Estate Planning: Wills, Trusts, Wealth Transfer

You may read the entire section or click on the topic below and go directly to your area of interest. 

• Estate planning & taxes
• Gifts & gift taxes
• Estate taxes
• The probate process
• Establishing a will
• Establishing a trust
• Modifying wills & trusts

Estate planning & taxes
When you die, you can make sure that your estate goes to your desired beneficiaries. Estate planning is the process of naming your heirs and/or beneficiaries and managing the tax consequences of passing your wealth on to those institutions or individuals. If your estate exceeds a certain value, your estate will owe estate taxes.

In an effort to administer your estate, you may wish to establish a will or a trust. A trust is an agreement where you are the grantor or executor, and you then designate a trustee and a beneficiary.  If you fail to establish a will or a trust, you will die intestate, which will require the courts to determine how your assets are to be distributed.  The probate process is used to satisfy estate liabilities before assets can be distributed. 

There was a study by AARP titled "A Report on Probate: Consumer Perspectives and Concerns".

• The average length of time it took to complete the probate process was 15 months.
• The average cost of probate is expected to be between 5 and 10 percent of the gross estate.
• An attorney will receive approximately $5,000 to $10,000 in costs and fees, for every $100,000 of assets which he or she administers through the probate process.

You will owe estate taxes on the value of your estate that exceeds the applicable exclusion limit. The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually lowers the maximum estate tax rate, from 55% to 45%, repealing the tax for one year in 2010. The exclusion limit and maximum tax rate revert back to 2001 levels in 2011.

If the value of your estate exceeds the applicable exclusion limit in the year of your death, your estate must file IRS Form 706. (Generation-skipping tax is the tax owed on property left to grandchildren or great-grandchildren.)

For the 2008 tax year, the applicable exclusion limit is $2 million and the maximum tax rate is 45%. The following table shows applicable exclusion limits and maximum tax rates through 2011. Future tax-law changes may affect these figures 

The 2001 tax law may make estate planning even more complex than it already can be. Consider that the law in its current version is set to expire at the end of 2010.

• Unexpected events. In the event you are impaired from a disease or accident, you may wish to arrange for key financial decisions to be made on your behalf. You can establish a living will, power of attorney (POA) agreement, or revocable living trust.
• Marital deduction. The marital deduction allows you to transfer to your spouse the entire value of your estate, free of estate taxes. The marital deduction is a tax-deferral rather than tax-avoidance strategy. When the surviving spouse dies, his or her estate (the combined value of both estates) may be liable for estate taxes.
• Gifting. In 2008, you can give up to $12,000 to each individual or charitable organization in a year without paying gift taxes. (The recipient does not pay taxes on the yearly limit of $12,000.) There is no yearly limit for qualified educational expenses. Gifting lowers the value of your estate and distributes your wealth while you are living. Gifts made to charitable organizations may be tax-deductible, but gifts to your heirs are not tax-deductible.

Unified tax credit. The unified credit is a cumulative tax credit. If you give more than $12,000 to an individual in a year, taxes owed on amounts that exceed the $12,000 per-person limit are subtracted from your unified credit. To record gifts in excess of the yearly limit, complete IRS Form 709. (Form 706 is for estate tax and Form 709 is for gift tax.)

Gifts & gift taxes
Over time, you are likely to accumulate assets, stemming from savings, investing, retirement plans, the purchase of your home, and/or a vacation home.  In addition, if you are self employed or own your own business, there may be significant value   in your business. You may sell that business for an amount that could be a very significant sum.  These assets appreciate in value, as you continue to add to your savings, as your savings grow due to the effect of compound interest, and due to general inflation over time.   All of these factors, combined, lead to an   increase in your personal net worth. When you die, this accumulated wealth is referred to as your estate.

There are several ways in which you can manage your estate. You can set up a will or trust, contribute to a charitable organization, or establish your own endowment or foundation. You can give away cash or other property to your children, grandchildren or other heirs and beneficiaries.

Your gross estate and taxable estate are different measures of your estate value. However, it's your taxable estate that determines the amount of estate tax your estate may owe. Estate taxes are a part of the federal government's transfer-tax system, a system aimed at taxing the value of property as it flows from a deceased party ("decedent") to the surviving heirs, or beneficiaries. Since estate taxes are levied on the transfer of a deceased person's estate, they are sometimes called "death taxes."

You can deduct some items from a gross estate in order to calculate your taxable estate. These items include funeral expenses paid by your estate, debts you owe at the time of your death and the marital deduction. The marital deduction is the conveyance of an estate from a spouse who has died (the decedent) to the surviving spouse. Federal estate tax law allows you to transfer your entire estate to the surviving spouse with no estate tax liability.  Hence, the marital deduction is a tax-free transfer of your assets to your surviving spouse. When your spouse dies, the full value of the remaining adjusted estate is subject to possible federal estate taxes.

To the extent that you have any of your gift tax unified credit left over (which is used to offset gift taxes while you are alive), your heirs may use this credit to reduce the amount of estate tax owed. For example, a unified credit is a tax credit reserve that you use to eliminate or reduce estate taxes. A tax credit is a dollar-for-dollar reduction in the amount of taxes you owe. While you are living, you can deduct a unified credit of $345,800 from the amount of gift taxes that you owe. When you die, you can deduct a unified credit from the amount of estate taxes owed. The estate tax unified credit for 2008 is $780,800. This unified credit amount corresponds to the 2008 applicable exclusion limit of $2 million.

The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually phases out the estate tax. Consistent with the new tax law, the tax credit for state death taxes was also phased out and eliminated beginning with the 2005 tax year.

A popular topic of discussion is the possible elimination of the estate tax, which will be eliminated in 2010, but only for one year. On Dec. 31, 2010, a "sunset" provision in the tax law means that estate tax statutes are set to expire. As a result, the estate tax is scheduled to revert to levels that existed when the law was passed.

Until 2010, you may still be liable for estate taxes if the value of your estate exceeds the applicable exclusion limit in the year that you die. The applicable exclusion limit is the dollar value of your estate that is exempt from estate taxes. For 2008, the applicable exclusion limit is $2 million. It increases to $3.5 million in 2009.

In that event, the executor of your estate must file IRS Form 706.

As previously mentioned, for 2008, the applicable exclusion limit is $2 million and maximum tax rate is 45%. The following table shows applicable exclusion limits and maximum tax rates through 2011. Future tax-law changes may affect these figures: 

You will see from the table above that the gift tax remains in 2010. Next, we take a closer look at this tax and how you can use gifting to reduce the value of your estate.

Estate taxes
As a part of managing your wealth, you will naturally seek to share it with your loved ones or desired charities as you advance in years. To distribute your wealth during your lifetime, you can give every year to your beneficiaries. This process is called gifting.

If you give what the IRS deems an excessive amount, you may be liable for gift taxes on the excess amount. For 2008, you owe gift taxes for gifts to any one individual that exceeds $12,000 in a year. This amount is called the gift-tax exemption or annual exclusion. The gift-tax exemption is indexed to inflation in increments of $1,000.

However, you may be able to avoid, or reduce, gift taxes by deducting the amount that exceeds the gift-tax exemption from your gift tax unified credit. Here's how it works: If you give $13,000 to a child in 2008, you would potentially owe gift taxes on the $1,000 that exceeds the $12,000 exemption. If the amount of gift tax owed was $180, you could deduct that from your gift tax unified credit, which is $345,800 in 2008.

Your gift tax unified credit is like a running balance.  If this is your first use of the credit, you would deduct the $180 and have a lifetime unified-credit balance of $345,620. As it turns out, the gift tax unified credit of $345,800 corresponds exactly to the applicable exclusion limit for gift tax of $1 million for 2008.

You may also choose to give to a charitable organization. These are non-profit organizations that have tax-exempt status under section 501(c)(3) of the tax code. Gifts that you make to a 501(c)(3) entity can be deducted from your estate for tax-reporting purposes. However, gifts to entities other than charitable organizations are generally not tax-deductible.

There are no dollar limits to how much you give to a charitable contribution. Other exemptions to the annual gift-tax exclusion include tuition or medical expenses that you pay for someone,  gifts to a spouse (which is covered with the marital deduction), and gifts to a political organization for its use. 

In addition, Section 529 plans allow you to tap into future years of the gift-tax exclusion. Section 529 plans are tax-advantaged plans to save for a child or grandchild's college education. These plans allow single parents, grandparents or other benefactors to contribute up to $60,000 in one year, and $120,000 if contributing as a married couple. (This process of sharing a gift between two spouses is called gift-splitting.) If you decide to "front-load" a 529 plan in such a way, you may have to wait as many as five years before making additional contributions to the plan or to the plan's beneficiary.

To record gifts in excess of the gift-tax exemption, complete IRS Form 709. You must also file Form 709 if you are splitting a gift with your spouse. Other circumstances may require you to complete the form. See IRS Pub. 950 for more information.

Unlike the estate or generation-skipping tax (GST), the gift tax is retained in 2010. However, the tax law does lower the maximum gift tax rate that year to 35%, which will correspond to the maximum individual income-tax rate in that year.

The following table shows how the gift-tax rate will decrease over the next several years and how it reverts to pre-tax law levels in 2011 with the expiration of the new tax law:

Next, we explain probate, and how you may better understand the probate process.

The probate process
Probate is a legal process that is generally dictated by the laws of the state in which you resided at the time of your death. Probate is aimed at distributing the assets of your estate after your death. (The deceased person is referred to as the "decedent.")

If you die having left a will or trust, the probate process -- completing the transfer of assets to desired beneficiaries to the extent possible and paying off unpaid debts -- is likely to move much more quickly and inexpensively. Dying without a will is called dying intestate.  One of the important steps of the probate process is paying any legitimate claims by creditors. These claims include any tax liens or other encumbrances. For example, if you die with an estate worth $750,000 and owe $50,000 in personal debts, some of the assets in your estate would be used to pay off these debts and your estate's value would decline to $700,000.

Similarly, if you own a home with a mortgage, your home may be sold to raise the proceeds necessary to pay off a mortgage loan. Any remaining cash from the sale, after transaction fees, would go to the estate.

Probate is often a messy, drawn-out affair. Rightful beneficiaries need to be identified and located. Competing claims on your estate need to be adjudicated. In some cases, an estate may require intervention by a probate court to hear competing claims against the estate or similar disputes.

If you own property in joint tenancy, your estate is generally transferred to any surviving tenants and probate may be unnecessary. You may use gifting to reduce the value of your estate and simplify the time and effort of probate.

You may have a life-insurance policy that pays a death benefit to your beneficiaries and is intended to pay any estate taxes owed on your estate. Proceeds from life insurance policies generally skip probate.

The probate process ends when your estate is fully distributed, and any creditors' claims and estate taxes are paid. Probate is likely to be more time-consuming and expensive in states where the process consumes more public legal resources.

The size of your estate is not necessarily a determinant in how fast your estate moves through probate. Instead, writing a will or executing a trust is a major way to expedite the probate process.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

Establishing a will
In the aftermath of the September 11, 2001, terrorist attacks in the U.S., lawyers and financial planners witnessed a surge of interest in writing a will. A will is a legally enforceable statement of how you wish to distribute your wealth after your death. Writing a will is a practical first step in estate planning, to ensure that your assets are passed on to your intended heirs and beneficiaries.

A will establishes how you wish your estate to be distributed after you die. Writing a will is as simple as typing out how you want your assets to be transferred to loved ones and any charitable organizations after you die. If you don't have a will when you die, your estate will be intestate.

You can write a living will if you want the flexibility to modify your will as you see fit. A living will can be quite practical, as it can be revoked or modified, should you decide to make changes in how your assets will be distributed.  

When writing a will, you should keep a few rules in mind:

• Age. For most states, you must be age 18 or older to execute a will.
• Mental capacity. To be valid, a will must be executed in sound judgment and mental capacity.
• Format. With the exception of a few states that accept a handwritten will as valid, a will must be typewritten or computer-generated.
• Substantiality. A will must have at least one substantive provision and clearly state that it is your will.
• Designating an executor. You must designate an executor of your will. An executor ensures that your estate is distributed in a fashion that follows your will as closely as possible. (A part of the estate disposition process is that your estate must pay legitimate debts owed creditors at the time of your death.)
• Witnesses. While your will does not require notarization, nor is it necessary to record your will at the local courthouse, executing a will requires you to sign it in the presence of at least two witnesses. While it is not necessary to notarize or record a will, doing so may provide additional safeguards to any claims that your will is invalid.

(Source: Nolo.com)

If you reside in one of the handful of states that have community-property law, your surviving spouse is entitled to keep half of your wealth after you die no matter what percentage you actually leave him or her. You may wish to seek legal advice on writing a will in order that you become better informed on all the rules of the estate disposition process in your particular state.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

Establishing a trust
A trust is a legal arrangement that allows you to transfer your assets to your desired beneficiaries. The main parties of a trust arrangement are the grantor, trustee and beneficiary.

You, and/or the person or persons with whom you establish a trust, are called the grantor (or co-grantor). The trustee is the individual or institution that acts as a fiduciary agent to manage the transfer and disposition of assets to the beneficiary.

How is a trust different from a will? A will merely stipulates how you want your assets distributed after you die. A trust formalizes how those assets will be distributed. A trust can be used to ensure that the assets you leave to a foundation or other charitable organization, or to your loved ones, are not consumed too quickly. A trust is appropriate when you have loved ones with special needs. A trust is appropriate when you have spendthrift children, whom you believe will not handle responsibly, the wealth you leave behind.

A living trust allows you to transfer assets while you are alive. You can also revoke or modify a living trust, which can be very practical. This kind of trust is called a revocable living trust, whereby the arrangements you have made in regard to your assets, can be unwound or changed.

To establish a living trust, you name yourself as trustee in a declaration of trust document. If you have a spouse, you are co-trustees. You also designate a successor trustee to take over as trustee after you die.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

Modifying Wills & Trusts
When you write a will or establish a trust, you will likely want to gain the most flexibility in being legally able to modify these documents.

Generally, you can modify a will at any time. However, you should ensure that a modified will does not compete with a previously written will. If you recorded your previous will, for example, you should also expect to record a modified will.

To avoid having conflicting wills, the latest modification may have to refer specifically to the earlier version. Otherwise, different beneficiaries may have conflicting claims against your estate as a result of you having two or more wills.

The type of trust that you establish largely determines whether or not you can modify it. For living trusts, a revocable living trust can be revoked or modified at any time while you are alive and replaced with another trust agreement. An irrevocable living trust cannot be revoked or modified once you establish it.

Some people deliberately establish an irrevocable living trust to add some finality to how they distribute their estate. However, this may not be very practical; you may wish to establish a revocable living trust to have the most flexibility.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

Establishing a Funeral Trust

Preparing for the inevitable
Comprehensive planning includes preparing for the inevitable. According to the American Association of Retired Persons (AARP) website, funeral and final expenses can easily exceed $10,000. So, when the inevitable day comes, how will your family pay for your funeral?

Introducing the Funeral Trusts
The Funeral Trust is a packaged plan where a company provides an insurance policy, with interest growth, assigned to a Funeral Trust, simplifying the process.  This plan is specifically designed to help pay for final expenses, and relieve this burden from your family.

Benefits of a Funeral Trust

• Peace of mind for you and your family
• Guaranteed issue is customarily available – up to the age of 99
• Interest growth for inflation protection
• Tax Free death benefits
• Claims paid Next Business Day - without a Death Certificate
• Benefits are portable to any funeral home in the country
• Protects funds from all creditors, nursing homes,

The Funeral Trust becomes a consideration, when we are all forced to answer the following question: How will your family pay for your funeral?

Consider how a Funeral Trust compares to other methods of advanced Funeral Funding.

As you can see, a Funeral Trust could play an important role, and may provide your family the most protection of any of the advanced funeral funding options.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

Burial/Final Expense

What it Protects against: Consider that a funerals is one of the most expensive purchases you may ever make (ranging from $6,000 to over $10,000), and there may be expenses you haven’t considered. Many people not only have to worry about funeral expenses, but about other outstanding debts that need to be paid upon their death. Mortgages, credit card bills, and car payments can all leave a hardship on the surviving family members.

When you purchase burial/final expense coverage, so that you will not have to worry that your loved ones will carry the burden of your final expenses.  The benefits provided will not decrease due to age or declining health, the premium you pay for this coverage will not increase- the premium payment you make when you first become insured is the same rate you will pay for the life of the policy. Your coverage can last for a lifetime, as long as premiums are paid.