Estate Planning

Is it valid from one state to the next?  Let’s say you have had enough of those Michigan winters and one day you happen to see the headline – North Carolina is ranked #1 among places to retire.  A year later you’ve just arrived in your new NC home and you’ve ordered a pizza while you contemplate the tedious chore of unpacking.  Wait a minute….what about your Will and other estate planning documents?  Do they still work? Or better yet….I wonder what happened to those documents?  Of course that is the last thing on your mind, but somewhere on your “To Do” list you should include a review of your documents and how they work in your new state.

 First things first: Yes, an out-of-state Will should be valid in North Carolina as long as it was prepared and executed in accordance with the laws of the other state.  This is also true for other documents such as financial Power of Attorney and Health Care Power of Attorney.  The problem is that these out-of-state documents may be much more difficult to use here in North Carolina and this may create headaches for your family.  Our courts, financial institutions and health care providers, will likely not be familiar with most out-of-state forms and this disconnect leads to delay and added administrative requirements.

 North Carolina has very specific requirements for language which must be included in a Will for the document to be probated in the normal course.  Without this magic language, it can be a real pain to probate a Will; you may have to locate witnesses from years ago in another state, or you may have to pay for a substantial security bond for an out-of-state Executor.  For this reason I regularly advise clients that, at a minimum, they should have their documents reviewed by a North Carolina attorney.  We often recommend that a client execute a new North Carolina Will to replace their existing document simply to ensure that the necessary language is included to avoid problems with probate.  We also regularly replace existing financial Powers of Attorney and Health Care Powers of Attorney with our North Carolina versions because they will be easier to use with our local institutions; since they are fairly standard forms they don’t require much time and expense to prepare.

 Some clients have a Living Trust as part of their estate plan which is designed to work in conjunction with the Will.  In many cases that Living Trust is designed to continue to function under the old state’s law regardless of where the client may live.  One benefit of a Living Trust is that it will not be subject to probate or review by the court at the client’s death.  In this case, we are not concerned with any special North Carolina language for these documents and we often don’t recommend any changes to a Living Trust simply because of the relocation to our state. 

 When people relocate to North Carolina, particularly for retirement, they regularly have other revisions to include in their documents which can be addressed at the same time their new North Carolina documents are prepared.  For example, if a client is moving to be near one of their children it is common to have that child serve as the primary fiduciary for the client (e.g. Executor or Health Care Agent) and this will often require an update in the documents.  There is also the ever-changing landscape of estate tax laws and this too will dictate changes in documents if they have not been revised recently. 

 If you or someone you know recently migrated to our fair state, be sure this chore is added to the list right along with changing your driver’s license and voter registration and finding a great Chinese food place. 


OK, I’m not talking about an actual spare tire – I’m talking about a Power of Attorney.  Yes, a Power of Attorney is just like a spare tire; I’ll let that analogy sink in for a few moments.  The term “Power of Attorney” is not foreign to most people, but how many of them really understand what it means?

 A Power of Attorney (POA) is a legal document but it has very little to do with an attorney.  Although your attorney prepares the document, your attorney is usually not named in the document and has no power under the document.  Instead, your POA allows you to name a family member or close family friend as your attorney-in-fact (i.e. your Agent) to handle your financial affairs for you, pay your bills, manage your investments, etc.  Many people consider a POA as something intended to be used if you become incapacitated, but most POAs are effective immediately and can be used if you are simply unavailable (for example, when one spouse is traveling out of the country and the other spouse needs to sign loan documents for a bank).  The important thing to know is that if you don’t have a POA in place and you become incapacitated, then your family will likely need to have a legal guardian appointed for you by the court; this  can be an expensive and time-consuming process.

 My clients often struggle with the decision of who to name as the Agent in the POA.  My advice is to name someone that you trust implicitly with everything; someone you would gladly hand your credit cards and checkbook to without any concern.  Typically a 19 year old child is not the first choice unless your chief goals are to 1) hit all the best concerts  within a 2 hour drive, 2) maintain a high profile in the local club scene, and 3) have an endless supply of Red Bull.  Most often people pick someone in their family or a close family friend who has sound business judgment and good money management skills.  Also, it is important to pick someone who is likely to get along with most everyone in your family; this will hopefully avoid potential conflicts in the future.

 A POA does not allow your Agent to do everything for you.  For example, your Agent can’t make or change your Will, can’t get a divorce for you, and can’t act in your place as an officer in a company; however, most other legal or financial matters that require your signature are fair game.  The POA may also allow your Agent to make gifts to your family from your property and you should make sure you review that option in the document if that is a concern for you one way or the other.

 In North Carolina if you sign a POA and later become incapacitated the POA must be recorded in the local Register of Deeds; most financial institutions will require that the document be recorded before honoring it in any event.  A financial institution may have other requirements and make the Agent jump through a few other hoops before accepting the POA, but ultimately once they are satisfied that everything is in order they will cooperate with Agent and allow the POA to work as intended.

 I am sure you get the point now about driving around without a spare tire.  A POA is something that you may never need, but if you do, you will be glad you have it.


Gifts of your real estate can be a bad idea for taxes. What?????? Many of you have probably heard that you should give real estate to your kids to help minimize estate taxes….yes that is still true….but that is only applicable if you have a large estate that will be subject to estate tax.  For most people estate tax is not a real concern.   Thanks to Congress and its ability to get only politics done….we don’t know who is subject to estate tax at the moment. We’ll know that answer at least by the end of 2010 but for now let’s just assume that if you have less than $1,000,000 then you have no estate tax concerns. 

 So if you have no estate tax concerns, a gift of your real estate is not saving your family estate taxes; you are wasting your time and money.  Of course your kids may not feel that way…who doesn’t enjoy ownership in a beach house or mountain cottage. However they may be interested to learn that the gifts can be bad for their income taxes if they ever plan to sell the property.

If you make a gift of your real estate during life instead of passing the property at death, your kids will use the same cost basis you have in the property to determine their income tax if they ever sell the property.  Basically your kids step into your shoes with regard to the built in capital gain in the property.  Admittedly, with the recent real estate turmoil, appreciated property ain’t what it used to be, but there are still plenty of old family farms out there that have vast appreciation built in which has not yet been taxed.  If that property is passed at death, the cost basis is increased to the fair market value of the property and the capital gain is wiped out, at least to the extent the gain is below $1,300,000.  On the other hand, if you transfer the property through gift during life, you loose the benefit of this basis adjustment and your kids will have higher income taxes if they ever sell the property.  This rule is true for all kinds of property (stock, art, etc), but real estate is the most common application.

As with any area of tax law there are some exceptions and special facts which may dictate a different plan of action.  For example, if the real estate is a principal residence occupied by the child, or if the property is expected to appreciate substantially, or if the family is exploring planning to help with medicaid qualification, then these factors may justify a gift even in the face of the potential income tax detriments.  Also, the basis adjustment rules are in flux at the moment and are likely to change further as part of the resolution of the estate tax, whenever that happens.

If you are considering a gift of real estate, make sure you consult your tax advisor first to determine whether you are gaining or loosing any tax benefits.



George Bailey….you’re worth more dead than alive!

Remember poor George Bailey and his life insurance?  Ok that is not one of the high points of It’s a Wonderful Life….but that quote always reminds me of a common misunderstanding my clients have about counting their assets for estate tax planning purposes.  Life insurance is an often overlooked asset that greatly enhances the value of your estate.  Even if your life insurance is a term policy and has no cash value, we have to look at the potential death proceeds in determining the size of your estate and whether we need to worry about estate tax.

 That’s right…even though you’ve always heard that life insurance is not subject to tax; that is only partially correct.  Life insurance is generally not subject to income tax, but if you own a life insurance policy on your own life, the death proceeds are counted as part of your estate for estate tax purposes regardless of who gets those proceeds.  So if you add up all of your assets and then you lump the death proceeds from a big life insurance policy on top, you may find that you have an estate tax issue.  Although there is no estate tax at the moment, the tax will be automatically reinstated no later than January 1, 2011 and unless Congress gets it act together, the individual exemption will be $1,000,000 at that point (see my January 2010 Counselor’s Corner).  At that level life insurance will have a much bigger estate tax planning impact for numerous clients.

 If you have a large life insurance policy as part of your estate, what can you do?  If your adult children are the intended beneficiaries, you can transfer the policy to your children as a gift; if the policy has little or no cash value then this can be a very efficient way to reduce your future taxable estate.  On the other hand if you have minor children or if you wouldn’t trust your adult children to take care of your dog much less own and maintain a valuable insurance policy, then your planning may require the creation of a life insurance trust to own the policy.  In either case, you will have to consider a few important facts such as the current cash value and the continued premium payments for the policy.  If you plan to continue to make the premium payments to maintain the policy then those annual payments will be gifts, and your advisors will need to ensure that you properly use your gift tax exemptions to avoid any gift tax consequences.

 One more little trick the IRS has is the so-called 3 year rule.  If you read this article and decide that it sounds like a great idea and give that life insurance policy to your kids, please be sure to consult your attorney or other tax advisors first.  Second be sure to live at least three more years.  If you die within three years of gifting a life insurance policy then the gift is basically ignored and the death proceeds will be included in your estate.  As you might expect, enterprising attorneys have devised ways to avoid the three year rule, but these options can be pretty complicated and for that you’ll have to talk to you own counselor.

 Remember any day you don’t have to think about death or taxes…It truly is a Wonderful Life!


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