Estate Planning FAQs

Q: What is estate planning?

When someone passes away, his or her property must somehow pass to another person or institution.  A proper estate plan involves strategies to minimize potential estate taxes and settlement costs, as well as coordinate what would happen with your home, investments, businesses, life insurance, employee benefits (such as a 401k plan), retirement assets and other property in the event of death or disability.  Important, basic estate documents include revocable trusts, wills, financial powers of attorney, medical directives, living wills and beneficiary designation forms for retirement accounts and life insurance policies


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Q: Why is it important to establish an estate plan?

Many individuals don’t engage in formal estate planning because they don’t think that they have “a lot of assets” or mistakenly believe that their assets will be automatically shared among their children upon their passing.  If you don’t make proper legal arrangements for the management of your assets and affairs after your passing, the state’s intestacy laws will take over upon your death or incapacity.  This often results in the wrong people getting your assets as well as higher estate taxes.

If you pass away without establishing an estate plan, your estate will undergo probate – a public, court-supervised proceeding.  Probate can be expensive and-tie up your assets for a prolonged period before your beneficiaries receive them.  Even worse, failure to outline your intentions through proper estate planning can cause family chaos as well unnecessary stress and expense.


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Q: What does my estate include?

Simply, your estate is everything you own, anywhere in the world, including:

  • Your home or any other real estate that you own
  • Your business interests
  • Your share of any joint accounts
  • The full value of your retirement accounts
  • Any life insurance policies that you own directly
  • Any property owned by a trust, over which you have a significant control
  • Your personal effects


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Q: How do I name a guardian for my children?

If you have children under the age of eighteen, you should designate a person or persons to be appointed guardian(s) over their person and property.  Of course, if a surviving parent lives with the minor children (and has custody over them) he or she automatically continues to remain their sole guardian.  You should name at least one alternate guardian in case the primary guardian cannot serve or is not appointed by the court.


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Q: What estate planning documents should I have?

A comprehensive estate plan should generally include the following documents which are based upon your particular family and financial situation:

Revocable Trust.  Like a will, a revocable trust is a legal document that provides for the management and distribution of your assets after your death.  A revocable trust has certain advantages when compared to a will.  A revocable trust allows for the immediate transfer of assets after death without court interference.  It also allows for the management of your affairs in case of incapacity, without the need for a guardianship or conservatorship process. 

A revocable trust can be used to hold legal title to and provide a mechanism to manage your property.  Typically, you (and your spouse if desired) will be the trustee(s) and beneficiaries during your lifetime.  You also designate successor trustees to carry out your instructions in case of death or incapacity.  One of the great benefits of a properly funded revocable trust is the fact that it will avoid or minimize the expense, delays and publicity associated with probate.

Will.  If you have a revocable trust, you also need a pour-over will.  For those with minor children, the nomination of a guardian must be set forth in a will.  The other major function of a pour-over will is that it names an executor and allows the executor to transfer any assets owned by the decedent into the decedent’s trust so that they are distributed according to its terms.

Financial Power of Attorney.  A financial power of attorney allows someone to carry on your financial affairs in the event that you become disabled.  Without a properly drafted power of attorney, it may be necessary for someone to go to court to have a guardian or conservator appointed to make decisions for you during a period of incapacitation.  This guardianship process is time-consuming, emotionally draining and very expensive.

Health Care Power of Attorney (or Advance Medical Directive).  The law allows you to appoint someone you trust to make medical treatment decisions for you if you lose the ability to decide for yourself.  You can do this by using a health care power of attorney (or advance medical directive) where you designate the person or persons to make such decisions on your behalf.  The health care power of attorney can authorize your agent to make all health care decisions for you or only about certain treatments.  Your agent can then ensure that health care professionals follow your wishes.  Your health care power of attorney should also include a HIPAA authorization form that allows the release of medical information to your agent.  It is important for everyone over the age of 18 to have a health care power of attorney.

Living Will.  A living will informs others of your preferred medical treatment should you become permanently unconscious, terminally ill, or otherwise unable to make or communicate decisions regarding treatment.  In conjunction with other estate planning tools, it can bring peace of mind and security while avoiding unnecessary expense and delay in the event of future incapacity.

Beneficiary Designations.  Retirement accounts, such as IRAs and 401ks, are controlled by beneficiary designations filed directly with the plan administrators, rather than by your revocable trust or will.  Similarly, if you own insurance on your own life, it will pay to the beneficiary or beneficiaries you instruct on a beneficiary designation form filed with the insurance company.  It is important to address these types of assets and coordinate your beneficiary designations when you plan your estate and sign other testamentary documents.


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Q: Will my estate be subject to estate taxes?

There are two types of estate taxes that you should be concerned about:  the federal estate tax and state estate tax.  The federal estate tax is computed as a percentage of your net estate.  Your net taxable estate is comprised of all assets you own or control minus certain deductions.  In 2014, the Federal estate tax exemption is $5,340,000 (less exemption amounts used during life).  Estate assets above the exemption amount are taxed at 40%.

Even if you believe that you may not be affected by the federal estate tax, you still need to determine whether you may be subject to state estate and inheritance taxes.  Further, you may have a taxable estate in the future as your assets appreciate in value. 

Virginia does not have a state estate tax or inheritance tax.  The District of Columbia has an estate tax on assets over $1,000,000.  Maryland also imposes an estate tax on assets over $1,000,000 and an inheritance tax on assets passing to anyone other than a spouse and descendants.  Real estate in other states may also be subject to estate or inheritance tax in the state of location.

You should regularly review your estate plan with an estate planning attorney to ensure your estate plan takes into account changes in the tax laws as well as shifts in your individual circumstances.


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Q: What is my taxable estate?

Your taxable estate comprises of the total value of your assets including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies minus liabilities and deductions such as funeral expenses paid out of the estate, debts owned by you at the time of death, bequests to charities and value of the assets passed on to your U.S. citizen spouse.  The taxes imposed on the taxable portion of the estate are then paid out of the estate itself before distribution to your beneficiaries.


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Q: What is an Irrevocable Life Insurance Trust and how does it work?

There is a common misconception that life insurance proceeds are not subject to estate tax.  While the proceeds are received by your family free of any income taxes, they are countable as part of your taxable estate and therefore your family can lose over 40% of its value to federal estate taxes, and possible more in state estate tax.  If properly drafted and administered, an irrevocable life insurance trust (ILIT) can keep the death benefits of a life insurance policy outside your estate so that they are not subject to estate taxes. 


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Q: What is Probate and why does everyone want to avoid it?

When a loved one passes away, his or her estate often goes through a court-managed process called probate or estate administration in which the assets of the deceased are managed and distributed.  If your loved one owned his or her assets through a properly drafted and funded revocable trust, it is likely that no court-managed administration is necessary.  The length of time needed to complete probate of an estate depends on the size and complexity of the estate as well as the rules and schedule of the local probate court.

Every probate estate is unique, but most involve the following steps:

  • Filing of a petition with the proper probate court
  • Notice to heirs under the will and/or statutory heirs
  • Petition to appoint a personal representative (or executor) for the estate
  • Inventory and appraisal of estate assets by the personal representative
  • Payment of estate debt to rightful creditors
  • Sale of estate assets, if appropriate
  • Payment of estate taxes, if applicable
  • Final distribution of assets to heirs

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