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TABLE OF CONTENTS

The Overall Picture
Wills
Trusts
Post-Mortem Letters
Livings Wills
Life Insurance
Disclaimers
Lifetime Gifts
INFOSOURCES

Proper estate planning can help to increase the size of your estate, whether large or small. Its basic purposes are (1) allows you to choose how your property will be distributed after your death, (2) help resume that your property will be distributed in an orderly and efficient way and (3) minimize taxes.

This Financial Guide gives you a roadmap to the estate planning process. It will help you to get started: to provide for your heirs, to lessen the administrative burden on your survivors, and to understand what you’ll have to do to minimize estate and income taxes. It will enable you to approach your attorney and other professional advisors with a clearer idea of what the process should entail.

THE OVERALL PICTURE

Just what is your "estate"? Simply stated, it includes everything you own at your death minus your debts. Some rather tricky rules apply, which may bring back into your estate assets you’ve given away, or thought you’d given away.

Most estates pass free of federal estate tax. You can leave an unlimited amount to a surviving spouse without having it be subject to federal estate tax (i.e., the bequest provides a marital deduction). And you can currently leave your other survivors up to $675,000 without paying federal estate tax. In addition to federal estate tax, state inheritance taxes, which vary from state to state, must also be considered.

If your estate is over $675,000,  you should probably set up a trust for your spouse, a credit shelter trust, to minimize estate tax.

In addition to the two primary estate planning tools wills and trusts, there are other essential tools you should consider:

• The post-mortem letter to your spouse and survivors,
• Living wills,
• Life insurance,
• Disclaimers,
• Lifetime gifts, and
• Powers of attorney.

WILLS

The will is the foundation of good estate planning. It’s critical to obtain competent legal help in drafting a will. A will that is poorly drafted or does not dot every legal "i" and cross every legal "t" can be the cause of endless trouble for your survivors.

TIP: Do not keep will originals in a safe deposit box. Instead, keep them in a fireproof safe at home. Give copies to your attorney and your executor.

Many people believe they do not need a will. There are many reasons, other than saving estate taxes. for having a valid and updated will.

Why You Need A Will

There are five basic reasons to prepare a will:

To Choose Beneficiaries. The intestate succession laws of the state in which you live determine how your property will be distributed if you die without a valid will. For example, in most states the property of a married person with children who dies intestate (i.e., without a will) generally will be distributed one-third to his or her spouse and two-thirds to the children, while the property of an unmarried, childless person who dies intestate generally will be distributed to his or her parents (or siblings if there are no parents). These distributions may be contrary to what you want. In effect, by not having a will, you are allowing the state to choose your beneficiaries. Further, a will allows you to specify not only who will receive the property, but how much each beneficiary will receive. You may also wish to leave property to a charity after your death, and a will may be needed to accomplish this goal.

To Minimize Taxes. Many people feel they do not need a will because their taxable estate does not exceed the amount that is allowed to pass free of federal estate tax (currently $675,000). However, your taxable estate may be larger than you think because of "hidden resources," assets that are overlooked because they are illiquid or untouchable (e.g., certain life insurance policies, qualified retirement plan benefits and IRAs). These assets can cause your estate to balloon to an amount subject to tax. More importantly, in many states an estate becomes subject to state estate or inheritance taxes at a point well below the $675,000 mark. A properly prepared will is necessary to implement estate-tax-reduction strategies.

TIP: Changes in the size of your estate may warrant a re-examination of your estate plan. If it has been a while since you've done any estate planning, or if you've never done so, now is a good time to explore whether there are any steps that can be taken to minimize tax on your estate.

To Appoint a Guardian. If you have minor children, you should prepare a will to name a guardian for in the event of your death and/or the death of your spouse. While naming a guardian does not bind either the named guardian or the court, it does indicate your wishes, which courts generally try to accommodate.

To Name an Executor. Without a will, you cannot appoint someone you trust to carry out the administration of your estate. If you do not specifically name an executor in a will, a court will appoint someone to handle your estate, perhaps someone you would not have chosen. Obviously, there is an advantage, and peace of mind, in selecting an executor you trust.

To Establish Domicile. You may wish to firmly establish domicile (permanent legal residence) in a particular state, for tax or other reasons. If you move frequently or own homes in more than one state, each state in which you reside could try to impose death or inheritance taxes at the time of death, possibly subjecting your estate to multiple probate proceedings. To lessen the risk of this, you should execute a will that clearly indicates your intended state of domicile.

You should review your will every two or three years, or whenever your circumstances change. A change that might necessitate a change to your estate plan might include:

• Divorce,
• Having a child,
• Having children move out of the house,
• Acquiring a large asset,
• Selling a large asset, or
• A change in the tax laws.

TIP: If you have neglected your estate planning for a while and have not updated your will since 1985, you should definitely re-examine it now, since there was a major revision to the estate tax laws in 1986.

TRUSTS

Today, trusts are not used only by the very wealthy. People of a wide variety of income levels use them as estate planning tools. Trusts are complex and costly to set up and run, requiring a higher level of services from an attorney than wills. They are useful in accomplishing various estate planning and financial planning goals.

What They Are

A trust owns its own property (holds the title). When it is set up, the trust appears on official papers and records as the legal owner of any property that is placed into it. The trust’s principal is the property that the trust owns, as distinguished from the interest or dividends earned by that property.  The terms of the trust dictate who will get the benefit of the income from the trust property, how long the trust will last, and so on.

The trustee is the person or entity whose job it is to administer and manage the trust: make investment decisions, pay taxes, make sure the terms of the trust are carried out, and take care of the trust’s property. Generally speaking, the trust must pay income tax on any of its undistributed interest or other income.

There are basically two types of trust:

• An irrevocable trust is a separate entity, for both legal and tax purposes, and pays its own taxes. The irrevocable trust cannot be revoked or changed.
• A revocable trust is not considered a separate entity for tax purposes, although it may be considered a separate legal entity. The revocable trust can be changed or revoked—taken back—by the creator of the trust.

Another way to categorize trusts: A living (or inter vivos) trust is set up by a living person while a testamentary trust is created by a will.

What They Can Accomplish

1. Trusts can be used for many worthwhile purpose.:
2. Give property to children.
3. Reduce estate taxes.
4. Leave assets to a spouse.
5. Provide for life insurance used to pay estate tax.

Giving property to children. People generally do not want to just give property to a minor child outright because of the financial risks involved (e.g., the child could squander it). Many people give property to a minor through a trust. The trust’s terms can be written so that the child does not get outright ownership until he or she has achieved a certain age, so that the child receives only the income from the trust property until that time. Another way to give  property to a minor  is via the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. These provisions, which apply in most states, provide for a custodianship over property given to a minor.

Reducing estate taxes. As noted earlier, if you leave everything to your spouse, it passes free of federal estate tax. However, when your surviving spouse dies, anything in his or her estate over $650,000 would be subject to estate tax. The credit shelter trust, or bypass trust, is used to shelter up to $650,000 from the estate tax. Here’s a simplified example of how it might work:

Example: Simon and Sylvia have an estate worth $1.5 million. Simon’s will puts $650,000 worth of assets in a bypass trust. The ultimate beneficiary of this trust is Simon and Sylvia’s daughter. (The beneficiary can be anyone other than Sylvia.) Sylvia is to receive the income from that trust for her life, but her rights in the trust are limited, so that she is not considered the owner. The rest of Simon’s estate ($850,000) is left to Sylvia in his will. When Simon dies, the $650,000 in the bypass trust is sheltered by his estate tax exemption. The $850,000 that goes to Sylvia is deducted from the estate because of the marital deduction. Thus, on Simon’s death, the federal estate tax due is zero. When Sylvia dies, her estate will include only the $850,000, plus any other assets she has accumulated. It will not include the $650,000 put into the bypass trust, which will be exempt from tax because of the $650,000 estate tax exemption.  Thus, the federal estate tax will apply only to Sylvia’s assets in excess of $650,000. Result: The family has sheltered assets worth $1.3 million from estate tax. Without the bypass trust, the estate tax would have applied to an additional $650,000 of the estate.

Leaving an asset to a spouse. The marital deduction trust allows the first spouse to die to place estate assets in a trust for the surviving spouse, instead of leaving them to him or her outright. If the legal requirements are met, the estate gets the marital deduction, but can still preserve assets for heirs other than the surviving spouse. Typically, the income of such trusts will go to the surviving spouse for life and the principal will go to children. All of the income must go to the surviving spouse for the trust to qualify for the marital deduction. It must be paid out at least once a year. There may be some access to the principal. When the second spouse dies, the property is included in his or her estate for estate tax purposes.

Pay estate tax. Complex and expensive arrangements, life insurance trusts are usually used to finance future estate taxes on an estate that contains a business interest or real estate.

POST-MORTEM LETTERS

Does anyone but you know where your tax records and supporting tax documents are located? How about deeds, titles, wills, insurance papers? Does anyone know who your accountant is? Your lawyer? Your broker? If you pass away without leaving your heirs this information, it will cause a lot of headaches. Worse than that, part of your estate may have to spent in needless taxes, claims, or expenses because the information is missing.

The post-mortem letter is an often overlooked estate planning tool. It tells your executors and survivors what they need to know to maximize your estate—the location of assets, records, and contacts. Without the post-mortem letter, you risk losing part of your estate’s assets because necessary documentation cannot be located.

LIVING WILLS

A living will makes known your wishes as to what medical treatment or measures you want to have if  you become incapacitated and unable to make the decision yourself. It tells family and physicians whether you want to be kept alive through mechanical means or whether you would prefer not to have such means used. If there is no living will, this decision is left up to the family, or the physicians, to decide.  Stating your preference in a living will can take some of the burden off family members and decrease the stress in an emergency. 

LIFE INSURANCE

The main purpose of life insurance is to provide for the welfare of survivors. But life insurance can also serve as an estate planning tool. For example, it can be used to finance the payment of future estate taxes or to finance a buy-out of a deceased’s interest in a business. It can also be used to pay funeral and final expenses and debts.

TIP: If the decedent owns the policy, the proceeds will be included in the estate, and subject to estate tax. However, if the decedent gives away all incidents of ownership in the policy, the proceeds will not be included in the estate.

DISCLAIMERS

The disclaimer is a way for an heir to refuse all or part of property that would otherwise pass to him or her, via will, intestacy laws, or by operation of law. If a disclaimer is done correctly in accordance with the tax law, the property passes to the next beneficiary in line.

TIP: The fact that the property is treated as if it had passed directly from the decedent to the next-in-line beneficiary may save thousands of dollars in estate taxes. The provision for a disclaimer in a will and the wise use of a disclaimer allows intra-family income shifting for maximum use of the estate tax marital deduction, the unified credit, and the lower income tax brackets.

TIP: Disclaimers can also be used to provide for financial contingencies. For example, a beneficiary can disclaim an interest if someone else is in need of funds.

LIFETIME GIFTS

The annual gift tax exclusion provides a simple, effective way of cutting estate taxes and shifting income. You can make annual gifts of up to $10,000 ($20,000 for a married couple) to as many donees as you desire. The $10,000 is excluded from the federal gift tax, so that you will not incur gift tax liability. Further, each $10,000 you give away during your lifetime reduces your estate for federal estate tax purposes.

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Related FGs

• POST-MORTEM LETTER: How To Prepare It And What To Include

• LIFE INSURANCE: How Much And What Kind To Buy

External Sites

Due to the nature of Planning For Your Estate, there are no available External Sites which are suited to this particular Life Event.  Accordingly, professional guidance should be sought for your particular needs.

Books and Other Publications

• William S. Moore, The Estate Plan Book (Great Barrington, MA, American Institute for Economic Research, 1994).
• Alex J. Soled, Estate Planning: Easy Answers to Your Most Important Questions (New York, Consumer Reports Books, 1994).
• Martin M. Shenkman, The Estate Planning Guide (New York, John Wiley & Sons, 1991).
• Eugene J. Daly, Thy Will Be Done: A Guide to Wills, Taxation, and Estate Planning for Older Persons (Buffalo, NY, Prometheus Books, 1990).
• Alexander Bove, Complete Book of Wills and Estates (Henry Holt & Co., 1991).
• Dennis Clifford, Plan Your Estate (Nolo Press, 1992).

Government and Non-Profit Agencies

• An organization that provides information on living wills:

Choice In Dying
200 Varick Street
New York, NY 10014
Tel. 800-366-5540

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• An organization that provides information on officers’ benefits and estate planning:

Army and Air Force Mutual Aid Association
800-336-4538

• This veterans’ benefit organization for Navy, Marine Corps, Coast Guard, Public Health, and NOAA personnel provides information:

Navy Mutual Aid Association
800-628-6011

• These publications contain estate planning tips for military personnel:

• National Guard Almanac
• Reserve Forces Almanac
• Retired Military Almanac
• Uniformed Services Almanac (Active Duty)

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