UNDERSTANDING ESTATE PLANNING
Your "Estate" means of all the assets you have accumulated during your lifetime – including real estate, stocks, bonds, savings, business interests, retirement plans, life insurance and personal effects.
Estate Planning is the process of considering, and setting up legally effective arrangements designed to:
- Preserve your estate
- Ensure continuity of management of your affairs in case of incapacity
- Avoid Probate
- Distribute your estate efficiently and effectively
- Minimize or prevent disputes and challenges to your wishes
- Minimize potential taxes and fees
A Good Estate Plan coordinates what happens to your home, savings, investments, businesses and retirement assets while you are alive and after you die.
Who needs an Estate Plan?
You do - whether your estate is large or small. Either way you should designate someone to manage your assets and make health care decisions for you if you ever become unable to do so for yourself. A simple Will along with Powers of Attorney may be sufficient to distribute a small estate. In today’s world however, the use of Revocable Living Trusts is increasingly more common.
Who Needs a Living Trust?
- Married couples or single parents with minor children
- Anyone who owns Real Estate
- Anyone who desires that assets be held “In Trust” and distributed to heirs according to special terms or beyond the age of 18.
- Anyone with special needs children or beneficiaries
- Married couples in a second marriage who want to protect children of a first marriage
- Business owners
- Domestic partners
Advantages of a Living Trust
A Revocable Living Trust is usually the essential foundation of any estate plan. Here are just some of the primary benefits of a living trust
- Safeguard your assets during your lifetime and beyond
- Avoid the expense, delays & publicity of probate
- May reduce or eliminate estate taxes
- Ensure the proper use of your assets long after you are gone
- Provide appropriate income for your heirs
- Prevent court control of assets in the event of your incapacity
- Protect special needs dependents
- Protect minor children from court imposed guardianships
- Minimize emotional stress
COMMON ESTATE PLANNING STRATEGIES
The “Do Nothing Plan” a.k.a. the “State’s Plan”.
The American Bar Association estimates that approximately 70% of American Adults have the “Do Nothing Plan”. If your estate exceeds the minimum dollar threshold, Probate is automatic. The difference between this plan and having a Will is that with the “Do Nothing Plan”, your assets will ultimately be distributed in accordance with the “State’s Plan” and not your own. Also, of extreme importance is that the court will decide who will be guardian of your minor children. Sadly, this is usually the most expensive estate plan you could own, and the one that will give your family the greatest amount of grief and problems.
The Last Will and Testament Plan.
With this plan you create a Will that specifies who is to receive your assets after you are gone. Contrary to what some people have heard and many have been led to believe, a Will does not shield you from Probate, it virtually assures it. While your estate must still usually meet the minimum dollar threshold, a Will cannot be enforced until the court validates it through the Probate Process.
Revocable Living Trust Plan
A Living Trust is a legal entity designed to own and hold your assets for you. It is created by a legal document that, like a Will, contains your instructions for what you want to happen to your assets when you die. But, unlike a Will, a Living Trust avoids Probate at death, can control all of your assets and prevent the Court from controlling your assets at incapacity. Because there is no Probate with a Living Trust, all expensive Court proceedings and delays are eliminated. Your privacy is preserved and the emotional stress on your family is minimized. It can reduce or eliminate estate taxes through the use of A/B a.k.a credit shelter provisions in the Trust, is extremely hard to contest and even provides very effective prenuptial protection.
Other Important Estate Planning Documents
Durable Power of Attorney – Gives a trusted person the legal power and authority to act on your behalf in personal, financial and legal matters if you become incapacitated.
Advance Health Care Directive – Gives a trusted person the legal authority to make medical decisions for you if you are unable to make them for yourself, including decisions about your care and comfort, medical procedures and end of life decisions related to life support measures.
Pour Over Will – When used in combination with a Revocable Living Trust, the Pour Over Will directs the court to “Pour Over” into the trust, any assets that may have inadvertently been left out of the trust, so that distributions are consistent with the instructions contained in your estate plan.
Trust Instructions to your Successors - Managing and distributing an estate held in a Living Trust is usually easy and uncomplicated. A well-designed trust should contain instructions for your Successor Trustees to follow to ensure that your wishes are efficiently carried out and also so that your heirs do not unnecessarily spend your assets in hiring an attorney to “settle” your estate. While there may from time to time be specific settlement functions an attorney can assist your heirs with, generally speaking, a Living Trust should make an attorney’s services unnecessary after your death.
Other Distribution Techniques
Contracts and Beneficiary Arrangements
Certain types of financial assets are designed to pass to your designated beneficiaries upon your death without the need for Probate. These assets include life insurance, annuities, and qualified retirement plans such as IRA’s, 401k’s and 403b’s, Bank accounts can also bypass Probate through the use of “Pay on Death” or “Transfer on Death” Beneficiary Designations.
These types of arrangements are often a component of a well-designed estate plan, but rarely serve as a substitute for a good estate plan. In the real world, most people own other assets in addition to the above-mentioned beneficiary driven types of accounts. Also, these types of accounts don’t always avoid Probate. If at your death, your named beneficiary is legally incompetent, deceased, or under the age of majority (age 18 in most states), these assets will usually head straight to the jurisdiction of the Probate Court.
Joint Tenancy Assets
Married couples frequently own real property and financial assets as Joint Tenants or Tenants by the Entirety. This arrangement only postpones Probate until both parties are deceased. Often when one spouse dies, the surviving spouse, after realizing they did not end up in Probate Court, executes a well-meaning but dangerous strategy of adding one or more of their children to the title of their real property and financial assets as…yes, you guessed it… Joint Tenants!
Dangers of Joint Tenancy
When you add someone to your assets as a Joint Tenant, you are in effect making them a Co-Owner of your assets, meaning that you lose control. As you can see below, Joint Tenancy is not an attractive alternative to a well-designed estate plan.
- Your assets become exposed to the Joint Tenants debts from divorce, lawsuits, personal guarantees and bankruptcy
- You will need your Co-Owners consent to sell or refinance.
- If your Co-Owner becomes incapacitated, you may have to deal with the court regarding the use of your Co-Owners share of “your” assets
- Potential tax benefits must be shared with your new Co-Owner
- You may be subjected to gift tax consequences
THE PERILS OF PROBATE
What is Probate?
Probate is the court-supervised process that oversees the distribution of assets owned by a person when they die. The court ensures debts and taxes are paid, disputes are settled, and that any remaining assets are distributed in accordance with your Will, or in accordance with State Law if you die without a Will.
Not everyone goes through Probate
The key to avoiding probate is simply to not own enough for your estate to qualify for probate. One way to accomplish this is to create a Revocable Living Trust while you are alive, to hold your assets for you. Another is to accumulate as little wealth as possible.
Every State has a minimum dollar value threshold before your estate would qualify for Probate. If you die owning less than the minimum threshold, Probate may be avoided. Check the laws of your State. The following chart illustrates the minimum market value of a decedent’s estate necessary to trigger Probate in the following sample States.
| State | Minimum Market Value to Trigger Probate |
|---|---|
| Arizona | $ 50,000 in personal property, or $ 75,000 market value of all real property |
| California | $100,000 in personal property, or $ 20,000 market value of all real property |
| Tennessee | $ 25,000 market value of all assets |
| Texas | $ 50,000 market value of all assets |
| Virginia | $ 15,000 market value of all assets |
Key probate problems
It is expensive. Legal/executor fees and other costs are currently estimated by the AARP at 8-10% or more of an Estate’s gross value (before debts are paid). These costs must be paid prior to your estate being distributed to your heirs. Also, if you own property in other states, your family could face multiple Probates.
It takes time. Normally 9 months to 2 years. During this time, your assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without the court’s and/or executor’s approval. If your family needs money to live on, they must request a living allowance that may be denied.
Your Family has no privacy. Probate files are open to the public, so anyone (including a business competitor) can see what you owned and whom you owed. This also invites unhappy heirs to contest your Will and exposes your family to unscrupulous solicitors.
Your Family has no control. The Court has control. Having someone tell them who gets what and when – and having to pay for this outside supervision - can be very frustrating for your family and often leads to disputes.
Use the following chart to estimate the cost of Probate for your estate.
TAX CONSIDERATIONS
Capital Gains Taxes
In the case of appreciating assets such as real property, stocks or business interests, if your children or other heirs receive gifts from you through inheritance, such as through a Living Trust, they will receive your bequest at the asset’s market value as of the date of your death, thus eliminating capital gains taxes if these assets are sold at or below the market value at the time of your death.
If you added a child or other person to title before you die (Joint Tenancy problem), your heir could face significant capital gains taxes on the sale of any such Joint Tenancy Assets.
Gift & Estate Taxes
The Unified Gift and Estate Tax rates imposed by the IRS are the highest marginal taxes in the Country and are applied against certain lifetime transfers or “gifts” and also transfers or “gifts” made at the time of your death. These tax rates graduate from 37% to 55%.
Lifetime Gifts
You are legally allowed to give up to $12,000 annually to as many people as you want free from the burden of Gift Taxes. You may also give as much as $1,000,000 in total lifetime gifts without imposition of Gift Taxes, by adhering to certain IRS requirements. Be careful about making large gifts or adding children or other persons to title of your assets while you are alive, as you may be saddled with the adverse tax consequences.
Transfers at Death
Federal Estate Taxes are imposed on the transfer of assets from a deceased person to anyone other than his or her (US Citizen) spouse. If you have accumulated too much wealth by the time you die, and the government decides how much is too much, the IRS will seek to take as much as half of the excess from your family. The IRS does provide an exemption and only taxes the estate in excess of the exemption amount. Certain lifetime gifts may be applied against your exemption when you die. Some states may also impose a separate State Inheritance Tax. Know your State’s rules.
Federal Estate Taxes A decedent leaving an estate valued in excess of the Federal Applicable Credit Amount (Exemption) in required to pay estate taxes. |
||
| Year | Exemption | Max Gift & Estate Tax Rate |
| 2008 | $ 2 Million | 45% |
| 2009 | $3.5 Million | 45% |
| 2010 | Unlimited | No Tax |
| 2011 | $1 Million | 50% |
Minimizing or Avoiding Estate Taxes
In most States, a married couple can establish a Living Trust with an A/B provision (called a bypass or credit shelter trust). This strategy enables both spouses to take advantage of their own individual exemptions. Without an A/B provision, decedent spouses leaving their share of the property and assets to their surviving spouse, such as is normal through a Will, do not get to use their exemption. Instead they use what is known as the “unlimited marital deduction”. This often leaves the surviving spouse with twice the taxable estate, but only one exemption to apply against it.
Too Successful?
If through luck, skill or a combination of both, you have accumulated more wealth than the government will allow you to pass to your heirs estate tax free, even with the use of the A/B Provision, you may have other tools at your disposal to reduce the tax mans bite.
Advanced Estate Planning Strategies
The impact of Estate Taxes can be more far reaching than just the amount owed. It can affect the continuation of a family business enterprise, force the sale of cherished or key family properties or assets, or interfere with the desired distribution of your estate. To avoid such hardships, additional planning must be considered. In most cases, planning for the anticipated or unavoidable estate taxes centers on creating a plan to pay the anticipated taxes with deeply discounted dollars or shifting future appreciation of assets to the next generation, or both.
Irrevocable Life Insurance Trusts
These specialized trusts provide for the payment of anticipated estate taxes with deeply discounted dollars. What most people don’t realize is that the death benefit of life insurance policies you own or otherwise control, are included in your estate for estate tax purposes. In looking at the chart at the left, perhaps you concluded that your estate is not subject to the estate tax. Now add the life insurance death benefits that you (and your spouse) own. Does that change the equation?
With an Irrevocable Life Insurance Trust, you...
- Keep insurance policy proceeds from being included in your taxable estate
- Allow proceeds to pass free from income and estate taxes
- Provide ready cash for heirs to pay estate taxes or other fees
- Pay the Estate Taxes or other fees for less than 10 cents on the dollar from your estate
Implementation of this strategy requires that you make periodic “gifts” to the trust in order to pay premiums on a trust-owned life insurance policy. Your attorney will usually structure your plan so that the “gifts” are tax-exempt or tax-free gifts.
Estate Freezing Strategies
Often times, if you have been “too successful” and are trying to leave your legacy to your heirs, instead of your “Uncle Sam”, you can’t give away assets fast enough. With the IRS limitations of $12,000 per donee annually and $1,000,000 lifetime, many wealthy individuals find that the appreciation of their estate exceeds what they could legally give away each year.
For these individuals, leveraged gifting using advanced estate-planning strategies may be used to great effect involving:
- LLC’s
- Qualified Personal Residence Trusts
- Charitable Remainder Trusts
- Other specialized Trust Arrangements
Will vs. Living Trust |
|||
|---|---|---|---|
| Without a Will | With a Will | With a Living Trust | |
| Avoids probate at death of first spouse | Sometimes | Sometimes | YES |
| Avoids probate at death of second spouse | No | No | YES |
| Saves time and money | No | No | YES |
| Strong protection from challenges | No | No | YES |
| Avoids need for conservatorship | No | No | YES |
| Provides maximum tax savings | No | Sometimes | YES |
| Provides privacy for family | No | No | YES |
Getting Started is Easy
- Speak with an authorized AmeriEstate representative whose role is to help educate you on various options and gather information in preparation for your attorney consultation.
- A Provider Attorney will be assigned to counsel with you via telephone consultation. Your Attorney will answer your questions and work with you to create a well crafted and comprehensive estate plan.
- A Notary Public who is specifically trained in the delivery and execution of your estate plan will deliver your estate plan to you at your home.
- Once your Estate Plan is in place, you can expect superior customer service by our trained and experienced customer service team, as well as continuing access to your Provider Attorney for any questions, changes or other assistance you may require.