FAQs

When someone passes away, his or her assets and liabilities must 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 will happen with your home, investments, businesses, life insurance, employee benefits, retirement assets and other property in the event of death or disability. Fundamental estate planning documents include Revocable Trusts, Wills, financial powers of attorney, medical directives, Living Wills and beneficiary designation forms for retirement accounts and life insurance policies.

Many individuals fail to address estate planning because they do not think they have “enough assets” or mistakenly believe their assets will automatically pass to their children. If you do not make proper arrangements for the management of your assets and affairs after your passing, your state’s intestacy laws will take over upon your death or incapacity. This can result in the wrong people inheriting your assets.

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 as unnecessary stress and expense.

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
• Your retirement accounts
• Any life insurance policies that you own directly
• Any property owned by a Trust, over which you have significant control
• Your personal effects

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

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 over 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 guardian or conservator to be appointed. 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. Another advantage of a properly funded Revocable Trust is it will avoid or minimize the expense, delay 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 that were not titled to your Trust during your life.

Financial Power of Attorney A financial power of attorney allows someone to carry on your financial affairs in the event 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) You should appoint someone you trust to make medical treatment decisions for you if you lose the ability to decide for yourself. This can be achieved by using a health care power of attorney (or advance medical directive) to designate the person(s) 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 certain specified 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 eighteen 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 life-sustaining procedures. The Living Will lets your family know your wishes and takes away the burden of them having to make that decision for you.

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 coordinate your beneficiary designations when you plan your estate and sign other testamentary documents.

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. The 2022 federal estate tax exemption is $12,060,000. Estate assets above the exemption amount are taxed at 40%. This exemption is indexed for inflation but will revert to lower amounts in 2026, unless Congress makes changes before then. Under current law, the exemption will revert in 2026 to $5,000,000 indexed for inflation.

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, your estate may become 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 $4,000,000. Maryland also imposes an estate tax on assets over $5,000,000 and an inheritance tax on assets passing to beneficiaries other than a spouse and descendants. Real estate located in other states may also be subject to estate or inheritance tax in that state.

You should regularly review your estate plan with an estate planning attorney to ensure your estate plan takes into account current tax law changes as well as shifts in your individual circumstances and your goals for your loved ones.

Your taxable estate consists of the total value of your assets, including real estate, business interests, your share of joint accounts, retirement accounts and life insurance policies. It is reduced by your liabilities and certain deductions, such as funeral expenses, debts owned by you at the time of death, and bequests to charities and your spouse, provided your spouse is a U.S. citizen. Taxes imposed on your estate are paid out of the estate itself, before distribution to your beneficiaries.

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 included in your taxable estate and therefore your family may lose over 40% of its value to federal estate taxes, and possibly 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 of your estate so that they are not subject to estate taxes.

Business law encompasses the many rules, statutes, codes and regulations that govern commercial relationships and provide a legal framework for the conduct and management of a business. Business law is highly diverse and includes areas such as:

• Business formation and organization
• Transactional business law (contracts)
• Business planning
• Business negotiations
• Mergers and acquisition
• Divestitures

There are many important options to consider when choosing a business form, including your preference of tax treatment, your state of residence, how you intend to capitalize the business, how many equity owners you will have, whether you plan to issue stock and trade it publicly, whether you will have employees, how you intend to structure the management of your business and issues surrounding the liability of the business owners.

A limited liability company (“LLC”), like a corporation, is a legal entity which exists separately from its owners. An LLC is created when Articles of Organization (or the equivalent under the laws of a particular state) are filed with the proper state authority, and all fees are paid. After the Articles of Organization are filed, the members of the LLC should adopt an Operating Agreement describing the operations, management and ownership structure of the LLC. This Agreement does not have to be filed with any state agency, but it is important that each member keep a signed copy of the Agreement for his or her records. Once formed, an LLC is subject to the ongoing requirements in its state of incorporation, such as filing annual reports and paying the applicable annual fees and/or franchise tax.

An LLC can either be “member-managed” (managed by all of its members) or “manager-managed” (managed by one or more designated managers). In a member-managed LLC, members may apportion duties among themselves as they decide, and may use the corporate titles of president, vice president, secretary and treasurer, and assume duties normally associated with such title(s). In a manager-managed LLC, the management duties are delegated to a manager or a board of managers selected by the members. A manager, whether an individual or an entity, can, but need not be, a member of the LLC.

Although newer than corporations, LLCs can be structured to offer the same liability protection as corporations, but with fewer formalities. Like shareholders of a corporation, LLC owners should be protected from personal liability for business debts and liabilities. While LLC members may lose their entire investment in the business, their other personal assets, such as homes, cars or personal bank accounts, should be safe from the creditors of the LLC. However, in cases of claims arising out of a contract (particularly one that was personally guaranteed by a member) or damages resulting from the member’s own negligence, fraud, illegal act or improper distribution, the limited liability protection may not be effective. Also, not all states provide similar creditor protection for an owner of a single-member LLC.

Federal tax regulations allow an LLC to elect its tax status for income tax purposes. An LLC can be taxed as a disregarded entity, a sole proprietorship or as a partnership. It is also technically possible to tax an LLC as a corporation, although such election makes sense only in extraordinary circumstances. Unless it is a disregarded entity, an LLC will need to obtain a taxpayer identification number from the Internal Revenue Service.

In most cases, the state to choose for your new LLC is the state in which you operate your business or the state in which your investment is located. For example, if you own a rental property in Florida and wish to conduct rental activities through an LLC to protect your other assets from liability, you would form a Florida LLC. Some entrepreneurs and investors pick other states, most commonly Delaware, since Delaware provides sophisticated courts and a business-friendly legal environment.

Sometimes, in addition to setting up your LLC in the state in which you operate your business, you will need to register your LLC as a foreign limited liability company in another state where your LLC owns property, invests or operates a related business.

A registered agent is an individual or a service company that acts as a representative for receiving notices or official government communications from the state department as well as service of process within the jurisdiction of the state where the company conducts its business. The registered agent can be any individual residing in the state where the company is registered and, in most cases, does not have to be a member or shareholder.

Meetings of shareholders and directors should take place at least annually if for no other reason than to elect new officers and directors. Failure to adhere to the formality of regular meetings can jeopardize the corporation’s ability to shield its officers, directors and shareholders from personal liability for the corporation’s actions. Any time a corporation undertakes a major change or transaction, it should be reflected in its minutes. A limited liability company, in contrast, is not required to hold annual meetings, but having complete written records of manager/officer elections and major transactions is recommended.

“Piercing the corporate veil” refers to a situation where the court disregards the fictional “veil” that the law uses to separate a corporation from its owners. The specific criteria for “piercing the corporate veil” vary somewhat from state to state, but most commonly the courts bypass the usual corporate immunity in the following situations:

• When an underlying business is indistinguishable from its owners who use it as merely their instrumentality or alter ego (e.g. divert corporate assets for their personal use), and the assets of the business are comingled with the personal assets of the owners
• When a business is formed for fraudulent purposes (e.g., to defraud creditors or evade existing obligations)
• When a corporation is undercapitalized at the time transactions with creditors are entered, or there is simply not enough capitalization to get the corporation running
• When a business ignores the corporate formalities required by law such as record-keeping and annual meetings
• In these situations courts may disregard the separate corporate existence and allow a plaintiff to reach the personal assets of the defendant owner(s) rather than limiting the plaintiff to recourse against the corporate assets only

Although the phrase “to pierce the veil” refers to corporations, similar criteria apply to actions against limited liability companies and their owners.