Important Questions & Answers
What is an estate plan?
Estate planning is simply an activity whereby the asset owner decides upon one or more methods of transferring all of his assets, real and personal, to chosen recipients at his death. A proper estate plan takes into account personal, administrative, and transfer tax matters in order to create the most efficient, cost-effective means of transferring a particular estate upon the owner's death.
What happens if I don't plan my estate?
Actually, everyone who owns any assets whatsoever already has an estate plan. If the asset owner does not establish his own plan during his lifetime, and he therefore dies "intestate", then the state's probate code will prescribe a statutory Last Will & Testament for him at his death.
What is a Last Will & Testament?
A Last Will & Testament is simply a statement or "testimonial" of one's intent regarding the disposition of his assets after death. It is not a contract, and it therefore cannot be binding on anyone – only those parties “interested” in the estate of the decedent. A will can also create a "trust," and it can appoint a trustee to hold (probated) assets for the benefit of another. This type of trust is called a "testamentary trust" and it is always funded only with probate assets.
How are the terms of a will enforced?
The probate court generally enforces the intent of the decedent unless evidence is submitted (through due diligence, law suits, or other litigation, obvious impropriety, etc.) that causes a determination that the decedent’s intent cannot be carried out as stated in his will. Because a will is not a contract (and is therefore not binding), a court of law has jurisdiction over its administration. - TOP
Why is it necessary to probate a will?
First of all, the court has to procedurally determine that the decedent’s will is valid and that it is, in fact, his/her will. This is called proving the will. Moreover, when an asset-owner dies, he becomes a deceased asset-owner. A deceased person is unable to transfer ownership of his assets to anyone. The result is that only a court of law has the legal authority and ability to appoint and transfer ownership of the decedent’s assets, even if it is only to the decedent’s own family members.
The role of the decedent’s personal representative (as executor, administrator, trustee, or other fiduciary) is to first have title to all of the decedent’s assets vested to him/her by the probate court. Then, after gathering all of the decedent’s assets and accounting to the court the personal representative eventually transfers title of the decedent’s property to the decedent’s intended heirs (or those heirs that the state’s legislature, through the state’s probate code, have decided should be the natural recipients of the decedent’s bounty).
All of this can happen only through either “formal” or “informal” statutory probate court procedures. - TOP
So, what’s so bad about probate?
Probate tends to:
Is there a positive side to probate?
Before the major tax law changes of 2001, there were a few obscure, minor tax benefits to certain estates with certain conditions. Now, those separate advantages are all but gone. However, some probate attorneys take the position that the formal supervision provided by a court in settling an estate is worth the expense, time-lapse, undesirable publicity, vulnerability, and frustration that can be experienced by the heirs while waiting to get their inheritance. - TOP
How can probate be avoided?
There are several ways:
All of these methods, however, can create potentially undesirable outcomes ranging from loss of control and unnecessary lawsuit exposure during lifetime to the forfeiture of a thoughtfully structured disposition of one’s estate at death. - TOP
Is there a singular way to address problems inherent in estate transfers?
Yes. A properly drafted, properly funded, properly implemented Revocable Living Trust is a proven foundational plan for almost any estate, and has the structure to remedy almost all of the problems that can be associated with transferring an estate, regardless of the size.
Click HERE for a more detailed explanation of the Revocable Living Trust
Wealthy estates may require more sophisticated planning in order to minimize the estate tax consequences of transferring great wealth. There are, thankfully, a whole range of options available for this purpose, including, but not limited to, irrevocable trusts, limited family partnerships, charitable trusts etc. Even for large estates, however, a living trust will still comprise the centerpiece of the estate plan because of its flexibility, portability, and ease of administration. - TOP
How does a living trust avoid probate?
When the creator of a living trust transfers assets to the trust, actually to himself as the trustee, he has already conveyed legal title to his assets to a “party” that does not cease to exist when he dies. That party is the office of the trustee – which he may occupy during his lifetime. He is also the beneficiary of his own trust during his lifetime. Probate is no longer necessary because the (successor) trustee already holds legal title to the decedent’s assets by operation of law. A trust is a contractual agreement between the creator and trustee of the trust. - TOP
What does it mean to “fund” a trust?
Funding a trust simply means to transfer one’s assets to the trust – actually to the trustee of the trust. This is generally accomplished by such means as:
Why must a living trust get funded during the creator’s lifetime?
A living trust must be funded during the lifetime of the creator in order to take advantage of the full benefit of the trust. That is why it is referred to as a “living” trust: it is designed to be funded and functional during the creator’s life, in addition to facilitating the transfer of his assets to his beneficiaries upon death.
Any (non-funded) assets still owned by the decedent outside of the trust at his death will have to be probated in order to be transferred to the trust through a “pour-over will” – a will that “pours” the assets into the trust – after they have been probated. - TOP
How does a Marital A/B Trust work?
A Marital A/B Trust is a trust format designed for legally married spouses (husband & wife) who establish a trust together as co-creators (note: spouses can also establish a “Marital Simple Trust” which has no A/B format).
When the first spouse dies, Trust “B,” called a Credit Shelter Trust because it takes advantage of the amount allowed to be sheltered from estate tax, is to be funded with that part of the entire trust estate which is deemed to belong to him (assuming husband dies first). This means that his sole and separate property (if any) and his interest in any property owned jointly by the spouses (community property and/or tenants-in-common or tenants-by-the-entirety property) is transferred to Trust “B,” which then utilizes his unified credit by not having the decedent spouse’s estate go directly to the surviving spouse under her full control.
The assets of Trust “B” are maintained IN TRUST for the benefit of the surviving spouse for the remainder of her lifetime (unless a prior arrangement is agreed upon). Although she has no ownership interest in Trust “B”, it can be set up so that she can receive all distributable net income from it as well as distributions from the principal for her health, education, maintenance and support.
Trust “B” provides legitimate protection of the decedent spouse’s estate from the surviving spouse’s potential creditors, or a new predatory spouse, or even possible spendthrift tendencies of the surviving spouse because it becomes irrevocable upon the death of the first spouse to die.
Upon the surviving spouse’s death, the assets of Trust “B”, along with the assets of Trust “A” (the surviving spouse’s estate) are then distributed according to the decrees of the trust. - TOP
If a living trust works so well, why hasn’t my attorney mentioned it?
Conventional wisdom says that the family lawyer, because of familiarity and the fact that he or she is a lawyer, is best qualified to help a family set up an estate plan (usually a will). Unfortunately, this is a misconception.
Law schools require only one course in the mechanics of wills, trusts, and estates, and only a fraction of practicing lawyers have the knowledge and skill to claim to be legitimate estate planners. This is because the law is vast; probate and trust law can be a complicated subject. In addition to the legal aspects of estate planning, a lawyer must be able to implement the plan once it is set up. This often requires the skills of a financial management professional, so the lawyer must either acquire those skills himself or find financial experts to do the work for him – all for just one small area of his law practice a function that he performs only occasionally for a valued client or friend.
Unless a lawyer is actively involved with proper estate planning as a fulltime practice or devotes a large percentage of his time to it (as do our network attorneys), it becomes a comparative loss for him or her to get involved in any form of estate planning beyond will preparation. Without question, on a client-per-client basis, it is much more profitable for a lawyer to probate the estate of a deceased client after death than it is to spend the time and effort it takes to help an occasional estate-planning client meet their real planning goals and objectives while they are still alive.
So, in defense of the family attorney (like everything else), it all boils down to the indisputable laws of “Economics – 101.” - TOP
What is a conservatorship?
A conservatorship is a legal guardianship established by a probate court for a person who has become mentally and/or physically debilitated to the extent that he is no longer able to perform financial decisions or responsibilities on his own behalf. It allows the conservator to use the incapacitated person’s assets on his behalf under the supervision of the court. Therefore, someone must petition the court for an adjudication of his incompetency – a public matter. - TOP
How can a potential conservatorship be avoided?
A Financial Durable Power of Attorney (DPA) can be used in some cases to help avoid issues with conservatorship. But a transfer agent (one who acts as a custodian over private accounts held in an institution such as a bank, etc.) is not under any legal requirement to transact with the agent appointed under the DPA. The reason is that a DPA is not a contract, only a valid statement of an agency relationship. Because it is not in contract form, the transfer agent is taking a “risk” in agreeing to honor the DPA, especially if there is later any question about the honesty of the DPA agent’s handling of the principal’s finances. - TOP
What is the best way to avoid a conservatorship?
A funded revocable living trust is the most effective way to prepare for a potential conservatorship. A living trust is a contract. Therefore, when a transfer agent who is representing the institution where the account is held honors the trust creator’s request to have the account retitled into his trust, the transfer agent assents to the terms of the trust/contract and agrees to transact with the trustee who is now serving as a trustee over the trust assets of the incapacitated creator. - TOP
What are estate taxes?
The estate tax is a transfer tax imposed upon the estate (not the heirs) belonging to the decedent at the time of (and because of) his death. It is imposed on the decedent’s entire estate. However, the unified credit can shelter the estate from estate taxes up to the exemption equivalent amount – then in effect at the year of the decedent’s death. Estate taxes are generally not deemed as an “inheritance tax”. Inheritance taxes are imposed only in a small number of certain states upon the beneficiaries of the estate (the heirs) and usually at lower rates than the federal (and state) estate tax. - TOP
What is the unified credit?
Let’s use an illustration to define a tax credit. A taxpayer owes a tax of say $500 as a result of selling an appreciated stock portfolio less than one year (short term gain) after acquisition; at first glance, he seems liable for the full $500 tax bill. But let’s assume he is allowed a tax credit of $200 that he can take against any tax liability(s) incurred as a result of selling the short-term appreciated property. This means that he will only have to pay a $300 tax instead of $500. The tax credit is a dollar-for-dollar credit against(i.e., a per dollar reduction from) that taxpayer’s tax liability.
The Unified Credit works the same way. A credit (the Unified Credit) is allowed against (e.g., used to reduce from) the federal transfer tax imputed on all transfers of assets (other than assets “excluded” from the transfer tax base, such as gifts that are excluded with the annual exclusion). Transfer taxes are imposed on each and every dollar of value that may be transferred by either a lifetime gift or by bequest at death (such as with a will or a trust). Congress allows a credit against those taxes which shelters a certain amount of the taxpayer’s estate from taxation when it is transferred to another.
The term unified, when referring to the Unified Credit, means that the transfer tax credit is allowed to be taken against transfer taxes incurred as a result of either (a) lifetime gifts, or (b) transfers at death, or (c) a combination of both; thus, it is unified – or combined. If the taxpayer uses part of the Unified Credit against a gift tax liability incurred as a result of a large gift made in a given year, then he has effectively reduced the Unified Credit that is available to his estate in the exact dollar-for-dollar amount of the credit that has already been used, whether his death occurred in the same year that the gift(s) was made or in a subsequent year. - TOP
What is the federal exemption equivalent amount?
Let’s start with an illustration. If we wanted to make a loaf of bread that was to become exactly 1 foot in length, 7 inches wide, and 6 inches high – assuming it was to be baked for a specific amount of time and with a specific temperature – we would need to use a certain amount of flour, water, and yeast to make that loaf of bread, every time. So, let’s say that it required 7 cups of flour, 3 cups of water, and 1 package of yeast to make the loaf we have described. That means that every time we had those exact ingredients in our possession, we have the equivalent of a loaf of French bread – 1 foot in length, 7 inches wide, and 6 inches high.
Is the flour, yeast and water the same as the loaf? Obviously, they are not. But when kneaded together and applied with the correct amount of baking time and temperature, the equivalent amount of those ingredients is that loaf of French bread? So, what the term “exemption equivalent” tells us is that since a specific transfer value (of say 1 million dollars) will be taxed at a progressive, marginal tax rate, a tax credit (the unified credit) can be used to offset the tax imputed on the transfer – which equates to that amount being exempted from tax. Using our illustration, because we have the current unified transfer tax credit ($345,800) in hand, we have the corresponding ability to transfer 1 million dollars free (e.g. exempt) of taxation.
To use more specific terms, the tax rates start at a tentative tax rate of 18% with the first $10,000 transferred; then 20% for the transferred value between $10,001 – $20,000; then 22% for the transferred value between $20,001 – $40,000; et cetera. What we find when we do the math using the tentative rate schedule is that an aggregate transfer tax liability of $345,800 will ultimately be incurred as a result of transferring a total of 1 million dollars. Under current law existing at the time of this writing, transferors are allowed a Unified Credit of $345,800 in the year 2003 against the tax liability that would be imposed on transfers of (or transfers in one or more years equal to an aggregate of) 1 million dollars. Therefore, because a taxpayer/transferor is allowed a federal transfer-tax unified credit of up to $345,800, the equivalent amount allowed to be transferred free from estate and/or gift tax is 1 million dollars. - TOP
2014 Update: The American Taxpayer Relief Act [passed January 2, 2013] permanently provides
for a maxium federal estate tax rate of 40 percent with an annually inflation-adjusted $5.34 million
exclusion [exemption equivalent] for estates of decedents dying after December 31, 2012.
What is an unlimited deduction pertaining to an estate?
There are essentially only two deductions associated with estate and gift taxes of which we need to be aware. They are the marital deduction and the charitable deduction. Taking a deduction from an estate value (e.g., to reduce the estate value for tax purposes) is not the same as using the unified credit against the tax itself, as pointed out above, but the ultimate desired result of transfer tax reduction or elimination is the same.
All transfers to a legal spouse or to a qualified [(501(c)(3)] charity – whether a lifetime-transfer (a gift) or a transfer at death (a bequest) – are not subject to taxation. Such transfers are, therefore, simply deducted dollar-for-dollar from the total value that the transferor or the transferor’s estate has made or will ever make. Ever since the Economic Recovery & Tax Act of 1981 (ERTA), the value of the marital deduction has been unlimited. This means that any amount of value transferred to a spouse – regardless of how great the value and regardless of whether it is a lifetime transfer or a transfer at death – is not subject to transfer tax.
In other words, all transfers to a spouse regardless of the amount(s) are deducted from the value of the transfers, dollar-for-dollar, for the purposes of calculating transfer tax. Of course, unlike transfers to a qualified charity, transfers to a spouse do not generate income tax deductions for the transferor.
As mentioned earlier, the charitable deduction is also unlimited. Any transfer to a qualified charity – regardless of how great the value and regardless if it is a lifetime transfer or a transfer at death – is not subject to taxation. The main difference between transfers to a charity and transfers to a spouse is that transfers to a charity can generate income tax deductions (another subject altogether). - TOP
What is a “step-up in basis”?
The determined “tax basis” of property (stock, real estate etc.) – for the purposes of calculating the value of property obtained by a taxpayer as a buyer/transferee – turns on a few different rules depending upon the nature of the transaction. A property-exchange transaction between two or more living parties is generally classified as one of three separate occurrences:
When property is exchanged for fair market value in a willing-seller (Jane) / willing-buyer (Peter) arrangement, the property value receives a full “step-up in basis” to the fair-market-value sale amount, and that stepped-up basis value is passed on to the buyer (Peter).
If the sale transaction was a “bargain sale,” meaning that the exchange was for less than fair market value, then the difference between the sale amount and the fair market value would actually be deemed a gift to the buyer/donee (Peter); therefore the stepped-up basis value in the acquired property would only be the purchase amount.
It should be noted that when bone-fide gifts (or partial gifts) are made, not only does the donee (Jane) not acquire a step-up in basis in the gifted property (or in a formulated value because of the partial gift transaction) but also, for transfer tax purposes concerning the donor’s (Jane’s) estate, the fair market value is used to calculate the amount transferred. When the buyer/donee (Peter) of the acquired property subsequently sells the property (to Mary) at fair market value (for example), he will be deemed to have acquired a capital gain and is therefore subjected to capital gains tax because of the sale.
The capital gains tax is calculated on the appreciated value of the property, which is simply the spread between the acquired basis of the seller and the acquired basis of the subsequent buyer. The determined tax basis of all property acquired by beneficiaries of a decedent transferor’s estate is simply the value of the property at the date of the transferor’s death – or the value of the property six months later if the “alternate valuation date rule” is used. Transfers that occur by reason of the death of the transferor are considered to be sale transactions. Therefore, under the current transfer tax rules, the value of all property owned and transferred by a decedent receives a full step-up in basis to the value of the property at the date of his/her death.
The general rule, then, is that all property over which a decedent enjoyed unhindered control (i.e., general power of appointment control) is deemed to be in the taxable estate of the decedent and therefore must receive a full step-up in basis at the decedent’s death. In addition, under the grantor trust rules, certain property irrevocably transferred to a grantor trust by the transferor during his/her lifetime will still be classified as being in the transferor’s estate for estate tax purposes if the transferor retained a right to receive income from the trust during his/her lifetime. The most notable exception to this rule is a qualified charitable remainder trust. - TOP
What is the annual exclusion?
Here is yet another term the application of which can have an impact on transfer tax liability similar to the unified credit or the unlimited (marital or charitable) deductions. Exclusions are not deductions; but for transfer tax purposes, they essentially could be deemed the same; it’s mostly a matter of semantics.
An exclusion is something that is removed altogether from the value of the transfer base of the transferor (deductions are deducted from the transfer). The transfer tax exclusion pertains primarily to the annual gift tax exclusion. Under current law (as of the year 2014) transferors are allowed a Fourteen Thousand Dollar ($14,000) annual exclusion. The annual exclusion can be utilized each and every year, but only on a non-cumulative basis. The term non-cumulative means that even though a transferor did not utilize the exclusion in a prior year(s), he cannot add up, or accumulate, the exclusion amounts that were not utilized (each year) to increase the exclusion amount for the current year.
The annual exclusion can be utilized with the unified credit. This means that if a transferor gave $25,000 to a transferee in a single given year, the transferor’s actual transfer (or gift) value for the purposes of computing the gift tax would be $11,000 ($25,000 minus $14,000 = $11,000) and the non-excluded $11,000 could be sheltered by taking a part of the unified credit against the transfer tax incurred as a result of the transfer. To put it another way, a transferor could hypothetically give a transferee one million & fourteen thousand dollars all in the same year. The one million would be exempt from transfer tax by virtue of the unified credit and the annual gift tax exclusion could be utilized to exclude the remaining fourteen thousand from the transfer base. - TOP
Estate planning is simply an activity whereby the asset owner decides upon one or more methods of transferring all of his assets, real and personal, to chosen recipients at his death. A proper estate plan takes into account personal, administrative, and transfer tax matters in order to create the most efficient, cost-effective means of transferring a particular estate upon the owner's death.
What happens if I don't plan my estate?
Actually, everyone who owns any assets whatsoever already has an estate plan. If the asset owner does not establish his own plan during his lifetime, and he therefore dies "intestate", then the state's probate code will prescribe a statutory Last Will & Testament for him at his death.
What is a Last Will & Testament?
A Last Will & Testament is simply a statement or "testimonial" of one's intent regarding the disposition of his assets after death. It is not a contract, and it therefore cannot be binding on anyone – only those parties “interested” in the estate of the decedent. A will can also create a "trust," and it can appoint a trustee to hold (probated) assets for the benefit of another. This type of trust is called a "testamentary trust" and it is always funded only with probate assets.
How are the terms of a will enforced?
The probate court generally enforces the intent of the decedent unless evidence is submitted (through due diligence, law suits, or other litigation, obvious impropriety, etc.) that causes a determination that the decedent’s intent cannot be carried out as stated in his will. Because a will is not a contract (and is therefore not binding), a court of law has jurisdiction over its administration. - TOP
Why is it necessary to probate a will?
First of all, the court has to procedurally determine that the decedent’s will is valid and that it is, in fact, his/her will. This is called proving the will. Moreover, when an asset-owner dies, he becomes a deceased asset-owner. A deceased person is unable to transfer ownership of his assets to anyone. The result is that only a court of law has the legal authority and ability to appoint and transfer ownership of the decedent’s assets, even if it is only to the decedent’s own family members.
The role of the decedent’s personal representative (as executor, administrator, trustee, or other fiduciary) is to first have title to all of the decedent’s assets vested to him/her by the probate court. Then, after gathering all of the decedent’s assets and accounting to the court the personal representative eventually transfers title of the decedent’s property to the decedent’s intended heirs (or those heirs that the state’s legislature, through the state’s probate code, have decided should be the natural recipients of the decedent’s bounty).
All of this can happen only through either “formal” or “informal” statutory probate court procedures. - TOP
So, what’s so bad about probate?
Probate tends to:
- Be relatively costly to the estate
- Take several months or even years to complete
- Be a source of frustration to the heirs
- Effect a disclosure all pertinent family and financial matters – by a public file – for even unscrupulous people to discover
- Be more prone to disputes (and even court litigation) among family members, including attracting the unwanted services of corporate entities who do not have altruistic motives - TOP
Is there a positive side to probate?
Before the major tax law changes of 2001, there were a few obscure, minor tax benefits to certain estates with certain conditions. Now, those separate advantages are all but gone. However, some probate attorneys take the position that the formal supervision provided by a court in settling an estate is worth the expense, time-lapse, undesirable publicity, vulnerability, and frustration that can be experienced by the heirs while waiting to get their inheritance. - TOP
How can probate be avoided?
There are several ways:
- Outright gifting during life is one such method that, if used correctly, can be very effective
- The most common method of probate avoidance, however, is to hold real property as joint-tenants-with-rights-of-survivorship (JTWROS)
- Another method is by deeding realty property to someone with a life estate retention clause in the deed
- A third well known strategy of avoiding probate of bank accounts, life insurance, IRA’s and other assets normally held in accounts is to make those accounts payable-on-death (POD) directly to a named beneficiary
All of these methods, however, can create potentially undesirable outcomes ranging from loss of control and unnecessary lawsuit exposure during lifetime to the forfeiture of a thoughtfully structured disposition of one’s estate at death. - TOP
Is there a singular way to address problems inherent in estate transfers?
Yes. A properly drafted, properly funded, properly implemented Revocable Living Trust is a proven foundational plan for almost any estate, and has the structure to remedy almost all of the problems that can be associated with transferring an estate, regardless of the size.
Click HERE for a more detailed explanation of the Revocable Living Trust
Wealthy estates may require more sophisticated planning in order to minimize the estate tax consequences of transferring great wealth. There are, thankfully, a whole range of options available for this purpose, including, but not limited to, irrevocable trusts, limited family partnerships, charitable trusts etc. Even for large estates, however, a living trust will still comprise the centerpiece of the estate plan because of its flexibility, portability, and ease of administration. - TOP
How does a living trust avoid probate?
When the creator of a living trust transfers assets to the trust, actually to himself as the trustee, he has already conveyed legal title to his assets to a “party” that does not cease to exist when he dies. That party is the office of the trustee – which he may occupy during his lifetime. He is also the beneficiary of his own trust during his lifetime. Probate is no longer necessary because the (successor) trustee already holds legal title to the decedent’s assets by operation of law. A trust is a contractual agreement between the creator and trustee of the trust. - TOP
What does it mean to “fund” a trust?
Funding a trust simply means to transfer one’s assets to the trust – actually to the trustee of the trust. This is generally accomplished by such means as:
- Assignment of deeds for realty interests
- Specific assignment/conveyance documents for contractual interests or other non-account assets
- Request-for-retitlement letters (and beneficiary-change letters)
- Assignment of stock & bond powers, or even by
- An entry in a corporate ledger. - TOP
Why must a living trust get funded during the creator’s lifetime?
A living trust must be funded during the lifetime of the creator in order to take advantage of the full benefit of the trust. That is why it is referred to as a “living” trust: it is designed to be funded and functional during the creator’s life, in addition to facilitating the transfer of his assets to his beneficiaries upon death.
Any (non-funded) assets still owned by the decedent outside of the trust at his death will have to be probated in order to be transferred to the trust through a “pour-over will” – a will that “pours” the assets into the trust – after they have been probated. - TOP
How does a Marital A/B Trust work?
A Marital A/B Trust is a trust format designed for legally married spouses (husband & wife) who establish a trust together as co-creators (note: spouses can also establish a “Marital Simple Trust” which has no A/B format).
When the first spouse dies, Trust “B,” called a Credit Shelter Trust because it takes advantage of the amount allowed to be sheltered from estate tax, is to be funded with that part of the entire trust estate which is deemed to belong to him (assuming husband dies first). This means that his sole and separate property (if any) and his interest in any property owned jointly by the spouses (community property and/or tenants-in-common or tenants-by-the-entirety property) is transferred to Trust “B,” which then utilizes his unified credit by not having the decedent spouse’s estate go directly to the surviving spouse under her full control.
The assets of Trust “B” are maintained IN TRUST for the benefit of the surviving spouse for the remainder of her lifetime (unless a prior arrangement is agreed upon). Although she has no ownership interest in Trust “B”, it can be set up so that she can receive all distributable net income from it as well as distributions from the principal for her health, education, maintenance and support.
Trust “B” provides legitimate protection of the decedent spouse’s estate from the surviving spouse’s potential creditors, or a new predatory spouse, or even possible spendthrift tendencies of the surviving spouse because it becomes irrevocable upon the death of the first spouse to die.
Upon the surviving spouse’s death, the assets of Trust “B”, along with the assets of Trust “A” (the surviving spouse’s estate) are then distributed according to the decrees of the trust. - TOP
If a living trust works so well, why hasn’t my attorney mentioned it?
Conventional wisdom says that the family lawyer, because of familiarity and the fact that he or she is a lawyer, is best qualified to help a family set up an estate plan (usually a will). Unfortunately, this is a misconception.
Law schools require only one course in the mechanics of wills, trusts, and estates, and only a fraction of practicing lawyers have the knowledge and skill to claim to be legitimate estate planners. This is because the law is vast; probate and trust law can be a complicated subject. In addition to the legal aspects of estate planning, a lawyer must be able to implement the plan once it is set up. This often requires the skills of a financial management professional, so the lawyer must either acquire those skills himself or find financial experts to do the work for him – all for just one small area of his law practice a function that he performs only occasionally for a valued client or friend.
Unless a lawyer is actively involved with proper estate planning as a fulltime practice or devotes a large percentage of his time to it (as do our network attorneys), it becomes a comparative loss for him or her to get involved in any form of estate planning beyond will preparation. Without question, on a client-per-client basis, it is much more profitable for a lawyer to probate the estate of a deceased client after death than it is to spend the time and effort it takes to help an occasional estate-planning client meet their real planning goals and objectives while they are still alive.
So, in defense of the family attorney (like everything else), it all boils down to the indisputable laws of “Economics – 101.” - TOP
What is a conservatorship?
A conservatorship is a legal guardianship established by a probate court for a person who has become mentally and/or physically debilitated to the extent that he is no longer able to perform financial decisions or responsibilities on his own behalf. It allows the conservator to use the incapacitated person’s assets on his behalf under the supervision of the court. Therefore, someone must petition the court for an adjudication of his incompetency – a public matter. - TOP
How can a potential conservatorship be avoided?
A Financial Durable Power of Attorney (DPA) can be used in some cases to help avoid issues with conservatorship. But a transfer agent (one who acts as a custodian over private accounts held in an institution such as a bank, etc.) is not under any legal requirement to transact with the agent appointed under the DPA. The reason is that a DPA is not a contract, only a valid statement of an agency relationship. Because it is not in contract form, the transfer agent is taking a “risk” in agreeing to honor the DPA, especially if there is later any question about the honesty of the DPA agent’s handling of the principal’s finances. - TOP
What is the best way to avoid a conservatorship?
A funded revocable living trust is the most effective way to prepare for a potential conservatorship. A living trust is a contract. Therefore, when a transfer agent who is representing the institution where the account is held honors the trust creator’s request to have the account retitled into his trust, the transfer agent assents to the terms of the trust/contract and agrees to transact with the trustee who is now serving as a trustee over the trust assets of the incapacitated creator. - TOP
What are estate taxes?
The estate tax is a transfer tax imposed upon the estate (not the heirs) belonging to the decedent at the time of (and because of) his death. It is imposed on the decedent’s entire estate. However, the unified credit can shelter the estate from estate taxes up to the exemption equivalent amount – then in effect at the year of the decedent’s death. Estate taxes are generally not deemed as an “inheritance tax”. Inheritance taxes are imposed only in a small number of certain states upon the beneficiaries of the estate (the heirs) and usually at lower rates than the federal (and state) estate tax. - TOP
What is the unified credit?
Let’s use an illustration to define a tax credit. A taxpayer owes a tax of say $500 as a result of selling an appreciated stock portfolio less than one year (short term gain) after acquisition; at first glance, he seems liable for the full $500 tax bill. But let’s assume he is allowed a tax credit of $200 that he can take against any tax liability(s) incurred as a result of selling the short-term appreciated property. This means that he will only have to pay a $300 tax instead of $500. The tax credit is a dollar-for-dollar credit against(i.e., a per dollar reduction from) that taxpayer’s tax liability.
The Unified Credit works the same way. A credit (the Unified Credit) is allowed against (e.g., used to reduce from) the federal transfer tax imputed on all transfers of assets (other than assets “excluded” from the transfer tax base, such as gifts that are excluded with the annual exclusion). Transfer taxes are imposed on each and every dollar of value that may be transferred by either a lifetime gift or by bequest at death (such as with a will or a trust). Congress allows a credit against those taxes which shelters a certain amount of the taxpayer’s estate from taxation when it is transferred to another.
The term unified, when referring to the Unified Credit, means that the transfer tax credit is allowed to be taken against transfer taxes incurred as a result of either (a) lifetime gifts, or (b) transfers at death, or (c) a combination of both; thus, it is unified – or combined. If the taxpayer uses part of the Unified Credit against a gift tax liability incurred as a result of a large gift made in a given year, then he has effectively reduced the Unified Credit that is available to his estate in the exact dollar-for-dollar amount of the credit that has already been used, whether his death occurred in the same year that the gift(s) was made or in a subsequent year. - TOP
What is the federal exemption equivalent amount?
Let’s start with an illustration. If we wanted to make a loaf of bread that was to become exactly 1 foot in length, 7 inches wide, and 6 inches high – assuming it was to be baked for a specific amount of time and with a specific temperature – we would need to use a certain amount of flour, water, and yeast to make that loaf of bread, every time. So, let’s say that it required 7 cups of flour, 3 cups of water, and 1 package of yeast to make the loaf we have described. That means that every time we had those exact ingredients in our possession, we have the equivalent of a loaf of French bread – 1 foot in length, 7 inches wide, and 6 inches high.
Is the flour, yeast and water the same as the loaf? Obviously, they are not. But when kneaded together and applied with the correct amount of baking time and temperature, the equivalent amount of those ingredients is that loaf of French bread? So, what the term “exemption equivalent” tells us is that since a specific transfer value (of say 1 million dollars) will be taxed at a progressive, marginal tax rate, a tax credit (the unified credit) can be used to offset the tax imputed on the transfer – which equates to that amount being exempted from tax. Using our illustration, because we have the current unified transfer tax credit ($345,800) in hand, we have the corresponding ability to transfer 1 million dollars free (e.g. exempt) of taxation.
To use more specific terms, the tax rates start at a tentative tax rate of 18% with the first $10,000 transferred; then 20% for the transferred value between $10,001 – $20,000; then 22% for the transferred value between $20,001 – $40,000; et cetera. What we find when we do the math using the tentative rate schedule is that an aggregate transfer tax liability of $345,800 will ultimately be incurred as a result of transferring a total of 1 million dollars. Under current law existing at the time of this writing, transferors are allowed a Unified Credit of $345,800 in the year 2003 against the tax liability that would be imposed on transfers of (or transfers in one or more years equal to an aggregate of) 1 million dollars. Therefore, because a taxpayer/transferor is allowed a federal transfer-tax unified credit of up to $345,800, the equivalent amount allowed to be transferred free from estate and/or gift tax is 1 million dollars. - TOP
2014 Update: The American Taxpayer Relief Act [passed January 2, 2013] permanently provides
for a maxium federal estate tax rate of 40 percent with an annually inflation-adjusted $5.34 million
exclusion [exemption equivalent] for estates of decedents dying after December 31, 2012.
What is an unlimited deduction pertaining to an estate?
There are essentially only two deductions associated with estate and gift taxes of which we need to be aware. They are the marital deduction and the charitable deduction. Taking a deduction from an estate value (e.g., to reduce the estate value for tax purposes) is not the same as using the unified credit against the tax itself, as pointed out above, but the ultimate desired result of transfer tax reduction or elimination is the same.
All transfers to a legal spouse or to a qualified [(501(c)(3)] charity – whether a lifetime-transfer (a gift) or a transfer at death (a bequest) – are not subject to taxation. Such transfers are, therefore, simply deducted dollar-for-dollar from the total value that the transferor or the transferor’s estate has made or will ever make. Ever since the Economic Recovery & Tax Act of 1981 (ERTA), the value of the marital deduction has been unlimited. This means that any amount of value transferred to a spouse – regardless of how great the value and regardless of whether it is a lifetime transfer or a transfer at death – is not subject to transfer tax.
In other words, all transfers to a spouse regardless of the amount(s) are deducted from the value of the transfers, dollar-for-dollar, for the purposes of calculating transfer tax. Of course, unlike transfers to a qualified charity, transfers to a spouse do not generate income tax deductions for the transferor.
As mentioned earlier, the charitable deduction is also unlimited. Any transfer to a qualified charity – regardless of how great the value and regardless if it is a lifetime transfer or a transfer at death – is not subject to taxation. The main difference between transfers to a charity and transfers to a spouse is that transfers to a charity can generate income tax deductions (another subject altogether). - TOP
What is a “step-up in basis”?
The determined “tax basis” of property (stock, real estate etc.) – for the purposes of calculating the value of property obtained by a taxpayer as a buyer/transferee – turns on a few different rules depending upon the nature of the transaction. A property-exchange transaction between two or more living parties is generally classified as one of three separate occurrences:
- A completed, bone-fide gift,
- A sale at fair market value, or
- A sale for less than fair market value
When property is exchanged for fair market value in a willing-seller (Jane) / willing-buyer (Peter) arrangement, the property value receives a full “step-up in basis” to the fair-market-value sale amount, and that stepped-up basis value is passed on to the buyer (Peter).
If the sale transaction was a “bargain sale,” meaning that the exchange was for less than fair market value, then the difference between the sale amount and the fair market value would actually be deemed a gift to the buyer/donee (Peter); therefore the stepped-up basis value in the acquired property would only be the purchase amount.
It should be noted that when bone-fide gifts (or partial gifts) are made, not only does the donee (Jane) not acquire a step-up in basis in the gifted property (or in a formulated value because of the partial gift transaction) but also, for transfer tax purposes concerning the donor’s (Jane’s) estate, the fair market value is used to calculate the amount transferred. When the buyer/donee (Peter) of the acquired property subsequently sells the property (to Mary) at fair market value (for example), he will be deemed to have acquired a capital gain and is therefore subjected to capital gains tax because of the sale.
The capital gains tax is calculated on the appreciated value of the property, which is simply the spread between the acquired basis of the seller and the acquired basis of the subsequent buyer. The determined tax basis of all property acquired by beneficiaries of a decedent transferor’s estate is simply the value of the property at the date of the transferor’s death – or the value of the property six months later if the “alternate valuation date rule” is used. Transfers that occur by reason of the death of the transferor are considered to be sale transactions. Therefore, under the current transfer tax rules, the value of all property owned and transferred by a decedent receives a full step-up in basis to the value of the property at the date of his/her death.
The general rule, then, is that all property over which a decedent enjoyed unhindered control (i.e., general power of appointment control) is deemed to be in the taxable estate of the decedent and therefore must receive a full step-up in basis at the decedent’s death. In addition, under the grantor trust rules, certain property irrevocably transferred to a grantor trust by the transferor during his/her lifetime will still be classified as being in the transferor’s estate for estate tax purposes if the transferor retained a right to receive income from the trust during his/her lifetime. The most notable exception to this rule is a qualified charitable remainder trust. - TOP
What is the annual exclusion?
Here is yet another term the application of which can have an impact on transfer tax liability similar to the unified credit or the unlimited (marital or charitable) deductions. Exclusions are not deductions; but for transfer tax purposes, they essentially could be deemed the same; it’s mostly a matter of semantics.
An exclusion is something that is removed altogether from the value of the transfer base of the transferor (deductions are deducted from the transfer). The transfer tax exclusion pertains primarily to the annual gift tax exclusion. Under current law (as of the year 2014) transferors are allowed a Fourteen Thousand Dollar ($14,000) annual exclusion. The annual exclusion can be utilized each and every year, but only on a non-cumulative basis. The term non-cumulative means that even though a transferor did not utilize the exclusion in a prior year(s), he cannot add up, or accumulate, the exclusion amounts that were not utilized (each year) to increase the exclusion amount for the current year.
The annual exclusion can be utilized with the unified credit. This means that if a transferor gave $25,000 to a transferee in a single given year, the transferor’s actual transfer (or gift) value for the purposes of computing the gift tax would be $11,000 ($25,000 minus $14,000 = $11,000) and the non-excluded $11,000 could be sheltered by taking a part of the unified credit against the transfer tax incurred as a result of the transfer. To put it another way, a transferor could hypothetically give a transferee one million & fourteen thousand dollars all in the same year. The one million would be exempt from transfer tax by virtue of the unified credit and the annual gift tax exclusion could be utilized to exclude the remaining fourteen thousand from the transfer base. - TOP