Katie Hanson, Randall K. Hanson, and LeAnn Luna
planning has changed dramatically over the past few years,
for reasons that relate to both tax and nontax developments.
Many estate planners now recommend that taxpayers execute
four documents when they are planning for the future: a
testamentary will, a living will, a durable power of attorney
for health care, and a durable power of attorney for finances.
In addition, recent estate tax legislation should be considered.
2001 Tax Act increased estate exemptions and reduced estate
tax rates. If a person dies in 2004, no estate taxes will
be owed unless the net taxable estate (including prior taxable
gifts) exceeds $1.5 million.
exemption will increase to $2 million in 2006, and then
to $3.5 million in 2009. The maximum estate tax rate is
reduced to 48% in 2004 and then drops 1% each year in 2005,
2006, and 2007. The rate will remain 45% in 2008 and 2009
before dropping to zero in 2010. If Congress does nothing
to change the law, on January 1, 2011, the exemptions and
estate tax rates will revert to the 2001 levels. Most commentators
anticipate that there could be an estate tax implemented
by 2011 but believe that the exemptions will remain at a
the present exemption of $1.5 million, most taxpayers will
not owe any estate tax. Those taxpayers with a taxable estate
exceeding the exemption will continue to try to minimize
the tax owed, typically by taking advantage of various types
of trusts and lifetime giving programs.
preparation is a crucial estate planning activity, although
estate planners need not always serve as executors. If a
taxpayer dies without a will, state statutes and a probate
judge will dictate who receives the deceased’s assets.
The intestate succession statutes, which set forth who will
receive property, generally protect immediate family members.
State statutes vary on what property passes to whom upon
the death of an individual, but spouses and children are
typically the priority heirs. Individuals
uncomfortable with the heirs specified in their state’s
statutes should execute a will to set forth an acceptable
plan for the distribution of their assets. Any person at
least 18 years old and of sound mind may lawfully execute
are some key advantages to having a will even if one is
content with the heirs listed in the state statutes. For
example, a will is the proper vehicle for designating the
guardian for minor children. One can also designate a personal
representative responsible for inventorying the estate,
paying debts, and distributing the excess pursuant to the
key advantages of a will are that it allows for bequests
to charities, bequests in unequal proportions, and specific
bequests of personal items. State statutes adopt a rigid
format for distributing assets, and the assets are always
distributed outright. In many cases, testators may not want
a mathematically equal distribution of assets among heirs,
and may not want certain assets (e.g., the family farm)
divided or liquidated.
benefit of having a will is that the grieving heirs will
be able to read the specific wishes of the deceased. This
helps many people to deal with the grieving process. If
the heirs have no will to read, they are sometimes left
with uneasiness about the deceased person’s true wishes.
Unfortunately, that uneasiness frequently leads to bitter
disagreements and even lawsuits between family members at
a time when concerns over money or assets should be avoided.
states permit individuals to refer to a personal property
list in their will and then itemize in a separate document
a suggested list of what items of personal property they
wish to go to particular persons. In this way the executor
may distribute personal items, such as wedding rings, antiques,
photo albums and dishes, to the persons the decedent most
wishes to have them. Including sentimental objects on the
personal property list eliminates any controversy about
the testator’s wishes.
a will also prompts heirs to make decisions and arrangements.
The decedent’s personal representative will know that
an attorney needs to be retained and the probate process
needs to be initiated. Simple probates typically take at
least six months to validate a will, appoint a personal
representative, inventory the assets, pay creditors, and
distribute the remaining assets to the heirs.
people are tempted to use simple software programs to prepare
their own will. Many times these documents will be sufficient.
When they fail, however, even for the simplest of shortcomings,
the consequences can be devastating. For example, a will
dispute in Tennessee was appealed all the way to the Tennessee
Supreme Court because one of the witnesses left the table
for a few minutes during its execution and may or may not
have actually witnessed the testator sign the document.
The will was ultimately held as valid, but the cost to the
heirs was over $100,000 in legal fees.
many individuals use a will as the funding mechanism for
various types of trusts. Trusts can address several ordinary
concerns, including the relatively common situation of a
potentially spendthrift heir. A simple trust with a thoughtful
nominee for trustee can ensure that assets are used productively
rather than to fund an extravagant lifestyle. The trust
might allow expenditures for education or health care or
to fund a new business venture, but severely restrict withdrawals
for items such as cars or travel. Trusts may also be used
to control assets in the case of a divorce or to guarantee
a college fund for children or grandchildren. In addition,
trusts are frequently set up for family members with a physical
or mental disability. A trust can ensure a disabled person’s
care for many years without disqualifying that person for
available need-based programs provided by private or public
will documents a person’s health-care wishes if that
person is unable to make her own health-care decisions because
she has become terminally ill, comatose, or conscious with
irreparable brain damage. The basic purpose of a living
will is to control whether one’s life will be prolonged
by life-support methods. Because of the current litigious
environment, allowing a person to die can be time-consuming,
expensive, emotionally draining, and sometimes impossible
unless a living will has been executed. A living will sets
forth the conditions under which life support can be removed,
and it allows a physician to lawfully withhold artificial
respiration, nutrition, or hydration, thus allowing a person
to pass away.
states have statutes on living wills, with varying provisions.
For example, in some states, two physicians must certify
that the patient’s condition is terminal before life
support can be removed pursuant to a living will. Some states
provide that a person must be in a coma for seven days before
any action is taken to remove life support. Hospitals are
a very good source for information on living wills. Another
excellent source is Partnership for Caring (www.partnershipforcaring.org),
which offers downloadable, state-specific living wills free
of charge. The forms are continuously updated and reflect
legislative changes in each state. Discussing
the living will with close family members is almost as important
as the document. Doctors and hospitals are understandably
hesitant to withhold life support if the family objects,
even if such action is authorized or required by a living
that living wills are not just for the elderly. Young people
should also execute a living will to clarify their feelings
about what care they desire if an unfortunate event or illness
Power of Attorney for Health Care
power of attorney for health care allows individuals to
appoint someone to act on their behalf in making health-care
decisions that do not necessarily involve terminating life-support
measures. This power of attorney is specifically limited
to health care and medically related decisions and is activated
anytime a person is unable to make medical decisions. It
may be activated if a person is temporarily unconscious,
confused, or unable to communicate medical desires. The
power of attorney will typically allow the grantee to authorize
routine medical tests, scans, or surgery. This document
will effectively allow timely permission and consent so
that proper care can be given and received.
must be mentally competent and of sound mind to execute
a valid, durable health-care power of attorney. The health-care
power of attorney is not, however, invalidated if the grantor
becomes mentally incompetent subsequent to its execution.
It is therefore very important that elderly persons execute
this durable power of attorney while they are mentally alert
and have the capacity to grant such a power to another person.
an individual executing a health-care power of attorney
must have the utmost confidence in the designated person,
who is typically a trusted family member. Many states require
that this type of power of attorney be witnessed and notarized.
Most states will not allow medical personnel or nursing
home employees to be named under a health-care power of
Power of Attorney for Finances
estate planning attorneys now recommend that clients also
execute a durable power of attorney for finances. This power
of attorney allows an individual to designate a representative
to handle financial affairs if the grantor becomes unable
to fully administer personal affairs. This document provides
valuable assistance for someone whose mental state is so
diminished she is unable to make wise financial decisions.
The powers given can be broad or narrow. Common broad powers
include activities such as opening mail, paying everyday
expenses, filing and paying taxes, maintaining property,
collecting Social Security benefits, investing money, executing
bank transactions, filing insurance claims, operating a
business, and managing retirement accounts.
power of attorney for finances continues to be valid even
if the individual granting the power later becomes incompetent.
The grantor must only be competent at the time that the
power of attorney is executed. It is imperative that the
person given power of attorney for finance be fully trusted.
The form will have to be witnessed and notarized, and some
states also require that the form be recorded.
a person fails to execute a durable power of attorney for
finances and that person becomes mentally incompetent, a
conservator or guardianship will have to be created and
overseen by a judge. This process is time-consuming and
expensive. A bond may be required, and court approval is
often needed to dispose of real estate or to make financial
Hanson, MSA, CPA, is a senior associate accountant
at Dixon Hughes, PLLC, in Sanford, N.C.
Randall K. Hanson, JD, LLM, is a professor
of business law and LeAnn Luna, PhD, is an
assistant professor of accounting, both at the Cameron School
of Business, University of North Carolina Wilmington.