Basic Estate Planning
No matter the level of your net worth, every individual should have a personalized plan for his or her estate. Whether your priority is tax planning, distribution of assets among your beneficiaries, appointing an executor, naming guardians for minor children, planning for avoidance of probate, asset protection or any other concern, estate planning is the key to ensuring that your priorities and family values are addressed to your satisfaction.
The first step in creating an estate plan is to determine your goals. You certainly know the concerns which motivated you to plan, and an experienced attorney can assist you with identifying additional issues of which you may not even be aware. Your goals may include one or more of the following:
- Providing financial protection for your surviving spouse
- Protecting and preserving an inheritance for your children (especially if your children are from a prior marriage or from multiple marriages)
- Providing for minor children or grandchildren (especially disabled ones)
- Minimizing estate and income taxes
- Determining proper beneficiary designations for retirement plans, IRAs, annuities and life insurance policies
- Naming guardians for your minor children
- Keeping the business in the family
- Establishing trusts for professional management of your assets
- Preventing the loss of your assets to creditors and predators
- Ensuring that your charitable giving goals are perpetuated
The next step is to identify the most effective estate planning tools for achieving your goals based upon advice of experienced counsel. Your estate plan might include one or more of the following documents:
Will – The foundation of most estate plans, the Will appoints an executor to carry out your written instructions for the distribution of your estate, through probate, following your death. The Will does not affect assets passing by beneficiary designations in life insurance policies and retirement plans or survivorship provisions on joint accounts. It is sometimes appropriate to establish a trust under your Will to protect and manage assets for certain beneficiaries. The terms of these “testamentary trusts” are contained within your Will and take effect and are funded at your death.
Revocable “Living” Trust – A popular estate-planning vehicle, the living trust is a document in which you can name yourself as the initial trustee and beneficiary. Assets re-titled in the name of your living trust enable a successor trustee to manage the trust assets in case of your incapacity or death, without court involvement (i.e., probate is not required). The living trust is designed to reduce the cost and delays of estate settlement associated with Wills and probate, protect your family’s privacy and avoid conservatorship proceedings for the court-supervised management of your assets during disability.
Financial Power of Attorney – Everyone needs to have a person legally designated to manage their financial affairs in the event of temporary and/or permanent physical or mental incapacity. A Financial Power of Attorney appoints another person as your agent for making all of your financial and legal decisions. A proper Financial Power of Attorney should grant your agent broad authority to perform a wide range of tasks, and provide special powers for gift tax planning, Medicaid planning, execution of tax returns, real estate transactions and coordination of health care services. If you do not have a Financial Power of Attorney and become disabled, a local court will need to appoint a person (or corporation) as your conservator to manage your financial affairs. The cost of the court proceeding is often expensive, and your assets will be the source of reimbursing court costs and litigation fees.
Health Care Power of Attorney – Distinguished from the financial power of attorney, the Health Care Power of Attorney (sometimes referred to as an Advanced Medical Directive) appoints another person to make all of your medical decisions if you are deemed physically or mentally unable to give informed consent for your treatment. Your agent will be able to authorize or refuse medical treatment, gain access to your medical records, arrange for long term care and perform myriad other medical and health related tasks on your behalf. If you do not have a Health Care Power of Attorney and become disabled, a local court will need to appoint a person (or corporation) as your guardian to make your health care decisions. The cost of the court proceeding is often expensive, and your assets will be the source of reimbursing court costs and litigation fees.
“Living Will” – The living will typically sets forth your desire that life-prolonging procedures be withdrawn or withheld in the event that you are diagnosed as being in a terminal condition or persistent vegetative state with no reasonable chance for recovery. You may customize this document to reflect your values or religious beliefs, and you may direct your health care agent to enforce the living will if necessary.
Advanced Estate Planning
Advanced estate planning involves assessing the anticipated estate and income tax liability of an individual or married couple and determining which combination of recognized – or creative – strategies will reduce or eliminate these taxes. Where appropriate, arrangements can be made to provide heirs with funds intended to replace the assets confiscated by high taxes.
If you are in an occupation that carries a high risk of liability (doctor, dentist, lawyer, professional athlete, entertainer, contractor, etc.), or your beneficiaries require protection from creditors or predators, asset protection strategies can be deployed to ensure your assets remain out of the reach of bad actors.
The following are some of the more common advanced estate planning vehicles we use, sometimes in multiple layers, to accomplish both your tax planning and asset protection goals:
Credit Shelter Trusts and Marital Trusts. These trusts are incorporated into the terms of a married couple’s revocable living trust document, and take effect on the first spouse’s death. A Credit Shelter Trust (sometimes referred to as a “family trust” or “bypass trust”) allows the deceased spouse’s estate to shelter up to $10,000,000 worth of assets, adjusted annually for inflation (commonly referred to as the “applicable exclusion amount”), from estate taxation, while allowing the surviving spouse to have the beneficial use and enjoyment of the Credit Shelter Trust assets until his or her death for this year’s applicable exclusion amount. The balance of the deceased spouse’s estate is often held in a Marital Trust, the terms of which also provide the surviving spouse with all of the income produced as well as the beneficial use and enjoyment of the trust assets. The Marital Trust can protect the assets for the children of the first spouse to die (in case of remarriage or spendthrift tendencies of the surviving spouse). These trusts are the foundation of any good estate plan when your assets exceed the applicable exclusion amount.
Irrevocable Life Insurance Trusts (ILIT). Depending upon the size of your estate, it may be appropriate to make gifts to an irrevocable trust to pay premiums on a life insurance policy for the benefit of your intended beneficiaries. The life insurance policy can be purchased on your individual life or on the lives of you and your spouse (called survivorship, or second to die, policies). When collected by the ILIT upon the death of the insured, the proceeds from the life insurance policy are not included in your estate for estate tax purposes, and the proceeds can be held in the ILIT for many generations, as well. ILITs are often used in the estate plans of those who have family businesses or real estate, and other assets which are not likely to be sold quickly to pay estate taxes. These trusts also provide the liquidity needed to keep special assets in your family.
Charitable Remainder and Charitable Lead Trusts. For clients with appreciated assets they wish to convert to cash or other investments (and defer the payment of tax), the Charitable Remainder Trust (CRT) and Charitable Lead Trust (CLT) can provide an opportunity for significant estate and income tax savings. Both the CRT and the CLT are irrevocable trusts. In a typical transaction, you transfer appreciated assets into the CRT or CLT, and the trustee of the trust sells the donated asset and reinvests the proceeds without any immediate capital gains tax liability. The reinvested trust assets are then used to pay an income stream of a fixed amount or percentage of the trust assets.
If the income stream is paid to you or your designated recipient(s), the trust is a Charitable Remainder Trust (CRT). A CRT may be established for your life or a term of up to 20 years. At the end of the CRT term, the remaining trust assets pass to the charity designated in the trust document. In the case of a CRT, you receive a charitable income tax deduction upon the initial funding of the trust equal to the present value of the remainder interest expected to pass to charity at the end of the CRT term.
If the income stream is paid to the designated charity, the trust is a Charitable Lead Trust (CLT). A CLT may be established for your life or a term of up to 20 years. At the end of the CLT term, the remaining trust assets can pass to your family or other beneficiaries designated in the trust document estate and gift tax-free. In the case of a CLT, you receive a charitable income tax deduction upon the initial funding of the trust equal to the present value of the income stream to be paid to the charity during the CLT term.
Both the CLT and CRT have significant income, gift and estate tax benefits, and they can be paired with the irrevocable life insurance trust to compensate for and provide your children the value of the asset going to charity, each without estate taxation.
Personal Residence Trusts. The Personal Residence Trust is an “estate freeze technique” designed to fix or freeze the current value of your principal residence or vacation home, for tax purposes to transfer the property to your children at a significant gift tax discount and to remove the future increases in the value of the residence from your estate. You continue to occupy the home for the term of the trust (which you choose at the outset), after which time the title passes to your children, taking the untaxed appreciation from the date of the trust with it as well.
Family Limited Partnerships. The concept of a Family Limited Partnership (FLP) is to give partial interests in the FLP to children and grandchildren into which valuable property has been transferred. Because your gift of the FLP interest is usually one of a minority interest and has a restricted market for resale, the value of the FLP interest transferred to your children and grandchildren is often discounted for gift and estate tax purposes. The transfer is normally structured to take advantage of your available gift tax exclusions so that no tax is actually paid during your life. Best of all, you can retain control of the partnership but not be concerned that the entire value of the assets in the partnership will be taxed as a part your estate (only the interest not given away may be subject to estate tax). The process of planning, establishing, valuing and transferring a FLP requires commitment, discipline and good advice, but the tax benefits can be significant. In addition, the partnership gives families an excellent vehicle for the orderly transfer of assets, including family business interests, as well as certain creditor protections.
Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT). Stocks, bonds, mutual funds and other assets with appreciation potential, can be gifted to family members free of estate and gift tax by way of an irrevocable trust. In a typical transaction, you transfer appreciating assets into the GRAT or GRUT. The trust assets are then used to pay an income stream of a fixed amount (GRAT) or percentage of the trust assets (GRUT) to you for a term not to exceed 20 years. At the end of the trust term, the remaining trust assets pass to the beneficiaries designated in the trust document, estate and gift tax free. There are numerous variations found in the way the income stream is valued and paid from these trusts, and the rules governing the creation and administration of GRATs and GRUTs are complex and unforgiving. Thus, experienced tax advice is critical to the success of these vehicles in your estate plan.
Miscellaneous Planning Tools. Beyond the groups of estate planning strategies discussed above, there are other techniques and options available for you to consider when evaluating your estate and achieving your estate planning goals. There are also non-tax considerations, such as planning for the blended family, protecting assets from litigation, and sheltering funds for the education and support of minors, and providing for beneficiaries with special needs. Non-citizen spouses also require special trust arrangements. Business succession agreements can make all the difference between a successful transition to the next generation and litigation among the heirs. Pre-marital or marital agreements can be effective tools to minimize litigation and protect family relationships.
Summary. Experienced counsel can apprise you of the available options and take the lead in planning and implementing your chosen advanced estate planning strategies. It is also our goal to bring together and coordinate your team of advisors in collaboration to efficiently incorporate tax, legal, business and financial perspectives, resulting in a thorough and efficient planning process, and providing you with valuable peace of mind, knowing that your desires and goals for the transfer and protection of your family’s wealth are achieved.