Estate Planning Seminar
By: David N Williams, Esq. © 2011 All Rights Reserved
Table of Contents:
- How the System Works
- Using Trusts for Preservation and Passsage of Wealth
- Other Estate Planning Documents
1. Estate Planning is the arrangement of a person’s affairs to ensure the growth and preservation of assets during lifetime and the passage of wealth from one generation to the next after death.
2. To accomplish the goal, estate planning takes many forms:
a) It may be a well-drafted Will or Trust which protects assets for minors.
b) It may be a Revocable Trust drafted to avoid probate or a Durable Power of Attorney for the management of assets when a person is incapacitated.
c) It may be a Living Will allowing a person to die with dignity instead of having life maintained by artificial means; including artificial feeding and hydration.
d) It may be a business buy/sell agreement to guarantee that the value of a person’s business interest will not be lost at death but will instead result in a stream of income to the decedent’s family.
e) It may be a combination of trusts designed to minimize death taxes, attorney’s fees and estate administration cost.
f) In most cases, a good estate plan will include well-drafted Wills, Trust Agreements, Durable Power of Attorney and Living Wills. By executing these documents and coordinating assets with the estate plan, most people can accomplish their estate planning goals.
II. HOW THE SYSTEM WORKS:
1. The federal government provides two (2) opportunities for tax savings at death. They include the unified credit against federal estate and gift tax and the federal unlimited marital deduction. The unified credit is currently unlimited, but will shelter up to $5 Million worth of a person’s assets from federal estate tax effective January 1, 2010.). The unlimited marital deduction provides that all property passing in a qualified manner to a surviving spouse will be free of federal estate tax. These tools are important since the first taxable dollar for federal estate tax purposes is taxed at a rate of thirty-five percent (35%).
2. The State of Delaware repealed its Inheritance Tax effective January 1, 1999.
3. The key to estate planning for most individuals is to be certain that each spouse uses his or her unified credit shelter.
III. USING TRUSTS FOR THE PRESERVATION AND PASSAGE OF WEALTH:
1. The By-Pass (Credit Shelter) Trust. This is a trust funded with the maximum amount of a decedent’s estate which can pass free of federal estate tax. The Trust is designed to provide the surviving spouse with the use and enjoyment of funds during her lifetime while at the same time excluding the value of the trust property from the survivor’s estate at the time of her death. In other words, the trust will “by-pass” the surviving spouse’s estate. The surviving spouse may serve as Trustee.
2. Marital Deduction Trust. The federal estate tax marital deduction shelters the value of a person’s estate in excess of the credit equivalent mentioned above if property passes to a surviving spouse in a qualified form. The simplest way to obtain a marital deduction is to bequeath the property out right to the surviving spouse. In second marriage situations this solution is often unacceptable. The decedent desires to ensure that after the surviving spouse’s lifetime, the property will pass to his or her children by the first marriage. In these cases, a marital deduction trust is used. The most common marital deduction trust is known as a QTIP Trust.
3. Irrevocable Trust. If the gross estate exceeds the credit shelter, there are other tools which may be used to avoid federal estate tax. The most common is the Irrevocable Trust. This trust is most often used when a person owns life insurance which has very little value during his lifetime but which will grow in value after his death. By transferring “all incidents of ownership” in the insurance policy to the Irrevocable Trust and surviving the transfer by three years, the decedent can avoid having any of the insurance proceeds included in his estate for federal estate tax purposes. It is possible to avoid the three year rule by having the irrevocable trust be the original applicant, owner and beneficiary of the newly purchased life insurance policy. In larger estates, the purchase of “survivorship” or “Second-to-die” life insurance through an irrevocable trust creates liquidity when it is needed most. The insurance proceeds are payable at the death of the second spouse when the tax liability will finally be due.
4. Qualified Domestic Trust. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) and the Revenue Reconciliation Act of 1989 placed substantial restrictions on the value of the property which can be transferred from one person to his or her spouse, if the spouse is not a citizen of the United States. These restrictions can result in a significant federal estate tax liability at the death of the citizen spouse unless careful planning is due. In substance, the new law denies the marital deduction for property passing to a non-citizen spouse unless the property passes to a special trust called a Qualified Domestic Trust (QDT) which is drafted to insure the tax will be paid on the trust assets at the death of the non-citizen spouse.
5. Minor Trust. Minors lack contractual capacity to deal with property. For this reason and to ensure the funds set aside for a child are properly used for the child’s benefit, i.e. health, education, maintenance and support, it may be necessary to establish a minor trust.
6. Special Planning Situations. In addition to the foregoing, there may be a need for special arrangements. These will occur where there is a handicap or disabled child, a second marriage or the need to place real estate in trust for the use and benefit of a person during his or her lifetime.
7. Revocable Trusts. All of the foregoing trusts may be included in a Will or created by a separate Revocable Trust Agreement. Trusts included in a Will are called Testamentary Trusts and are funded at death with probate assets which pass by the decedent’s Will to the various trusts. Trusts created by separate agreement are called inter vivos or living trusts. Assets titled in the name of the trust during the person’s lifetime pass at death in accordance with the terms of the trust agreement rather than by the terms of the person’s Will. As a result, these assets avoid probate when they fund the various trusts.
IV. OTHER ESTATE PLANNING DOCUMENTS:
1. Durable Power of Attorney. A Durable Power of Attorney permits the maker “principal” to designate an attorney in fact “agent” to manage business and personal affairs for the principal. The Durable Power of Attorney may be effective immediately or may include a “springing power” so it only becomes effective when the principal is incapacitated. The power of attorney is called durable because it survives the subsequent disability or incapacity of the principal. Durable Power of Attorney can be used for the management of assets, the conduct of business and financial affairs and the making of health care decisions for an incapacitated principal.
2. Living Will. Living Will, or death with dignity legislation as it is sometimes called, permits a person to make a declaration or statement concerning life-sustaining measures. In most cases, a person will want to provide that no artificial life-sustaining procedures should be used to maintain the person’s life in a situation where there is no reasonable medical probability of recovery. Others provide a Living Will that no artificial feeding or hydration shall be used to sustain life when a person is in a persistent vegetative state. Most Living Wills make it clear that the use of drugs, surgical procedures and therapeutical procedures may still be used to alleviate pain and provide comfort for the patient.
3. Anatomical Gift Form. Anatomical gift forms permit a person to designate gifts of body parts or organs for medical research or for transplantation. People who execute anatomical gift forms are commonly referred to as organ donors and a special notation is included on their driver’s licenses.
4. Lifetime Gifts. Lifetime gifts can reduce the size of a taxable estate and save federal estate tax. A donor may give $13,000 to a person each year without gift tax. Married couples can therefore give $26,000 to each child annually if they choose to do so. In addition, a donor may pay unlimited amounts of qualified educational expenses (tuition) and medical expenses (payment to health care providers) free of gift tax.
Estate planning is an important part of any financial planning. Without it, the wealth that you worked so hard to accumulate during your lifetime may be unnecessarily dissipated through taxes and administration expenses after your death. Moreover, your intentions with respect to the disposition of your property may be defeated.
A good estate planner can design an estate plan which will accomplish all of your estate planning objectives and reduce or even eliminate the government as a beneficiary of your estate. You owe it to yourself and to your family to make estate planning one of your most important financial planning objectives.