Estate Planning: Protecting Your Legacy

The primary goal of estate planning is to ensure that your property passes to your chosen beneficiaries, without burdensome delays, taxes or administrative costs. An effective estate plan may include a combination of documents, such as a will, revocable trust, power of attorney, and advance medical directive. K.M. Khan Law will guide you quickly and easily through this often-neglected but crucial planning process, giving you the peace of mind that comes from knowing that your legacy is protected and secure.

Estate Planning Documents

Your Will

A will is a legal document providing for the settlement of an individual’s debts and obligations and the orderly transfer of the remaining property to his or her designated heirs. The Executor is the person designated in your will to administer your estate, pay expenses and debts, and distribute the estate’s assets.

In the absence of a valid will, your estate would be subject to Virginia’s intestacy laws, and your property could be distributed in ways you did not intend. With a will prepared by K.M. Khan Law, you will be able to reduce administrative costs, distribute gifts to your intended beneficiaries according to your wishes, and name an appropriate guardian for any minor children.

Revocable Trust

A trust is a more advanced form of distributing property upon the passing of an individual. A revocable trust is created during a person’s lifetime. It names a Trustee, who holds legal title to the trust’s property and assets. The Trustee also performs the day-to-day management of the trust. With a revocable trust, the creator may change any of the trust’s terms, assets or contents during his or her lifetime.

Unlike a will, which is recorded as a public document, a revocable trust and its contents remain private. The value of the assets held in the trust at the individual’s passing, as well as their disposition, are revealed only to those with an interest in the trust. Other benefits include the authorization of the Trustee to manage the trust for the benefit of the creator, a safer alternative than a general power of attorney.

Trusts are also useful in avoiding probate, the court-supervised administration of your estate. Avoiding probate reduces expenses and speeds the delivery of assets to your designated beneficiaries. A typical estate going through probate would be subject to the Virginia probate tax as well as fees paid to the Commissioner of Accounts, usually a percentage of the total value of all of the property in the estate.

Power of Attorney

A “power of attorney” is a document created by an individual (the “principal”), who names an “agent” to act on his or her behalf to manage property and/or financial affairs. A “general” power of attorney is written very broadly, permitting the agent to do almost anything that the principal could do him or herself. A “durable” power of attorney remains in effect even if the principal is disabled or incapacitated. A power of attorney can be revoked by the principal at any time, as long as the principal is not disabled, and it ceases to be effective at his or her demise.

Advance Medical Directive

An Advance Medical Directive is similar to a power of attorney, but it applies only to medical matters. It is actually a combination of three documents: (1) a “living will,” (2) a health care power of attorney, and (3) an anatomical donor authorization. Virginia law expressly authorizes advance medical directives. With an advance medical directive prepared by K.M. Khan Law, you can provide clear instructions to your loved ones and to medical authorities, ensuring that your wishes will be followed with respect to the use of life-prolonging procedures, health care decision-making, and organ donation.

Irrevocable Life Insurance Trust

Many people believe life insurance to be a tax-free asset. However, while the proceeds will be tax-free income for your designated beneficiaries, the Internal Revenue Service will include these proceeds when determining your taxable property for estate tax purposes. An Irrevocable Life Insurance Trust is an advanced device that can remove these proceeds from your taxable estate, while still providing the benefits from these policies to your heirs.

Pet Trust

A pet trust ensures that your pet will receive proper care in the event of your passing or a serious disability. To create a pet trust, you place a certain amount of money or other property in the care of a Trustee, who is responsible for making arrangements for your pet according to your instructions. In addition to naming a trustee, a pet trust also names a pet caretaker, who will actually take possession of the pet and use the designated funds to care for the pet and to cover his or her expenses. The trustee and caretaker may be the same person. A sanctuary or no-kill shelter may also be named as the pet’s caretaker.

Life Estate

A life estate is a gift to a person "for his or her life." The holder of a life estate is permitted to enjoy the use of particular assets during his or her lifetime, but cannot pass on the property to anyone in his or her own will. This is an advanced technique to ensure that only your chosen heirs will become the owners of your property.

Holders of life estates have the right to transfer their interests in a property during their lifetimes, but they must not engage in “waste,” actions which would prevent the next person in line from putting the property to full use.

If you need assistance preparing your estate planning documents, contact K.M. Khan Law today to discuss your situation.

Estate Taxes

Probate Tax

State probate tax in Virginia is currently $1.00 per $1,000 of probate-eligible assets in the estate. Certain jurisdictions also charge an additional 33 cents in local probate tax for every $1,000 of the estate’s value.

This tax must be paid when entering the will for probate with the local Circuit Court Clerk’s Office.

State Taxes

In addition to the probate tax, the final state income tax return of the deceased must be filed, as well as the final personal property tax return.

If the estate receives any income after death, such as through a beneficiary designation, an income tax return may also have to be filed on behalf of the estate.

Federal Income Tax

A final federal income tax return must be filed on behalf of the decedent, and a return may also have to be filed on behalf of the estate if there is sufficient income coming into the estate after the individual’s death.

Estate Tax

The exemption from federal estate tax is currently approximately $5 million per individual and $10 million per married couple, subject to adjustment for inflation. For estates over this threshold, a 40% tax is imposed on the amount exceeding this limit. For 2014, the federal estate tax applies to individual estates with a value greater than $5,340,000.

For those affected by this tax, K.M. Khan Law employs a variety of estate planning devices to reduce the total tax liability, such as trusts and living gifts. In addition, a decedent may pass the entire value of his or her estate to a living spouse without any tax being imposed (the “marital deduction”). Furthermore, a portability provision in the federal estate tax law allows a surviving spouse to utilize his or her deceased spouse’s unused estate tax credit to increase the survivor’s exemption amount.

Generation-Skipping Transfer Tax

The generation-skipping transfer tax is a tax on property that is passed from a grandparent to a grandchild (or great-grandchild) in a will or trust. The tax is also assessed on property passed to unrelated individuals more than 37.5 years younger.

In 2014, individuals are entitled to a $5,340,000 generation-skipping transfer tax exemption. A 40% tax will be imposed on any value exceeding this limit.

Gift Tax

The gift tax is a tax on the transfer of property by one individual to another while receiving no compensation, or less than full value, in return. The tax applies whether or not the donor intends the transfer to be a gift.

In 2014, a person may give up to $14,000 in tax-free gifts to any individual per year. A married couple may give together up to $28,000 to any individual per year. However, each person has a lifetime gift limit. As with the estate tax, this limit is approximately $5 million per individual, adjusted for inflation. For 2014, the lifetime gift tax exemption is $5,340,000.

If you believe your estate may be subject to estate tax, contact K.M. Khan Law today to discuss your options.

Fiduciaries and Agents

Executor of a Will

After a person’s death, the Executor is responsible for:
• Probating the will;
• Collecting the assets of the estate;
• Carrying out the directions contained in the will;
• Filing income tax returns for the decedent and the estate;
• Filing estate tax returns for the estate, if necessary; and
• Accounting to the Circuit Court for all of the assets passing through the Executor's hands.

Trustee of a Trust

The Trustee is responsible for:
• Investing the assets of the trust;
• Distributing the income and principal of the trust to the beneficiaries during the term of the trust;
• Filing income tax returns on behalf of the trust;
• Providing an accounting of distributions of the trust principal and income to the beneficiaries each year; and
• Distributing all of the trust’s assets upon its termination.

Guardian of a Minor Child

It is especially important for parents with minor children to prepare a will which names the guardian of their choice for their child or children. This guardian will serve as the substitute parent and be responsible for the day-to-day decisions of raising the child, such as his or her lifestyle, education, etc.

In Virginia, the nomination of a guardian by the parent or parents is usually followed. However, the court may name a different guardian over a minor child after determining the “best interest of the child.” Generally, this will occur in situations where the guardian appointed by the parents is incapable, either mentally or financially, of caring for the child.

Power of Attorney Agent

With a durable financial power of attorney, a person grants an agent the power to conduct financial affairs on his or her behalf. This power can be exercised immediately after the document is signed.

Agent for Health Care Decisions

By formally designating an agent for health care decisions, you grant that person the power to make decisions about your medical treatment, beginning at the time when you are unable to make these decisions yourself.

If you need assistance preparing your estate planning documents, contact K.M. Khan Law today to discuss your situation.

The Probate Process

Probate is the official process by which a will is established and recorded as the authentic and valid last will and testament of a deceased person.

Location of Probate

The will should be probated in the Circuit Court where the deceased person owned a home or any real estate in Virginia. If neither of these apply, probate may be undertaken in the jurisdiction where the person died.

If the decedent died in a nursing home or similar institution, probate should be undertaken in the jurisdiction where he or she resided prior to becoming a patient.

Initiation of Probate

While the executor of the will is generally the one to file the will with the Clerk of the Circuit Court’s Probate Office, any person with an interest in the will may admit it for probate. A person is considered to have an interest in the will if he or she stands to inherit any assets, real estate or other interest in the decedent’s property.

There is no set time for probate. However, we recommend that a will be entered for probate within 30 days after the death. If too much time passes, the state may consider the decedent to have died without a will, and the property may be distributed according to the state’s inheritance laws for those who die “intestate” or without a valid will.

Appointment of an Executor

Generally, a will names an Executor to handle the administration of the estate. If no one is named, or if the named person refuses to serve or ceases to act after being appointed, an alternate person may be appointed, such as a beneficiary of the will or a local attorney. Anyone nominated in a will or appointed by the court as an Executor must be competent and capable of handling the duties involved.

Duties of an Executor

The Executor’s most important duties are to identify and take possession of the deceased person’s property, and to determine the estate’s debts and liabilities. Tax returns must also be filed. In addition, the Executor must distribute the property of the estate in accordance with the provisions of the will and the laws of Virginia.

Generally within four months after taking on his or her duties, the Executor must file a complete inventory of the probate-eligible estate with the Commissioner of Accounts. The Commissioner of Accounts is a local person, generally an attorney, appointed by the Circuit Court to ensure that estates are properly handled.

The Executor must also give written notice of his appointment to the heirs and beneficiaries of the estate, or those who would have been the heirs, within thirty days after qualification or probate. Finally, he or she must provide a yearly account of all assets and distributions of the estate until the process of administration is concluded. Often, a first and final accounting can be made at the end of the first year following qualification.

Cost of Probate

In Virginia, the probate tax is currently $1.00 per $1,000 of probate-eligible assets within the estate. Certain jurisdictions also charge an additional 33 cents in local probate tax for each $1,000 in value. This tax must be paid at the time when the will is filed with the Circuit Court Clerk’s Office.

In addition, the Executor is entitled to reasonable compensation for his or her administrative duties on behalf of the probated estate. Generally, this compensation is limited to no more than 5% of the estate’s total value.

If you need assistance with probate or administering an estate, contact K.M. Khan Law today to discuss your matter.

Cory Miller ©2014