Estate Law
Letter of Instruction to Your Heirs
When counseling parties who are drafting their Will and/or Trust, I often advise that they should consider writing a letter to their heirs, meant to be read after death, advising of specific issues that will help their family with the Estate. This letter can also be used to accomplish the provisions of Ark. Code Ann. Section 28-25-107 (1987), an Arkansas Law which allows parties to make a list of personal items of property, with designated recipients, attached to their Will subsequent to its execution. Specifically, the law allows parties, after they have completed their Will, to create a handwritten or signed list of items they would like to specifically pass to certain member of their family or estate. Using this process, a person can move forward with drafting a Will even at a younger age, without having to worry about changing the Will in later years simply because they acquire property that may not have covered in the earlier Will.
Writing this letter may assist with even more important issues, as well. The letter clarifies requests to be carried out upon your death and provides essential information, thereby relieving surviving family members of needless worry and speculation. Below is an example of items you may wish to consider:
“Dear Loved Ones,
*(obviously the letter will likely start with an emotional message to your family. Following these sentiments, the “business” part of your letter will begin):
Please allow this letter to serve as the correspondence contemplated by Ark. Code Ann. § 28-25-107 (1987), which allows me to make disposition of tangible personal property by attaching or associating with my Will subsequent to its execution a statement and list signed by me designating the devisees of items of specific tangible personal property. I desire to leave my coin collection to my Nephew, ____. I desire to leave all of my artwork in my home to my Wife, ____. (You can list as many items as you would like, here, whether or not they were included in your Will).
Further, I direct my Executor to a list of passwords and computer related information left in my safety deposit box with ABC Bank. This list also includes information concerning my various investment accounts, banking accounts, and other financial data necessary to probate my Estate. (We live in a complicated world, and all of your electronic data will need to be accessed after your death. So, make sure you have a list of websites, blogs, and any other electronic sources (with passwords) you frequently access, and leave this where your Executor can find it upon your death).
My safety deposit box also includes copies of my will; birth, baptismal, and marriage certificates; communion and confirmation certificates; diplomas; military papers; naturalization papers; and birth certificates for my children. It also includes copies of tax returns, leases, and additional personal financial data. Finally, it contains paperwork associated with the two businesses discussed further below.
I am a one-third owner of XYZ Business located in Little Rock, Arkansas. My Partners and I have drafted Articles of Incorporation and Bylaws which specifically detail how my interest in the business should be handled upon my death. Please work with my Partners to effectuate the terms of these agreements, which allow for my partners to purchase the business from my heirs based upon a formulated value agreed upon by the partnership as a whole. The line of credit for the business should be re-financed to remove my name. You will find additional paperwork associated with my business in the bottom left-hand drawer of the desk in my office.
I own investment property in North Little Rock, Arkansas. It is owned in a LLC, and the co-owner and I have completed an Operating Agreement which states that in the event of my death, my family will receive a liquidated payment in an amount specified by the agreement.
I have pre-arranged funeral services with ABC Funeral Home. It is my desire that I be buried next to my parents. I would prefer that in lieu of flowers, donations are made to the Humane Society of Little Rock. Please ensure that my obituary mentions by name all of my children and grand-children, including any that may have pre-deceased me.
Please notify the following organizations to which I belong of my death: Little Rock Chamber of Commerce, XYZ Professional Association, and the Board of Directors of the Humane Society. Please cancel my automobile insurance policy, disability policy, and credit life insurance. Also please cancel my credit cards with Generic Department Store and Generic Bank. I have a life insurance policy with Generic Insurance Company of Omaha, Nebraska. My spouse has a copy of the policy. (Include a list of all accounts, company names, and addresses). “
Write your letter clearly so that even a stranger could understand it. Be sure to sign and date your letter. As always, consult with our office concerning various additional ideas to be included with this letter, as well as to ensure you have a valid and complete Will, Trust, and effective agreements concerning your business and property holdings. Email me anytime at clcox@coxandsterling.com.)
What is the Estate Tax?
The Estate Tax, commonly referred to as “the Death Tax” in the media, is also known as the “inheritance tax.” This tax is assessed on the estate of a deceased person. In other words, when a person dies, and his or her property and assets are passed to heirs and descendants, the estate tax comes into play. It does not matter if the person dies with a will (or trust), or whether they die intestate (without a will), the estate tax must nevertheless be taken into consideration (you know what they say about death and taxes). Federal Law provides an exemption, based upon the year of death. For 2011 the exemption is $5 million. For 2012, the exemption is $5,120,000.
For purposes of federal taxation, the estate tax is imposed upon the amount of “taxable estate” passed to the heirs or descendants of the person who has died. When calculating the “taxable estate,” the law first takes into account the total “gross estate” of the decedent, which generally includes all property of the person at the time of death, including proceeds from life insurance.
The key in estate planning is to limit the amount of your “gross estate” which will be included within your “taxable estate.” By creating trusts and taking advantage of additional planning techniques, you are able to limit the amount of your estate which would be taxable, i.e. subject to the estate tax. Various articles on this blog will discuss tools which may be used to reduce your taxable estate, the most important of which is a Revocable Trust. Other tools which may be used include:
- Gifts
- Business Ownership
- Life Insurance Trusts
- Bypass and Marital Trusts
- Charitable Gifts
When does the Estate Tax Apply?
When determining whether the Federal Estate Tax (“the Estate Tax”) may apply to you, the first step is to determine the amount which may be excluded under the Federal Tax Code. For 2009, the exclusion is $3.5 million per person. This means, for a person who dies in 2009, the first $3.5 million of their “taxable estate” is not subject to the Estate Tax. The “taxable estate” is calculated from the “gross estate”, which is a broad spectrum, including most assets owned by the party at the time of death, including any life insurance proceeds left to the person’s beneficiaries. For a discussion of the taxable estate and recommended tools for reducing the estate, see “What is the Estate Tax.”After 2009, the situation becomes significantly less clear. Under current law, a person dying in 2010 will be subject to no estate tax. Generally, this means that regardless of the value of the assets of the decedent, there will be absolutely no tax liability for purposes of the estate tax. In 2011, the exclusion drops to $1 million, unless the present law is changed before that date by Congress. In the event the law remains in effect, we will see a drastic increase in the number of estates subject to the death tax.
Due to the fluidity of the tax laws and uncertainty regarding death, proper estate planning is necessary to protect your assets. Under the present tax law, anyone who dies after 2010 will maintain only a $1 million exemption from the death tax, and the value of the primary residence, life insurance, and retirement savings alone will place many people in a position where the death tax will present a real problem for which adequate planning is necessary.
The goal, of course, is to eliminate the death tax and ensure that all of the assets earned during your lifetime may be passed to your heirs. Any amounts left subject to the estate tax are subject to the “tentative tax” rates allocated by the IRS. Various articles on this blog will discuss tools which can be used to reduce your taxable estate, including:
- Revocable Trusts
- Gifts
- Business Ownership
- Life Insurance Trusts
- Bypass and Marital Trusts
- Charitable Gifts
Letter of Instruction to Your Heirs:
When counseling parties who are drafting their Will and/or Trust, I often advise that they should consider writing a letter to their heirs, meant to be read after death, advising of specific issues that will help their family with the Estate. This letter can also be used to accomplish the provisions of Ark. Code Ann. Section 28-25-107 (1987), an Arkansas Law which allows parties to make a list of personal items of property, with designated recipients, attached to their Will subsequent to its execution. Specifically, the law allows parties, after they have completed their Will, to create a handwritten or signed list of items they would like to specifically pass to certain member of their family or estate. Using this process, a person can move forward with drafting a Will even at a younger age, without having to worry about changing the Will in later years simply because they acquire property that may not have covered in the earlier Will.
Writing this letter may assist with even more important issues, as well. The letter clarifies requests to be carried out upon your death and provides essential information, thereby relieving surviving family members of needless worry and speculation. Below is an example of items you may wish to consider:
“Dear Loved Ones,
*(obviously the letter will likely start with an emotional message to your family. Following these sentiments, the “business” part of your letter will begin):
Please allow this letter to serve as the correspondence contemplated by Ark. Code Ann. § 28-25-107 (1987), which allows me to make disposition of tangible personal property by attaching or associating with my Will subsequent to its execution a statement and list signed by me designating the devisees of items of specific tangible personal property. I desire to leave my coin collection to my Nephew, ____. I desire to leave all of my artwork in my home to my Wife, ____. (You can list as many items as you would like, here, whether or not they were included in your Will).
Further, I direct my Executor to a list of passwords and computer related information left in my safety deposit box with ABC Bank. This list also includes information concerning my various investment accounts, banking accounts, and other financial data necessary to probate my Estate. (We live in a complicated world, and all of your electronic data will need to be accessed after your death. So, make sure you have a list of websites, blogs, and any other electronic sources (with passwords) you frequently access, and leave this where your Executor can find it upon your death).
My safety deposit box also includes copies of my will; birth, baptismal, and marriage certificates; communion and confirmation certificates; diplomas; military papers; naturalization papers; and birth certificates for my children. It also includes copies of tax returns, leases, and additional personal financial data. Finally, it contains paperwork associated with the two businesses discussed further below.
I am a one-third owner of XYZ Business located in Little Rock, Arkansas. My Partners and I have drafted Articles of Incorporation and Bylaws which specifically detail how my interest in the business should be handled upon my death. Please work with my Partners to effectuate the terms of these agreements, which allow for my partners to purchase the business from my heirs based upon a formulated value agreed upon by the partnership as a whole. The line of credit for the business should be re-financed to remove my name. You will find additional paperwork associated with my business in the bottom left-hand drawer of the desk in my office.
I own investment property in North Little Rock, Arkansas. It is owned in a LLC, and the co-owner and I have completed an Operating Agreement which states that in the event of my death, my family will receive a liquidated payment in an amount specified by the agreement.
I have pre-arranged funeral services with ABC Funeral Home. It is my desire that I be buried next to my parents. I would prefer that in lieu of flowers, donations are made to the Humane Society of Little Rock. Please ensure that my obituary mentions by name all of my children and grand-children, including any that may have pre-deceased me.
Please notify the following organizations to which I belong of my death: Little Rock Chamber of Commerce, XYZ Professional Association, and the Board of Directors of the Humane Society. Please cancel my automobile insurance policy, disability policy, and credit life insurance. Also please cancel my credit cards with Generic Department Store and Generic Bank. I have a life insurance policy with Generic Insurance Company of Omaha, Nebraska. My spouse has a copy of the policy. (Include a list of all accounts, company names, and addresses). “
Write your letter clearly so that even a stranger could understand it. Be sure to sign and date your letter. As always, consult with our office concerning various additional ideas to be included with this letter, as well as to ensure you have a valid and complete Will, Trust, and effective agreements concerning your business and property holdings. Email me anytime at clcox@coxandsterling.com.)
Cade Cox
