Estate Planning Question and Answer
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What are some common estate planning mistakes?
Will my estate owe and estate or inheritance tax? In 2004, each individual has applicable exclusion amount 1,500,000.00. With proper planning, a couple can now shelter up to $3,000,000.00 from estate taxes. However, this cannot be accomplished with a simple will. Creation of a bypass trust is necessary. The exemption increases between now and 2009 to $3,500,000.00 with the estate tax being repealed during 2010 and then returning again at 2002 levels with a $1,000,000.00 exemption in 2011. In addition the tax rate on taxable estate is gradually being reduced. Without proper planning a couple with a community estate of more than the exemption amount will potentially owe estate taxes. How can I shelter the maximum amount of my estate from tax? For most couples, the implementation of a plan, which shelters the exemption amount of the first spouse from tax in the estate of the second spouse, will eliminate estate taxes altogether. Most couples desire to eliminate tax in the estate of the first to die. This can be accomplished by the use of the bypass trust in combination with the unlimited marital deduction so that no tax will be paid until the death of both spouses. In most cases the surviving spouse can be named executor and trustee and with certain limitations, will be able to use the entire estate for his or her health, maintenance and support. What if I still will owe estate tax after basic planning? There are a number of ways to reduce your estate if the use of the bypass trust will does not shelter the entire estate from tax. Each individual my give up to $11,000 per year to as many individual donees as the individual desires. This means that a couple with three children could give each child $22,000 per year for a total of $66,000 with no gift or estate consequences. Similar gifts could be made to each grandchild. Because the maximum estate tax rate is now 49%, a couple in the 49% bracket would be saving $5,390 in estate taxes (plus the growth on the assets) for each $11,000 gift. Annual exclusion gifts may be made outright, and if done correctly, may also be made in trust. Using all or a part of the exemption amount during lifetime is another way to remove the growth of the gifted asset from the estate and save estate taxes.Numerous other techniques are also available. Use of the family limited partnership, grantor retained annuity trusts , qualified personal residence trust, defective grantor trusts and the irrevocable life insurance trust are just a few of the methods that are available to reduce the size of the taxable estate. How is my life insurance handled in my estate? If an individual has any incident of ownership of a life insurance policy, the policy proceeds are included for estate tax purposes. Naming the surviving spouse as the beneficiary of life insurance proceeds in a large estate will simply increase the estate taxes due at his or her death. The proper use of an irrevocable life insurance trust is a great way to keep the policy proceeds out of the estate tax base but to have them available either for payment of estate taxes or as a tool for wealth replacement. How should my bank accounts, CDs and brokerage accounts be handled? The most common way for a couple to hold a bank account or CD is as joint tenants with right of survivorship. The surviving joint owner of the account owns the account even if the will of the deceased owner directs the proceeds differently. Community property may now be held with right of survivorship. In smaller estates, if the couple desire the account to go directly to the survivor, survivorship accounts are quite proper. However, if the couple has done estate planning due to the size of the estate, holding accounts in survivorship form is almost always not recommended. Who should be the beneficiary of my IRA and employee benefits? It depends. Usually, the surviving spouse is the best bet. However, if there is the potential that the proceeds of the IRA may be needed to fund the bypass trust, you will need professional assistance in formulating the beneficiary designation. Be sure that you consult with your tax advisor well in advance of your required beginning date to make sure that the beneficiary designation on your IRA maximizes the income tax deferral benefits while at the same time leaving room for flexibility for estate planning purposes. My estate is not that large, why should I plan? Proper stewardship suggest that we should all plan our affairs so that our material resources are distributed in the exact way the we desire and with the least amount of stress, expense, and trouble for our loved ones. Even the smallest of estates can benefit from planning. What are the basic estate planning documents? The big four are the Will, Durable Power of Attorney, Health Care Power of Attorney and Living Will. In some cases a separate designation of guardian may be appropriate. What happens if I become disabled or incapacitated? If you have prepared and signed a durable power of attorney and durable health care power, your agent will be able to take care of your business and health related affairs. The business agent and health care agent need not be the same person. If these documents have not been signed, guardianship proceedings may have to be initiated. Guardianship is usually a time consuming process that can be avoided with proper planning. In some cases, a stand by revocable trust can be very helpful as a disability-planning tool. Who inherits my property if I don't have a will? Subject to the administration of your estate, which may be a time consuming process if you die without a will and if your family is not cooperative, the following persons inherit your probate assets at your death. Married Persons The surviving spouse inherits your community property if you have no children or if all children are children of your marriage to your surviving spouse. If there are children from a prior marriage they inherit your one half of the community property. If you have children, your separate personal property is inherited one third by your surviving spouse and two thirds by your children. Your separate real property is inherited by your children subject to a one-third life estate in your surviving spouse. If you have no children your separate personal property inherited by your surviving spouse. Separate real property is inherited one half by the surviving spouse and one half by parents if living or if not living then to brothers and sisters and their descendants. Single Persons First to Children and their descendants. If no children or descendants then to parents equally. If one parent is deceased then one-half to the surviving parent and one-half to surviving brothers and sisters and their descendants by representation. If both parents are deceased then to brothers and sisters and their descendants by representation. What is probate and how much does it cost? Probate is the process of transferring your assets at death to the persons legally entitled thereto and the settlement of all debts, expenses and taxes owed by the estate. In Texas, if your estate is properly planned, probate is a relatively simple process that is generally free of court supervision. In very simple estates with no debts and no taxes, the will may be probated with no administration and the process completed within a couple of weeks. Most experience trust and estate attorneys handle probates on an hourly basis. Fees can range from well under $1,000 in simple situations to thousands of dollars in large estates with complicated issues. Your best defense to avoiding high costs is to have an experienced professional plan you estate. This will avoid most of the costs associated with a court supervised estate administration. What is a living trust and do I need one? A living trust is a trust created during lifetime which may or may not be funded with assets and is revocable by the grantor. Living trusts have been promoted by unscrupulous unlicensed individuals at high costs and with little benefit to the purchaser. Living trusts do have a place in estate planning. However, you should make the decision as to whether this tool is something you need after assessing all of the facts. The State Bar of Texas has recently published a pamphlet regarding Living Trust Scams and the Senior Consumer. Some of the conclusions of the State Bar task force as are follows:
The article also gives ways to avoid becoming a victim. This pamphlet is available from the Texas Young Lawyers Association and may be ordered by calling 512-463-1388. The bottom line is that you should establish a relationship with a qualified estate planner who will review your situation and help you make the decision that is best suited to your needs. Should I consider using a corporate fiduciary? There are many situations in which a corporate trustee or executor may be appropriate. In situations involving long-term trusts, the stability of a corporate trustee may be advisable. In addition, professional management and accountability may be desired and there may not be an appropriate family member to handle the job. In many instances, a corporate fiduciary will enable the estate plan to have more flexibility from a tax standpoint. Finally, it may be necessary to have a corporate fiduciary in situations where potential beneficiaries do not have the ability to adequately manage their own financial affairs. Can I benefit my church or other charities with my estate plan? The Internal Revenue Code allows a 100% deduction from estate taxes for all qualified gifts to qualified charities. There is also the same deduction for gift tax purposes for gifts made to charity during lifetime. In addition, the income tax laws also favor gifts to charity. Gifts to charity of appreciated assets can potentially avoid capital gains taxes. Charitable remainder trusts can be used to benefit the donor and family currently while providing for charity in the future. Private foundations are also a technique used by many families to benefit charity. Planned giving to the church through charitable giving techniques will benefit not only the church but also can be structured so gifts to family will not be unduly diminished. What is the best way to choose an attorney? Here are a few common sense tips:
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