is based on a person’s “domicile,” defined as “the place which an individual intends to be their permanent home and to which such individual intends to return whenever absent.” As this is not a particularly clear definition, we look at where one is registered to vote and what state issued one’s driver’s licenses as good indicators of one’s state of residency.
For married couples and registered domestic partners, revocable trusts can often offer estate tax planning provisions to shelter up to $2,000,000 at the second spouse’s death, (estate taxes are rarely due at the first spouse’s death). Other planning vehicles are available, but they are complex and should not be entered into without great thought and discussion with attorneys, accountants, and financial advisors.
NOTE: For current tax or legal advice, please consult with an accountant or attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.
Most people are familiar with Powers of Attorney and how they work at a basic level. However, these documents can have very important consequences to your overall estate plan and should be thoughtfully drafted.
First, some important terminology to understand the different roles in a Power of Attorney. The Principal is the person creating the Power of Attorney, giving someone else authority over their financial decisions. The Agent is the person being given the authority. Now we can discuss how Powers of Attorney work.
Powers of Attorney may be broad or narrow in scope. For instance, the Principal can give the Agent powers to manage all of the Principal’s assets or limited them to only address real property. Powers may also be limited by time, allowing the Agent to manage the Principal’s assets while the Principal is away. However the Principal wants to limit the Agent’s powers, is fine; the Principal need only clearly state those limits in the document.
It is important to understand that in a general Power of Attorney, the Agent’s powers only exist as long as the Principal has the legal capacity to exercise those powers themselves. If something happens to the Principal and they are not able to manage their own finances (due to a coma, say), the Agent loses their ability to act on the Principal’s behalf.
This does not work so well in the world of estate planning, where we are creating documents specifically allowing others to help us if we are incapacitated. Luckily, this problem is easily addressed by making the Power of Attorney “durable,” allowing the powers of the Agent to continue even when the Principal lacks capacity. In Oregon, the default is that a Power of Attorney “durable;” however, I always in include specific language stating this intent, as this may not be the default in other states. Almost all of the Powers of Attorney I prepare are “durable.”
Another choice is whether to make the Power effective immediately or “springing.” A Power of Attorney that is effective immediately gives the Agent the powers in the document immediately upon the Principal signing it. Even though the Principal is fully capable of managing their own finances, the Agent has simultaneous full authority alongside the Principal. Typically, when naming a financial Agent, we do not want their power to exist unless we are incapacitated. To effectuate that, I advise a “springing” Power of Attorney – one which only comes into effect upon the Principal’s incapacity. In this situation, it is important to have a good clear definition of incapacity in the document itself in order to avoid court for the determination.
A well-crafted Springing Durable Power of Attorney often works best to satisfy my clients’ desire to have someone named to manage their assets only if they are unable to manage them alone. Working with an experienced estate planning attorney will ensure that your documents are drafted in a way most beneficial to your situation.