ESTATE PLANNING FAQ’S
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ESTATE PLANNING OVERVIEW
Estate, Gift, and GST Taxes
The federal government imposes taxes on gratuitous transfers of property made during lifetime (gifts) or at death (bequests/devises) that exceed certain exemption limits. Gift taxes are imposed on transfers during lifetime that exceed the exemption limits, and estate taxes are imposed on transfers at death that exceed the exemption limits. The generation-skipping transfer (GST) tax is imposed on transfers to grandchildren and more remote descendants that exceed the exemption limits so transferors cannot avoid transfer taxes on the next generation by “skipping” a generation. The GST tax is levied in addition to gift or estate taxes and is not a substitute for them.
The gift, estate, and GST tax exemptions were $5 million in 2011. The exemptions are indexed for inflation, resulting in exemptions of $5.12 million for 2012, $5.25 million for 2013, $5.34 million for 2014, $5.43 million for 2015, $5.45 million for 2016 and $5.49 million for 2017. In December 2017, Congress increased the gift, estate, and GST tax exemptions to $10 million through 2025. With indexing for inflation, these exemptions are $11.18 million for 2018. An individual can transfer property with value up to the exemption amount either during lifetime or at death without paying any transfer tax. In other words, any portion of the exemption used during lifetime reduces the amount of exemption available at death for estate tax purposes. For example, if you made a lifetime taxable gift of $5 million in 2017, your remaining exemption amount that could be used by your estate at your death would be $6.18 million ($11.18 million 2018 inflation adjusted exemption, less the $5 million lifetime gift). The GST exemption essentially allows the earmarking of transfers, made during lifetime or at death, that either skip a generation or are made in trust for multiple generations. Certain gifts are not applied toward the exemption, such as “annual exclusion” gifts and direct payments to medical or education providers, and can be made completely tax-free.
Transfers between spouses and to certain trusts for spouses, made during lifetime or at death, may be made without the imposition of any tax. These transfers also do not use any exemption. This is known as the “unlimited marital deduction.”
The $10 million inflation adjusted estate tax exemption is “portable” between spouses beginning 2011 so that a surviving spouse may take advantage of a deceased spouse’s unused exemption (DSUE) through lifetime gifts by the surviving spouse, or at the surviving spouse’s later death.
This means that prior to 2026 no transfer tax is assessed on estates up to $11.18 million for individuals and $22.36 million for married couples, assuming no lifetime gifts other than annual exclusion gifts or certain transfers for educational or medical expenses were previously made.
It is important to note that there was no inflation indexing of the transfer tax exemption prior to 2012. Given the large $10 million base amount that is indexed, the annual increases in the exemption amounts are likely to be substantial, even when inflation is not particularly high. This will create new planning opportunities. First, for taxpayers who fully use their exemption in any given year, there will be a significant new exemption available the next year. Second, for the first time, the growth in the exemptions will enable taxpayers whose estates grow to remain protected from the imposition of transfer tax.
With the new high exemptions, most people will no longer be subject to the federal estate tax, but this fact should not be interpreted to mean that planning is not necessary. Federal estate, gift and GST taxes are but one component of the myriad of issues addressed in the estate planning process. In addition, many states now impose state estate tax, and the state estate tax exemption, if any, may be much lower than the federal exemption. The most common state estate taxes are based on a specified percentage of the federal estate tax. Some states impose an inheritance tax tied to the family relationship between the decedent and the recipient of property from the estate.
Only Connecticut and Minnesota currently impose a state gift tax. This means that residents of any state, other than Connecticut and Minnesota, that imposes a state estate tax, may be able to significantly reduce or even eliminate their state estate tax at death by making gift transfers during their lifetimes. These taxes can be particularly complex or apply in unexpected ways. In addition, the determination as to which state may tax a particular taxpayer or tax property located within that state regardless of where the taxpayer resides is complex. Accordingly, this type of planning should be pursued only with professional guidance.
Glossary Of Estate Planning Terms
A-B trust planning – A common arrangement used in a will when a married testator has an estate with a value that exceeds his or her remaining estate tax exemption amount. A testator creates at the first death a marital trust or “A Trust” for the sole benefit of the surviving spouse for life (sometimes called a “Marital Trust” or “QTIP Trust”) and a bypass or “B Trust” for the benefit of the testator’s descendants or the testator’s surviving spouse and descendants for life (sometimes called the “Credit Shelter Trust” or “Family Trust”). After the death of the surviving spouse, the remaining assets of both trusts generally pass to the testator’s descendants. The B Trust passes at the death of the surviving spouse to the beneficiaries free of estate taxes regardless of the value of the B Trust at that time. The value of the A trust is included in the surviving spouse’s estate for estate tax purposes, and the surviving spouse’s remaining estate tax exemption is applied to the collective value of the A Trust and the surviving spouse’s own assets. Under prior law, only the decedent could use his or her estate tax exemption, so it was important to create the B Trust in order to earmark this exemption. Since the concept of portability is now part of the law, not everyone will need the complexity of the A-B trust structure in order to take advantage of his or her estate tax exemption. Portability allows the surviving spouse to use the unused estate tax exemption of the first spouse to die. Be careful, however. While it is seductively simple and inexpensive to leave all assets outright to the surviving spouse and plan on his or her use of portability to avoid estate taxes, trusts offer many more advantages than tax planning. Continuing to use trusts allows you the assurance that your assets will be used and distributed as and to whom you wish and offers other advantages such as asset or creditor protection and generation skipping.
Administration – The process during which the executor or personal representative collects the decedent’s assets, pays all debts and claims, and distributes the residue of the estate according to the will or the state law intestacy rules (when there is no will).
Administrator – The individual or corporate fiduciary appointed by the court to manage an estate if no executor or personal representative has been appointed or if the named executor or personal representative is unable or unwilling to serve.
Annual exclusion – The amount an individual may give annually to each of an unlimited number of recipients free of federal gift or other transfer taxes and without any IRS reporting requirements. In addition, these gifts do not use any of an individual’s federal gift tax exemption amount. The annual exclusion is indexed for inflation and is $14,000 per donee for 2013. Payments made directly to providers of education or medical care services also are tax-free and do not count against the annual exclusion or gift tax exemption amounts.
Applicable exclusion amount – Another name for the estate tax exemption amount (formerly called the unified credit), which shelters a certain value of assets from the federal estate and gift tax. This amount is $5 million and is inflation adjusted annually.
Ascertainable standard – A standard, usually relating to an individual’s health, education, support, or maintenance, that defines the permissible reasons for making a distribution from a trust. Use of an ascertainable standard prevents distributions from being included in a trustee/beneficiary’s gross estate for federal estate tax purposes. Depending on state law, the use of an ascertainable standard may provide less protection for a beneficiary from creditors. If the risk of a lawsuit or divorce concerns you, you should discuss distribution standards with your attorney.
Attorney-in-Fact – The person named as agent under a power of attorney to handle the financial affairs of another.
Bypass trust – The “B Trust” in A-B trust planning that is sheltered from the federal estate tax by the decedent’s estate tax exemption amount. Because this trust “bypasses” the estate tax in the decedent’s estate and at the surviving spouse’s death, this trust often is called a bypass trust. This type of trust will not be as important for tax planning in light of the concept of portability in the estate tax law, but such a trust still will be valuable for many non-tax planning considerations. If you reside in a state with a lower estate tax exemption than federal estate tax law provides, you may need to modify the terms of any bypass trust to address that lesser amount. See the comments above concerning A-B trust planning.
Charitable lead trust – A trust created during lifetime or at death that distributes an annuity or unitrust amount to a named charity for life or a term of years, with any remaining trust assets passing to designated non-charitable beneficiaries upon termination of the trust.
Charitable remainder trust – A tax-exempt trust created during lifetime or at death that distributes an annuity or unitrust amount to one or more designated non-charitable beneficiaries for life or a term of years, with the remaining trust assets passing to charity upon termination of the trust. If appreciated assets are transferred to a charitable remainder trust and sold by the trust, the trust does not pay capital gains tax. Instead, the non-charitable beneficiaries are taxed on a portion of the capital gains as they receive their annual distributions and, in this manner, the capital gains tax is deferred.
Codicil – A formally executed document that amends the terms of a will so that a complete rewriting of the will is not necessary.
Community property – A form of ownership in certain states, known as community property states, under which property acquired during a marriage is presumed to be owned jointly. Only a small number of states are community property states, and the rules can differ significantly in these states.
Conservator – An individual or a corporate fiduciary appointed by a court to care for and manage the property of an incapacitated person, in the same way as a guardian cares for and manages the property of a minor.
Credit shelter trust – Another name for the bypass or “B Trust” in A-B trust planning.
Crummey trust – An irrevocable trust that grants a beneficiary of the trust the power to withdraw all or a portion of assets contributed to the trust for a period of time after the contribution. The typical purpose of a Crummey trust is to enable the contributions to the trust to qualify for the annual exclusion from gift tax. In light of the current high gift and estate tax exemption amounts, many taxpayers will no longer need their trust contributions to qualify for the annual exclusion.
Decedent – An individual who has died.
Descendants – An individual’s children, grandchildren, and more remote persons who are related by blood or because of legal adoption. An individual’s spouse, stepchildren, parents, grandparents, brothers, or sisters are not included. The term “descendants” and “issue” have the same meaning.
Disclaimer – The renunciation or refusal to accept a gift or bequest or the receipt of insurance proceeds, retirement benefits, and the like under a beneficiary designation in order to allow the property to pass to alternate takers. To be a qualified disclaimer and thereby not treated as a gift by the disclaimant (the person who makes the disclaimer), the disclaimer must be made within nine months and before the disclaimant has accepted any interest in the property in order to avoid a tax triggering event. In light of the current high gift and estate tax exemption amounts, it may be feasible in many instances to disclaim even after that time period to accomplish non-tax goals. State laws addressing disclaimer may differ, and some wills and trusts might include express provisions governing what happens to assets or interests that are disclaimed. Be certain to consider all these issues before disclaiming.
Durable power of attorney – A power of attorney that does not terminate upon the incapacity of the person making the power of attorney.
Estate planning – A process by which an individual designs a strategy and executes a will, trust agreement, or oth
er documents to provide for the administration of his or her assets upon his or her incapacity or death. Tax and liquidity planning are part of this process.
Estate tax – A tax imposed on a decedent’s transfer of property at death. An estate tax is to be contrasted with an inheritance tax imposed by certain states on a beneficiary’s receipt of property. More than 20 states have state estate taxes that differ from the federal system, so your estate could be subject to a state estate tax even if it is not subject to a federal estate tax.
Estate tax exemption amount – Another name for the unified credit amount, applicable exclusion amount, and credit shelter amount.
Executor – A person named in a will and appointed by the court to carry out the terms of the will and to administer the decedent’s estate. May also be called a personal representative. If a female, may be referred to as the executrix.
Family office – An arrangement to coordinate the legal, tax, and other needs of one or more families, either through a true office staffed with employees or through outsourcing to the family’s regular advisors. Frequently, a family’s private trust company serves as the family office.
Family trust – A trust established to benefit an individual’s spouse, children or other family members. A family trust is often the bypass trust or credit shelter trust created under a will.
Fiduciary – An individual or a bank or trust company designated to manage money or property for beneficiaries and required to exercise the standard of care set forth in the governing document under which the fiduciary acts and state law. Fiduciaries include executors and trustees.
Generation-skipping transfer (GST) tax – A federal tax imposed on outright gifts and transfers in trust, whether during lifetime or at death, to or for beneficiaries two or more generations younger than the donor, such as grandchildren, that exceed the GST tax exemption. The GST tax imposes a tax on transfers that otherwise would avoid gift or estate tax at the skipped generational level. Some states impose a state generation-skipping transfer tax.
Gift tax – The tax on completed lifetime transfers from one individual to or for the benefit of another (other than annual exclusion gifts and certain direct payments to providers of education and medical care) that exceed the gift tax exemption amount ($5 million inflation adjusted). Under the concept of portability in the tax law, if your spouse predeceased you after 2010 with remaining unused exemption (the deceased spouse unused exemption, or DSUE) and an estate tax return was filed, your exemption for gift tax purposes can be augmented by your deceased spouse’s DSUE. Only the State of Connecticut imposes a separate state gift tax.
Grantor – A person, including a testator, who creates, or contributes property to, a trust. If more than one person creates or contributes property to a trust, each person is a grantor with respect to the portion of the trust property attributable to that person’s contribution except to the extent another person has the power to revoke or withdraw that portion. The grantor is also sometimes referred to as the “settlor,” the “trustor,” or the “donor.” Contrast with the use of the term “grantor trust” to imply a trust the income of which is taxed to the person considered the “grantor” for income tax purposes.
Grantor trust – A trust over which the grantor retains certain control such that the trust is disregarded for federal (and frequently state) income tax purposes, and the grantor is taxed individually on the trust’s income and pays the income taxes that otherwise would be payable by the trust or its beneficiaries. Such tax payments are not treated as gifts by the grantor to the trust or its beneficiaries. Provided the grantor does not retain certain powers or benefits, such as a life estate in the trust or the power to revoke the trust, the trust will not be included in the grantor’s estate for federal estate tax purposes. Contrast with the non-tax reference to a person who forms or makes gifts to a trust as the “grantor.”
Gross estate – A federal estate tax concept that includes all property owned by an individual at death and certain property previously transferred by him or her that is subject to federal estate tax.
GST exemption – The federal tax exclusion that allows a certain value of generation-skipping transfers to be made without the imposition of a generation-skipping tax. The GST exemption amount is $5 million inflation adjusted ($5.25 million in 2013).
Guardian – An individual or bank or trust company appointed by a court to act for a minor or incapacitated person (the “ward”). A guardian of the person is empowered to make personal decisions for the ward. A guardian of the property (also called a “committee”) manages the property of the ward.
Health care power of attorney – A document that appoints an individual (an “agent”) to make health care decisions when the grantor of the power is incapacitated. Also referred to as a “health care proxy.”
Heir – An individual entitled to a distribution of an asset or property interest under applicable state law in the absence of a will. “Heir” and “beneficiary” are not synonymous, although they may refer to the same individual in a particular case.
Insurance trust – An irrevocable trust created to own life insurance on an individual or couple and designed to exclude the proceeds of the policy from the insured’s gross estate at death.
Interest of a beneficiary – The right to receive income or principal provided in the terms of a trust or will.
Inventory – A list of the assets of a decedent or trust that is filed with the court.
Irrevocable trust – A trust that cannot be terminated or revoked or otherwise modified or amended by the grantor. As modern trust law continues to evolve, however, it may be possible to effect changes to irrevocable trusts through court actions or a process called decanting, which allows the assets of an existing irrevocable trust to be transferred to a new trust with different provisions.
Joint tenancy – An ownership arrangement in which two or more persons own property, usually with rights of survivorship.
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Life beneficiary – An individual who receives income or principal from a trust or similar arrangement for the duration of his or her lifetime.
Life estate – The interest in property owned by a life beneficiary (also called life tenant) with the legal right under state law to use the property for his or her lifetime, after which title fully vests in the remainderman (the person named in the deed, trust agreement, or other legal document as being the ultimate owner when the life estate ends).
Marital deduction – An unlimited federal estate and gift tax deduction for property passing to a spouse in a qualified manner. In other words, property transfers between spouses generally are not taxable transfers because of the marital deduction.
Marital trust – A trust established to hold property for a surviving spouse in A-B trust planning and designed to qualify for the marital deduction. A commonly used marital trust is a qualified terminable interest property trust, or QTIP trust, which requires that all income must be paid to the surviving spouse.
Non-Resident Alien – An individual who is neither a resident nor a citizen of the United States. A non-resident alien nonetheless may be subject to federal estate tax or probate with regard to certain assets sitused in the United States. An estate tax treaty between that individual’s home country and the United States may affect this result.
No-Contest Clause – A provision in a will or trust agreement that provides that someone who sues to receive more from the estate or trust or overturn the governing document will lose any inheritance rights he or she has. These clauses are not permissible in all instances or in all states.
Operation of Law – The way some assets will pass at your death, based on state law or the titling (ownership) of the asset, rather than under the terms of your will.
Per stirpes – A Latin phrase meaning “per branch” and is a method for distributing property according to the family tree whereby descendants take the share their deceased ancestor would have taken if the ancestor were living. Each branch of the named person’s family is to receive an equal share of the estate. If all children are living, each child would receive a share, but if a child is not living, that child’s share would be divided equally among the deceased child’s children.
Power of appointment – A power given to an individual (usually a beneficiary) under the terms of a trust to appoint property to certain persons upon termination of that individual’s interest in the trust or other specified circumstances. The individual given the power is usually referred to as a “holder” of the power. The power of appointment may be general, allowing the property to be appointed to anyone, including the holder, or limited, allowing the property to be distributed to a specified group or to anyone other than the holder. Property subject to a general power of appointment is includible in the holder’s gross estate for federal estate tax purposes.
Power of attorney – Authorization, by a written document, that one individual may act in another’s place as agent or attorney-in-fact with respect to some or all legal and financial matters. The scope of authority granted is specified in the document and may be limited by statute in some states. A power of attorney terminates on the death of the person granting the power (unless “coupled with an interest”) and may terminate on the subsequent disability of the person granting the power (unless the power is “durable” under the instrument or state law).
Power of withdrawal – A presently exercisable power in favor of the power holder other than a power exercisable in a fiduciary capacity limited by an ascertainable standard, or which is exercisable by another person only upon consent of the trustee or a person holding an adverse interest in the trust.
Principal – The property (such as money, stock, and real estate) contributed to or otherwise acquired by a trust to generate income and to be used for the benefit of trust beneficiaries according to the trust’s terms. Also referred to as trust corpus.
Private trust company –An entity formed by a family to serve as fiduciary for the estates and trusts of extended family members. Often referred to as a family trust company.
Probate tax – A tax imposed by many jurisdictions on property passing under an individual’s will or by a state’s intestacy law.
Property – Anything that may be the subject of ownership, whether real or personal, legal or equitable, or any interest therein.
Prudent man rule – A legal principle requiring a trustee to manage the trust property with the same care that a prudent, honest, intelligent, and diligent person would use to handle the property under the same circumstances. See Prudent Investor Act.
Prudent Investor Act – A law that provides for how fiduciaries must invest trust, estate and other assets they hold in a fiduciary capacity, such as a trustee or executor.
Qualified domestic trust – A marital trust (referred to as a “QDOT”) created for the benefit of a non-U.S. citizen spouse containing special provisions specified by the Internal Revenue Code to qualify for the marital deduction.
Qualified personal residence trust – An irrevocable trust (referred to as a “QPRT”) designed to hold title to an individual’s residence for a term of years subject to the retained right of the individual to reside in the home for the term, with title passing to children or other beneficiaries at the end of the term.
Qualified terminable interest property – Property (referred to as “QTIP”) held in a marital trust or life estate arrangement that qualifies for the marital deduction because the surviving spouse is the sole beneficiary for life and entitled to all income.
Remainder interest – An interest in property owned by the remainderman that does not become possessory until the expiration of an intervening income interest, life estate or term of years.
Residue – The property remaining in a decedent’s estate after payment of the estate’s debts, taxes, and expenses and after all specific gifts of property and sums of money have been distributed as directed by the will. Also called the residuary estate.
Revocable trust – A trust created during lifetime over which the grantor reserves the right to terminate, revoke, modify, or amend.
S corporation – A corporation that has made a Subchapter S election to be taxed as a pass-through entity (much like a partnership). Certain trusts are permitted to be shareholders only if they make the appropriate elections.
Self-dealing – Personally benefiting from a financial transaction carried out on behalf of a trust or other entity, for example, the purchasing of an asset from a trust by the trustee unless specifically authorized by the trust instrument.
Special needs trust – Trust established for the benefit of a disabled individual that is designed to allow him or her to be eligible for government financial aid by limiting the use of trust assets for purposes other than the beneficiary’s basic care.
Spendthrift provision – A trust provision restricting both voluntary and involuntary transfers of a beneficiary’s interest, frequently in order to protect assets from claims of the beneficiary’s creditors.
Tangible personal property – Property that is capable of being touched and moved, such as personal effects, furniture, jewelry, and automobiles. Tangible personal property is distinguished from intangible personal property that has no physical substance but represents something of value, such as cash, stock certificates, bonds, and insurance policies. Tangible personal property also is distinguished from real property, such as land and items permanently affixed to land, such as buildings.
Tenancy by the entirety – A joint ownership arrangement between a husband and wife, generally with respect to real property, under which the entire property passes to the survivor at the first death and while both are alive, may not be sold without the approval of both.
Tenancy in common – A co-ownership arrangement under which each owner possesses rights and ownership of an undivided interest in the property, which may be sold or transferred by gift during lifetime or at death.
Terms of a trust – The manifestation of the grantor’s intent as expressed in the trust instrument or as may be established by other evidence that would be admissible in a judicial proceeding.
Testamentary – Relating to a will or other document effective at death.
Testamentary trust – A trust established in a person’s will to come into operation after the will has been probated and the assets have been distributed to it in accordance with the terms of the will.
Transfer on death designation – A beneficiary designation for a financial account (and in some states, for real estate) that automatically passes title to the assets at death to a named individual or revocable trust without probate. Frequently referred to as a TOD (transfer on death) or POD (payable on death) designation.
Trust – An arrangement whereby property is legally owned and managed by an individual or corporate fiduciary as trustee for the benefit of another, called a beneficiary, who is the equitable owner of the property.
Trust instrument – A document, including amendments thereto, executed by a grantor that contains terms under which the trust property must be managed and distributed. Also referred to as a trust agreement or declaration of trust.
Trustee – The individual or bank or trust company designated to hold and administer trust property (also generally referred to as a “fiduciary”). The term usually includes original (initial), additional, and successor trustees. A trustee has the duty to act in the best interests of the trust and its beneficiaries and in accordance with the terms of the trust instrument. A trustee must act personally (unless delegation is expressly permitted in the trust instrument), with the exception of certain administrative functions.
Unified credit – A credit against the federal gift and estate tax otherwise payable by an individual or estate. Frequently referred to as the estate tax exemption amount, the exemption equivalent, or applicable exclusion amount. The current exemption amount is $5 million inflation adjusted ($5.25 million in 2013).
Uniform custodial trust act – A law enacted by some states providing a simple way to create a trust for a minor or adult beneficiary without the need for a complex trust document. Such a trust typically is used for a trust of modest size, particularly for a disabled beneficiary. An adult beneficiary may terminate the trust at any time, otherwise the trust may continue for the life of the beneficiary.
Uniform transfers to minors act – A law enacted by some states providing a convenient means to transfer property to a minor. An adult person known as a “custodian” is designated by the donor to receive and manage property for the benefit of a minor. Although the legal age of majority in many states may be 18, the donor may authorize the custodian to hold the property until the beneficiary reaches age 21. Formerly called the Uniform Gifts to Minors Act.
Virtual Representation – A mechanism provided in a will or trust, or in some instances by state law, to permit a beneficiary to make decisions on behalf of another beneficiary who can claim or receive property only under or after them.
AN INTRO TO WILL & TESTAMENTS
What Happens If You Die Without A Will?
If you die intestate (without a will), your state’s laws of descent and distribution will determine who receives your property by default. These laws vary from state to state, but typically the distribution would be to your spouse and children, or if none, to other family members. A state’s plan often reflects the legislature’s guess as to how most people would dispose of their estates and builds in protections for certain beneficiaries, particularly minor children. That plan may or may not reflect your actual wishes, and some of the built-in protections may not be necessary in a harmonious family setting. A will is the most simple form of estate planning and allows you to alter the state’s default plan to suit your personal preferences. It also permits you to exercise control over a myriad of personal decisions that broad and general state default provisions cannot address. We offer Free Will & Testaments To Those Who Don’t Have One. When You Do Estate & Asset Protection Planning With Us We Include A Spill Over Will & Testament That Grants all forgotten or mentioned items to be owned by the trusts.
What Does A Will Do?
A will provides for the distribution of certain property owned by you at the time of your death, and generally you may dispose of such property in any manner you choose. Your right to dispose of property as you choose, however, may be subject to forced heirship laws of most states that prevent you from disinheriting a spouse and, in some cases, children. For example, many states have spousal rights of election laws that permit a spouse to claim a certain interest in your estate regardless of what your will (or other documents addressing the disposition of your property) provides. Your will does not govern the disposition of your property that is controlled by beneficiary designations or by titling and so passes outside your probate estate. Such assets include property titled in joint names with rights of survivorship, payable on death accounts, life insurance, retirement plans and accounts, and employee death benefits. These assets pass automatically at death to another person, and your Will is not applicable to them unless they are payable to your estate by the terms of the beneficiary designations for them. Your probate estate consists only of the assets subject to your will, or to a state’s intestacy laws if you have no will, and over which the probate court (in some jurisdictions referred to as surrogate’s or orphan’s court) may have authority. This is why reviewing beneficiary designations, in addition to preparing a will, is a critical part of the estate planning process. It is important to note that whether property is part of your probate estate has nothing to do with whether property is part of your taxable estate for estate tax purposes.
Wills can be of various degrees of complexity and can be utilized to achieve a wide range of family and tax objectives. If a will provides for the outright distribution of assets, it is sometimes characterized as a simple will. If the will creates one or more trusts upon your death, the will is often called a testamentary trust will. Alternatively, the will may leave probate assets to a preexisting inter vivos trust (created during your lifetime), in which case the will is called a pour over will. Such preexisting inter vivos trusts are often referred to as revocable living trusts. The use of such trusts or those created by a will generally is to ensure continued property management, divorce and creditor protection for the surviving family members, protection of an heir from his or her own irresponsibility, provisions for charities, or minimization of taxes.
Aside from providing for the intended disposition of your property upon your death, a number of other important objectives may be accomplished in your will.
- You may designate a guardian for your minor child or children if you are the surviving parent and thereby minimize court involvement in the care of your child. Also, by the judicious use of a trust and the appointment of a trustee to manage property funding that trust for the support of your children, you may eliminate the need for bonds (money posted to secure a trustee’s properly carrying out the trustee’s responsibilities) as well as avoid supervision by the court of the minor children’s inherited assets.
- You may designate an executor (personal representative) of your estate in your will, and eliminate their need for a bond. In some states, the designation of an independent executor, or the waiver of otherwise applicable state statutes, will eliminate the need for court supervision of the settlement of your estate.
- You may choose to provide for persons whom the state’s intestacy laws would not otherwise benefit, such as stepchildren, godchildren, friends or charities.
- If you are acting as the custodian of assets of a child or grandchild under the Uniform Gift (or Transfers) to Minors Act (often referred to by their acronyms, UGMA or UTMA), you may designate your successor custodian and avoid the expense of a court appointment.
What Does A Will Not Do?
A will does not govern the transfer of certain types of assets, called non-probate property, which by operation of law (title) or contract (such as a beneficiary designation) pass to someone other than your estate on your death. For example, real estate and other assets owned with rights of survivorship pass automatically to the surviving owner. Likewise, an IRA or insurance policy payable to a named beneficiary passes to that named beneficiary regardless of your will.
How Do I Execute or Sign A Will?
Wills must be signed in the presence of witnesses (3rd party notary) and certain formalities must be followed or the will may be invalid. In many states, a will that is formally executed in front of witnesses with all signatures notarized is deemed to be “self-proving” and may be admitted to probate without the testimony of witnesses or other additional proof. Even if a will is ultimately held to be valid in spite of errors in execution, addressing such a challenge may be costly and difficult. A potential challenge is best addressed by executing the will properly in the first instance. A later amendment to a will is called a codicil and must be signed with the same formalities. Be cautious in using a codicil because, if there are ambiguities between its provisions and the prior will it amends, problems can ensue. In some states, the will may refer to a memorandum that distributes certain items of tangible personal property, such as furniture, jewelry, and automobiles, which may be changed from time to time without the formalities of a will. Even if such a memorandum is permitted in your state, proceed with caution. This type of separate document can create potential confusion or challenges if it is inconsistent with the terms of the will or prepared in a haphazard manner.
What About Joint Owned Property?
If you own property with another person as joint tenants with right of survivorship, that is, not as tenants in common, the property will pass directly to the remaining joint tenant upon your death and will not be a part of your probate estate governed by your will (or the state’s laws of intestacy if you have no will).
It is important to note that whether property is part of your probate estate has nothing to do with whether property is part of your taxable estate for estate tax purposes.
Frequently, people (particularly in older age) will title bank accounts or securities in the names of themselves and one or more children or trusted friends as joint tenants with right of survivorship. This is sometimes done as a matter of convenience to give the joint tenant access to accounts to pay bills. It is important to realize that the ownership of property in this fashion often leads to unexpected or unwanted results. Disputes, including litigation, are common between the estate of the original owner and the surviving joint tenant as to whether the survivor’s name was added as a matter of convenience or management or whether a gift was intended. The planning built into a well-drawn will may be partially or completely thwarted by an inadvertently created joint tenancy that passes property to a beneficiary by operation of law, rather than under the terms of the will. In some instances, a power of attorney document giving the trusted person the power to act on your behalf as your agent with regard to the account in order to pay bills will achieve your intended goal without disrupting your intended plans regarding to whom the account will ultimately pass.
Many of these problems also are applicable to institutional revocable trusts and “pay on death” forms of ownership of bank, broker, and mutual fund accounts and savings bonds. Effective planning requires knowledge of the consequences of each property interest and technique.
In many instances, consumers prepare wills believing that the will governs who will inherit their assets when in fact, the title (ownership) of various accounts or real property, for example, as joint tenants, or beneficiary designations for IRAs, life insurance and certain other assets control the distribution of most or even all assets. This is why merely addressing your will is rarely sufficient to accomplish your goals.
What Are Trusts?
Trusts are legal arrangements that can provide incredible flexibility for the ownership of certain assets, thereby enabling you and your heirs to achieve a number of significant personal goals that cannot be achieved otherwise.
The term trust describes the holding of property by a trustee, which may be one or more persons or a corporate trust company or bank, in accordance with the provisions of a contract, the written trust instrument, for the benefit of one or more persons called beneficiaries which are the people you want the assets to pass too.
The trustee is the legal owner of the trust property, and the beneficiaries are the equitable owners of the trust property. A person may be both a trustee and a beneficiary of the same trust.
If you create a trust, you are described as the trust’s grantor or settlor. A trust created by a will is called a testamentary trust, and the trust provisions for such a trust are contained in your will. A trust created during your lifetime is called a living trust which is attached to your social security or an inter vivos trust, and the trust provisions are contained in the trust agreement or declaration. The provisions of a living trust or inter vivos trust (rather than your will or state law default rules) usually will determine what happens to the property in the trust upon your death. However there is ZERO asset protection with a living trust. We advise using a living trust as part of your tax planning, then once assets are deducted, then move them into your Asset Protection Structure.
A trust created during lifetime may be revocable, which means it may be revoked or changed by the settlor, or irrevocable, which means it cannot be revoked or changed by the settlor. Either type of trust may be designed to accomplish the purposes of property management, assistance to the settlor in the event of physical or mental incapacity, and disposition of property after the death of the settlor of the trust with the least involvement possible by the probate (surrogate or orphan’s) court.
Trusts are not only for the wealthy. Many young parents with limited assets choose to create trusts either during life or in their wills for the benefit of their children in case both parents die before all their children have reached an age deemed by the parents to indicate sufficient maturity to handle property (which often is older than the age of majority under state law). Trusts permits the trust assets to be held as a single undivided fund to be used for the support and education of minor children according to their respective needs, with eventual division of the trust among the children when the youngest has reached a specified age.
This type of arrangement has an obvious advantage over an inflexible division of property among children of different ages without regard to their level of maturity or individual needs at the time of such distribution.
Annuities & Retirement Benefits?
You may be entitled to receive some type of retirement benefit under an employee benefit plan offered by your employer (which can be you) or have an Individual Retirement Account (IRA) or a Roth-IRA.
Typically, a deferred compensation or retirement benefit plan provides for the payment of certain benefits to beneficiaries designated by the employee in the event of the employee’s death before retirement age.
After retirement, the employee may elect a benefit option that will continue payments after his or her death to one or more of the designated beneficiaries. It is sometimes advantageous to have these plan assets paid to trusts, but naming a trust as the beneficiary of such plan assets raises a number of complex income tax, estate planning and other issues. Naming the surviving spouse as the beneficiary of certain retirement plans and spousal annuities is mandated by law and may be waived only with his or her properly signed consent. Competent estate planning counsel is crucial.
If you are entitled to start receiving retirement benefits during your lifetime, the various payment options will be treated differently for income tax purposes. You should seek competent advice as to the payment options available under your retirement plan and the tax consequences of each.
Why Life Insurance?
If you own life insurance on your own life, you may either
(a) designate one or more beneficiaries to receive the insurance proceeds (also known as a death benefit) upon your death, or
(b) make the proceeds payable to your probate estate or to a trust created by you during your lifetime or by your will.
If insurance proceeds are payable to your estate, they will be distributed as part of your general estate in accordance with the terms of your will or, if you die without a will, according to the applicable state laws of intestate succession.
If the proceeds are payable to a trust, they will be held and distributed in the same manner as the other trust assets and may be protected from creditors’ claims. Insurance proceeds that are payable directly to a minor child generally will necessitate the court appointment of a legal guardian or conservator. This can be avoided by naming a trust or custodial account under the state transfers-to-minors law as the beneficiary. Trusts often are used for insurance proceeds, even if the trust beneficiary is not a minor, to protect the assets from a creditors, divorce, to provide income tax planning and distribution flexibility, and to provide centralized or professional management of the proceeds.
Insurance plays an important role in financial, retirement and estate planning and should be coordinated with all other aspects of your estate plan. As a Business Owner its highly encouraged to utilize our LEGACY WEALTH ACCOUNT which provides so much more than just life insurance.
The laws pertaining to the taxability of insurance proceeds are complex, so it is important that all matters pertaining to life insurance be carefully reviewed with your attorney and insurance advisor. For example, your insurance coverage should be reviewed at least every two or three years to assure that the policy is performing as intended, the insurance company remains in solid financial position, and that the ownership of the policy and its beneficiary designations still comport with your wishes.
What Is A Revocable Living Trust?
Much has been written regarding the use of “living trusts” (also known as a “revocable trust,” “inter vivos trust,” or “loving trust”) as a solution for a wide variety of problems associated with estate planning that wills cannot address.
Most attorneys regularly recommend the use of such Irrevocable Living Trusts, while others believe that their value has been somewhat overstated. For instance, everything listed in the trust is NOT private it’s 100% public which also provides no asset protection. You also jeopardize the safety of your beneficiaries due to the public nature of when you die, all assets are public that go to your beneficiaries. The choice of a living trust should be made after consideration of a number of factors. We like to use it for tax planning and write offs then we put the assets into the asset protection plan.
The term “living trust” is generally used to describe a trust that you create during your lifetime. A living trust can help you manage your assets or protect you should you become ill, disabled or simply challenged by the symptoms of aging. Most living trusts are written to permit you to revoke or amend them whenever you wish to do so.
These trusts do not protect your assets nor do they help you avoid estate tax because your power to revoke or amend them causes them to continue to be includable in your estate. These trusts do help you avoid probate, which may not always be necessary depending on the cost and complexity of probate in your estate.
You also can create an “irrevocable” living trust, but this type of trust may not be revoked or changed, and such a trust is almost exclusively done to produce certain tax or asset protection results, which you will find in the asset protection side.
The myth that a Irrevocable trust cant be revoked is incorrect. The Trustee can always do whats in the best interest of the trust. If that means taking the trust off title for a refinance or to liquidate something, the Trustee may do that. Sometimes attorneys have a way of fear steering folks into whats best for them and not the client.
A “living trust” is legally in existence during your lifetime, has a trustee who currently serves, and owns property which (generally) you have transferred to it during your lifetime. While you are living, the trustee (who may be you, although a co-trustee might also be named along with you) is generally responsible for managing the property as you direct for your benefit. Upon your death, the trustee is generally directed to either distribute the trust property to your beneficiaries, or to continue to hold it and manage it for the benefit of your beneficiaries.
Like a will, a living trust can provide for the distribution of property upon your death. Unlike a will, it can also (a) provide you with a vehicle for managing your property during your lifetime, and (b) authorize the trustee to manage the property and use it for your benefit (and your family) if you should become incapacitated, thereby avoiding the appointment of a guardian for that purpose.
POWER OF ATTORNEY
Power Of Attorney
An important part of lifetime planning is the power of attorney. A power of attorney is accepted in all states, but the rules and requirements differ from state to state. A power of attorney gives one or more persons the power to act on your behalf as your agent. The power may be limited to a particular activity, such as closing the sale of your home, or be general in its application for all of your financial affairs.
The power may give temporary or permanent authority to act on your behalf. The power may take effect immediately, or only upon the occurrence of a future event, usually a determination that you are unable to act for yourself due to mental or physical disability. The latter is called a “springing” power of attorney. A power of attorney may be revoked, but most states require written notice of revocation to the person named to act for you.
The person named in a power of attorney to act on your behalf is commonly referred to as your “agent” or “attorney-in-fact.” With a valid power of attorney, your agent can take any action permitted in the document. We will often need a power of attorney or limited power of attorney to handle specific things for our clients.
Often your agent must present the actual document to invoke the power. For example, if another person is acting on your behalf to sell an automobile, the motor vehicles department generally will require that the power of attorney be presented before your agent’s authority to sign the title will be honored.
Similarly, an agent who signs documents to buy or sell real property on your behalf must present the power of attorney to the title company. Similarly, the agent has to present the power of attorney to a broker or banker to effect the sale of securities or opening and closing bank accounts. However, your agent generally should not need to present the power of attorney when signing checks for you.
Why would anyone give such sweeping authority to another person? One answer is convenience. If you are buying or selling assets and do not wish to appear in person to close the transaction, you may take advantage of a power of attorney. Another important reason to use power of attorney is to prepare for situations when you may not be able to act on your own behalf due to absence or incapacity. Such a disability may be temporary, for example, due to travel, accident, or illness, or it may be permanent.
If you do not have a power of attorney and become unable to manage your personal or business affairs, it may become necessary for a court to appoint one or more people to act for you. People appointed in this manner are referred to as guardians, conservators, or committees, depending upon your local state law.
If a court proceeding, sometimes known as intervention, is needed, you may not have the ability to choose the person who will act for you. Few people want to be subject to a public proceeding in this manner so being proactive to create the appropriate document to avoid this is important. A power of attorney allows you to choose who will act for you and defines his or her authority and its limits, if any. In some instances, greater security against having a guardianship imposed on you may be achieved by you also creating a revocable living trust.
Who Should Be Your Agent?
Similar to a Trustee, you may wish to choose a family member to act on your behalf. Someone who is highly trusted.
Many people name their spouses or one or more children. In naming more than one person to act as agent at the same time, be alert to the possibility that all may not be available to act when needed, or they may not agree. The designation of co-agents should indicate whether you wish to have the majority act in the absence of full availability and agreement. Regardless of whether you name co-agents, you should always name one or more successor agents to address the possibility that the person you name as agent may be unavailable or unable to act when the time comes.
There are no special qualifications necessary for someone to act as an attorney-in-fact except that the person must not be a minor or otherwise incapacitated. The best choice is someone you trust. Integrity, not financial acumen, is often the most important trait of a potential agent.
How Should The Agent Sign?
Assume Michael Douglas appoints his wife, Catherine Zeta-Jones, as his agent in a written power of attorney.
Catherine, as agent, must sign as follows: Michael Douglas, by Catherine Zeta-Jones under POA or Catherine Zeta-Jones, attorney-in-fact for Michael Douglas.
If you are ever called upon to take action as someone’s agent, you should consult with an attorney about actions you can and cannot take and whether there are any precautionary steps you should take to minimize the likelihood of someone challenging your actions. This is especially important if you take actions that directly or indirectly benefit you personally.
What Powers Should I Give My Agent?
In addition to managing your day-to-day financial affairs, your attorney-in-fact can take steps to implement your estate plan. Although an agent cannot revise your will on your behalf, some jurisdictions permit an attorney-in-fact to create or amend trusts for you during your lifetime, or to transfer your assets to trusts you created. Even without amending your will or creating trusts, an agent can affect the outcome of how your assets are distributed by changing the ownership (title) to assets. It is prudent to include in the power of attorney a clear statement of whether you wish your agent to have these powers.
Gifts are an important tool for many estate plans, and your attorney-in-fact can make gifts on your behalf, subject to guidelines that you set forth in your power of attorney.
For example, you may wish to permit your attorney-in-fact to make “annual exclusion” gifts (up to $14,000 in value per recipient per year in 2013) on your behalf to your children and grandchildren. It is important that the lawyer who prepares your power of attorney draft the document in a way that does not expose your attorney-in-fact to unintended estate tax consequences. While some states permit attorneys-in-fact to make gifts as a matter of statute, others require explicit authorization in the power of attorney.
If you have older documents you should review them with your attorney. Because of the high estate tax exemption ($5 million inflation adjusted) many people who had given agents the right to make gifts may no longer wish to include this power. Others, however, in order to empower their agent to minimize state estate tax might continue or add such a power.
Finally, there may be reasons not to limit the gifts your attorney-in-fact may make to annual exclusion gifts in order to facilitate Medicaid planning or to minimize or avoid state estate tax beyond what annual exclusion gifts alone might permit.
In addition to the power of your agent to make gifts on your behalf, many powers of your attorney-in-fact are governed by state law. Generally, the law of the state in which you reside at the time you sign a power of attorney will govern the powers and actions of your agent under that document.
If you own real estate, such as a vacation home, or valuable personal property, such as collectibles, in a second state, you should check with an attorney to make sure that your power of attorney properly covers such property.
What If I Move?
Generally, a power of attorney that is valid when you sign it will remain valid even if you change your state of residence. Although it should not be necessary to sign a new power of attorney merely because you have moved to a new state, it is a good idea to take the opportunity to update your power of attorney.
The update ideally should be part of a review and update of your overall estate plan to be sure that nuances of the new state law (and any other changes in circumstances that have occurred since your existing documents were signed) are addressed.
Will My Power Of Attorney Expire?
Some states used to require the renewal of a power of attorney for continuing validity. Today, most states permit a “durable” power of attorney that remains valid once signed until you die or revoke the document.
You should periodically meet with your lawyer, however, to revisit your power of attorney and consider whether your choice of agent still meets your needs and learn whether developments in state law affect your power of attorney.
Some powers of attorney expressly include termination dates to minimize the risk of former friends or spouses continuing to serve as agents. It is vital that you review the continued effectiveness of your documents periodically.
LIVING WILLS, HEALTH CARE PROXIES, AND ADVANCED HEALTH CARE DIRECTIVES!
With the increasing ability of medical science to sustain our lives, people are living much longer than ever before. Unfortunately, as we grow older, or if we experience health challenges, we may find ourselves in a position in which decisions need to be made as to how we wish to be treated in a variety of medical situations. This is especially true at the end of our lives, but can be true at any time as a result of the impact of an accident, injury, or illness. If we are in a condition such that we no longer can express our preferences about treatment, decisions will be made for us by others if we have not planned for our own treatment in advance. Advance health care directives allow us to deal with these situations. Without such directives, our families may find it necessary to obtain court orders to deal with our medical situations.
State laws vary concerning the appropriate documents to cover these situations. All fifty states permit you to express your wishes as to medical treatment in terminal illness or injury situations, and to appoint someone to communicate for you in the event you cannot communicate for yourself. Depending on the state, these documents are known as “living wills,” “medical directives,” “health care proxies,” or “advance health care directives.” Some states have a standardized or statutory form, while other states allow you to draft your own document. But even if you use a standard or statutory form, you should review it to be sure that it comports with your personal wishes. Never sign a document presented to you as standard unless you have read and understood it and confirmed that it does in fact reflect your desires.
A living will is your written expression of how you want to be treated in certain medical circumstances. Depending on state law, this document may permit you to express whether you wish to be given life-sustaining treatments in the event you are terminally ill or injured, to decide in advance whether you wish to be provided food and water via intravenous devices (“tube feeding”), and to give other medical directions that impact your care, including the end of life. “Life-sustaining treatment” means the use of available medical machinery and techniques, such as heart-lung machines, ventilators, and other medical equipment and techniques that may sustain and possibly extend your life, but which may not by themselves cure your condition. Be very careful signing any such document without reviewing the implications to you. For example, some of the commonly used clauses in living wills may forbid the provision of assisted breathing, including devices you presently may be using if, for example, you are living with COPD. Most important, many of the provisions of such a document have profound religious and philosophical implications. Be certain that whatever you sign is consistent with your beliefs and wishes. In addition to terminal illness or injury situations, most states also permit you to express your preferences as to treatment using life-sustaining equipment or tube feeding for medical conditions that leave you permanently unconscious and without detectable brain activity.
A living will applies in situations in which the decision to use such treatments may prolong your life for a limited period of time and not obtaining such treatment would result in your death. Having a living will does not mean that medical professionals would deny you pain medications and other treatments that would relieve pain or otherwise make you more comfortable. Living wills do not determine your medical treatment in situations that do not affect your continued life, such as routine medical treatment and non life-threatening medical conditions. Most states permit you to include other medical directions that you wish your physicians to be aware of regarding the types of treatment you do or do not wish to receive. In all states the determination as to whether you are in such a medical condition is determined by medical professionals, usually your attending physician and at least one other medical doctor who has examined you or reviewed your medical situation.
Health Care Proxy
A “health care proxy,” sometimes called a “health care surrogate” or “durable medical power of attorney,” is a durable power of attorney specifically designed to cover medical treatment. You appoint a person and grant to him or her the authority to make medical decisions for you in the event you are unable to express your preferences about medical treatment. Most commonly, this situation occurs either because you are unconscious or because your mental state is such that you do not have the legal capacity to make your own decisions. As with living wills, depending on your state of residence, the health care proxy may be a standard or statutory form or it may be may be drafted specifically for you by your lawyer.
Normally, one person (not multiple persons to act at one time) is appointed as your health care proxy. It is quite common, however, for you to appoint one or more alternate persons (successors) in the event your first choice proxy is unavailable. You should confirm prior to appointing someone as your proxy that he or she will in fact be willing and able to carry out your wishes. If your preferred proxy has, for example, a religious view that prevents him or her from carrying out your wishes, you should name someone else. As in the case of a living will, medical professionals will make the initial determination as to whether you have the capacity to make your own medical treatment decisions.
Why Have Health Directives?
Regardless of the name your state gives to these documents, their purpose is to allow you to express your preferences concerning medical treatment in an extreme medical situation when you cannot communicate, including at the end of your life. By expressing such preferences in a written legal document, you are ensuring that your preferences are made known. Physicians prefer these documents because they provide a written expression from you as to your medical care and designate for the physician the person he or she should consult concerning unanswered medical questions. Rather than the physician having to obtain a consensus answer from your family as to your treatment, the physician knows your preferences and knows who you want to provide decisions when you cannot do so. Also, providing such information and designating a health care proxy means that the physician knows whose direction is to be followed in the event your family disagrees as to what medical treatment you would want.
In addition to helping your physician, these documents express your wishes to your family so that they do not have to guess about what you would want. Making your wishes known in advance prevents family members from making hard choices at what likely will be one of the most stressful times in their lives.
Obtaining and Maintaining Living Wills And Health Care Proxies.
Your lawyer can provide you with these documents. Generally, these documents require at least two witnesses, who must be adults as defined under your state law. It is the policy of some hospitals and other medical institutions not to permit their employees to witness the signing of such documents. Most states have other restrictions as to who may witness such documents. Generally, the persons who act as witnesses are not permitted to be individuals entitled to any inheritance as a result of your death, either by will or by state law. Often, state law does not permit persons to witness such documents if they are related to you by blood or by marriage or if they are responsible for payment of your medical bills. Some lawyers recommend that these documents be notarized as well as witnessed.
While all states recognize these types of documents, the law varies as to whether a state will recognize a document prepared in another state. It is not necessary to prepare additional documents in case you might vacation in another state. If you spend a considerable amount of time living in more than one state, however, you should consider having such documents prepared in each of the states in which you spend significant periods of time.
Should you change your mind about your health care treatment or end of life decisions or your choice of health care proxy, you can simply destroy the documents you have and create new ones. Once you have a living will, health care proxy, or advance health care directive, you should keep it among your important papers. Make sure a responsible adult, such as the named health care proxy, knows where you keep these documents. If you have a regular physician who keeps your medical records, you should provide a copy of the document to him or her for your medical records. In the event you are admitted to a hospital, you should take this document with you at the time you are admitted and permit the hospital to place a copy of it into your medical file. It is also a good idea to discuss the decisions you have made in your document with family members so that they may better know and understand your wishes concerning these matters.
Will My Power Of Attorney Expire?
Some states used to require the renewal of a power of attorney for continuing validity. Today, most states permit a “durable” power of attorney that remains valid once signed until you die or revoke the document.
You should periodically meet with your lawyer, however, to revisit your power of attorney and consider whether your choice of agent still meets your needs and learn whether developments in state law affect your power of attorney.
Some powers of attorney expressly include termination dates to minimize the risk of former friends or spouses continuing to serve as agents. It is vital that you review the continued effectiveness of your documents periodically.
PROBATE & PLANNING WITH RETIREMENT BENEFITS
What Is Probate?
Probate is the formal legal process that gives recognition to a will and appoints the executor or personal representative who will administer the estate and distribute assets to the intended beneficiaries. The laws of each state vary, so it is a good idea to consult an attorney to determine whether a probate proceeding is necessary, whether the fiduciary must be bonded (a requirement that is often waived in the will) and what reports must be prepared. Most probate proceedings are neither expensive nor prolonged, which is contrary to the claims of many vendors selling living trust and other products.
The basic job of administration and accounting for assets must be done whether the estate is handled by an executor in probate or whether probate is avoided because all assets were transferred to a living trust during lifetime or jointly owned. Many states have simplified or streamlined their probate processes over the years. In such states, there is now less reason to use probate avoidance techniques unless there are other valid reasons to continue to minimize probate. In planning your estate, more important than minimizing probate is minimizing the real issues that can make probate difficult, such as lawsuits by heirs
How Can I Avoid Probate And Should I?
The living trust is often marketed as a vehicle that allows you to “avoid probate” upon your death. This provides ZERO asset protection in most cases. The way around that is only if you have some of your other assets under LLC’s owned by your Living Trust in which a large portion of your assets are still publicly exposed.
Probate is the court-supervised process of administering your estate and transferring your property at death pursuant to the terms of your will.
Probate is rarely the calamity naysayers claim. In addition, many types of property routinely pass outside of the probate process, even without the cost of establishing a living trust. Such property includes life insurance or retirement plan proceeds, which pass to a named beneficiary by designation rather than pursuant to your will, and real estate or bank or brokerage accounts held in joint names with right of survivorship.
While it is true that the property passing under the terms of a living trust upon your death will “avoid probate,” it should be noted that there may or may not be actual value in that result.
Probate laws are different in every state. In some states there are statutorily mandated court or attorney fees while in others those fees may be minimal. Many states have expedited or simplified court proceedings that are efficient and inexpensive for small or simple estates.
A properly drafted will in many states can eliminate some of the steps otherwise required in the probate proceedings. In addition, much of the delay and red tape customarily associated with probate is a result of tax laws and tax filing requirements, which cannot be eliminated through a living trust and the avoidance of probate.
Finally, a living trust can almost never totally avoid probate, and a simple will is needed to “pour over” to the trust any property that has not been transferred to the trust during your lifetime.
Let’s not forget to mention that there is ZERO Asset Protection under a living trust. The Living Trust is 100% under your Social Security number whereas a irrevocable trust has its own EIN number thus no longer allowing the ownership of those assets to be in your name.
Property that passes at death through a revocable living trust must be transferred to the trust, administered by a trustee who may or may not charge fees, and then transferred out of the trust to the beneficiaries. There may be other costs, such as real estate transfer taxes or fees, depending upon the jurisdiction. The costs associated with these steps and the costs associated with tax filings are often ignored by living trust marketers. A comparison of the costs of probate and those of a living trust should be made on a case by case basis.
Living trusts, in fact, have great value as part of estate planning, but not necessarily to avoid probate. A living trust, if properly prepared and administered, can be a very effective tool to manage assets in the event of illness, disability or the effects of aging. In light of the aging population, the use of living trusts to minimize the risk of elder financial abuse and address similar issues, should be an important consideration in an estate plan.
When Are Participants-Beneficiaries Taxed On Retirement Plan Contributions?
Assets held in qualified plans and IRAs normally generate no current income tax liability. The distribution of those assets to a participant or a participant’s beneficiaries in a future tax year, however, generally triggers income tax liability at ordinary income tax rates. However, a significant exception applies for Roth contributions.
What Is The Exception For Roth Contributions?
Roth contributions to a Roth IRA or to a designated Roth account in a qualified plan are made on an after-tax basis. Roth contributions included in a distribution from a Roth IRA or a qualified plan are not taxable, but the earnings on those Roth contributions may or may not be taxable. If the distribution is a “qualified distribution,” then those earnings are not taxable. Earnings in a distribution that is not a “qualified distribution” are taxable. A “qualified distribution” from a Roth IRA or a qualified plan generally is a payment made after the participant reaches age 59-1/2 (or death or disability) and after the 5-taxable-year period commencing with the first taxable year for which the participant made Roth contributions to the Roth IRA or the plan, as the case may be.
Is There A Penalty For Receiving A Distribution From The Plan Before Retirement? The
The Internal Revenue Code (“Code”) imposes a tax penalty on withdrawals made either too soon or not soon enough. For example, if a participant withdraws assets from a plan before reaching age 59-1/2, the participant will normally be responsible for paying ordinary income tax on the taxable portion of the distribution, plus a 10% tax penalty on the taxable portion of early distributions (unless a limited exception applies).
Roth contributions are not subject to this tax penalty, but earnings on Roth contributions are if they are not part of a qualified distribution.
Information on the exceptions to the 10% penalty tax for qualified plan distributions may be found in IRS Publication 575 (Pension and Annuity Income), and information on the exceptions to the 10% penalty tax for IRA distributions may be found in IRS Publication 590-B (Distributions from Individual Retirement Accounts (IRAs)).
Are There Any Options For Accessing A Qualified Plan Account Balance Before Retirement?
The tax rules allow qualified plans to adopt certain features to allow participants to use their qualified plan account balances before reaching retirement.
For example, a 401(k) plan may allow participants to request hardship withdrawals in the event of an immediate and heavy financial need. The tax rules also allow plans to make loans available so that participants can borrow against their account balances (up to a certain statutory limit) and make repayments directly to their plan accounts with interest added.
Hardship withdrawals are taxed as early distributions, but properly made plan loans generally have no income tax consequence unless the loans are not repaid to the plan as agreed. Two other distribution options that a plan may offer to participants are in-service distributions for participants who have reached age 59-1/2 and disability distributions. Participants should consult their plan administrators, official plan documents, and summary plan descriptions for additional details about whether their plans offer these and other distribution features.
What Happens To The Qualified Plan Account Balance In A Defined Contribution Plan If A Participant Moves To A different Employer?
Plan terms generally govern when distributions may occur for a terminated participant, although the tax rules require qualified plans to permit terminated participants to roll over their vested account balances to an eligible retirement plan, such as another employer’s plan or an IRA.
Any rollover of Roth contributions from an employer’s plan must be to a Roth IRA or to another employer’s plan that accepts Roth contribution rollovers. Direct rollovers from one plan to another plan generally are tax-free rollovers.
If a participant elects to receive the rollover check instead of conducting a “direct” rollover to an eligible retirement plan, mandatory 20% income tax withholding normally applies to the taxable portion. For small account balances totaling up to $1,000, many plans require participants to accept a lump sum distribution of the entire account balance.
For balances between $1,000 and $5,000, most plans include the Code’s automatic IRA rollover rule that requires the plan to roll over the participant’s account balance to an IRA established by the plan on behalf of the participant. Plans generally permit participants to retain in the plan any account balance that exceeds $5,000.
These distribution rules are plan-specific, so it is important to consult the official plan documents or the summary plan description for additional details about plan offerings.
What Happens If A Participant Does Not Start Receiving Plan Benefits At Age 70-1/2?
More onerous than the early distribution tax penalty is an additional penalty tax imposed if a participant does not begin receiving certain minimum withdrawals, called “required minimum distributions” (“RMDs”), commencing by the participant’s “required beginning date” (“RBD”). The minimum distribution rules apply to qualified retirement plans, IRAs − including traditional IRAs, Roth IRAs (but only after a participant’s death), Simplified Employee Pension (“SEP”) IRAs and Savings Investment Match Plan for Employees (“SIMPLE”) IRAs – and 403(b) plans.
The tax rules require that participants begin receiving RMDs as of the RBD. The RBD generally is April 1 of the year after the year that the participant reaches age 70-1/2. (Separate RBD rules may apply to participants who remain employed after reaching age 70-1/2 or who are owner-employees.) However, RMDs are not required from a Roth IRA during the Roth IRA owner’s lifetime.
If a participant elects to delay RMDs until April 1, instead of electing to receive the first RMD in the year that the participant reached age 70-1/2, the participant will be required to accept two RMD payments–one for the year that the participant reached age 70-1/2 and another for the year that includes the April 1 date.
In other words, if the participant postpones RMDs until April 1 (generally, the latest date that the participant may postpone RMDs) the participant will be required to accept two RMDs for the first year of retirement.
If a participant does not timely withdraw RMDs in a given year, a 50% tax penalty is imposed on the amount that should have been distributed to the participant on top of the federal income (and, if applicable, state) taxes that ordinarily apply to plan distributions.
For good cause, however, the IRS may waive the 50% penalty if the participant follows the guidelines explained in IRS Instructions to Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) and files Form 5329.
What Happens If A Participant Receives More Than One RMD (I.e., duplicate checks) for the same year?
If a participant receives more than one RMD payment, the participant should contact the plan administrator as soon as possible. Plan rules may allow participants to elect partial withdrawals so that, if desired, the plan may allow the participant to keep the second check.
For participants who prefer to redeposit the funds back into the plan, options may be limited if the participant cashes the check. Under all circumstances, however, the participant should contact the plan administrator for additional instructions.
Retirement Plan Summary
As you can see, there is a potential tension between a participant who may not want to receive any plan withdrawals even after the RBD and the IRS which monitors the statutorily-mandated withdrawals (i.e., the RMDs). The good news is that, with proper planning, a participant can decrease the size of the RMD and increase the plan’s income tax benefit. Note that RMDs provide a floor, not a ceiling. Participants generally are free to withdraw more than the minimum amount if needed for living and health expenses after retirement. As noted, RMDs are not required of a Roth IRA during the Roth IRA owner’s lifetime.