Estate Planning 101
UNDERSTANDING YOUR ESTATE
Probate vs. Non-Probate Assets: Your estate consists of two kinds of assets for tax purposes.
o Probate Assets: items or property that you own and that will be given to a beneficiary
through your Will or intestacy upon your death. Examples include: real estate, vehicles,
stocks, and other physical assets.
o Non-Probate Assets: items or property that are assigned by contract or beneficiary
designation upon your death. They are not governed by your Will. Examples include: life
insurance, IRA funds, retirement plans and assets that are held in "joint tenancy with
right of survivorship."
This Estate Planning Summary is designed to provide simple and straightforward
descriptions of important and applicable legal terms and processes, as well as Estate
Planning Community Property vs. Separate Property
options and resources for decision-making. Estate Planning is the process of
o Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and
Wisconsin and community property states. an property The goal of estate
arranging for the allocationare all disposition of assets inAny estate. accumulated during a
marriage is presumed to be community the value of by estate. Individuals
planning is to eliminate uncertainty and maximize property (owned the both spouses), unless
otherwise proven as separate property.
Separate property: assets owned process and as well as of estate planning.
should use thisoform to help understand the prior to marriage, devices assets given as gifts or
o Upon your death, your estate consists of one-half of all community property and all of
your separate property. Even if community property was listed under your spouse's name,
it is still divided into two upon death.
o While community property is divided upon death, during the marriage the spouse whose
name the property lists is the exclusive manager over the property.
Is Probate Complicated?
o While many people assume probate is a complicated process, it’s usually not, depending
on the state. During probate, a Will is filed with the court after death. The judge admits
the Will to probate a few weeks later. Separate from probate, the Will’s executor will
manage the estate. Many of the costs that are presumed to be part of the typical probate
process are actually a result of problems that occur after death, and may not relate to
probate at all.
Should I Have a Living Trust?
o A living trust serves to transfer your probate assets while living. You can benefit from a
living trust throughout your lifetime, and upon your incapacity or death, will disburse
your assets to your beneficiaries without the need for a will.
o Benefits of a Living Trust:
May help you avoid probate
Defers to your wishes in case of incapacity
Provides a single resource for your beneficiary information
May protect against will contests
o Disadvantages of a Living Trust:
If misused, will not prevent probate
May be more expensive than a Will
Inconvenient to keep assets in trustee’s name
Combining community property and separate property in trust may make assets
vulnerable to creditor claims
May be more difficult to administer immediately after death
UNDERSTANDING THE TRANSFER TAX SYSTEM
The System of Estate and Gift Taxes
o Traditionally, gift and estate taxes were combined into a single system. The system had a
single exemption used for taxable gifts during life, which if not used, was available upon
o There are a few benefits to making gifts of assets:
There is an annual exclusion for gifts up to $13,000 per donee per year.
Post-gift income and appreciation avoid transfer tax for the donor.
Gift tax is "tax exclusive" while estate tax is "tax inclusive:" estate tax must be
paid for the whole estate, including the funds that will be used to pay the tax.
o There no limit to the amount of assets transferred between spouses who are US citizens.
The marital deduction applies to outright gifts and qualified terminable interest trusts
(QTIP trusts.) No tax is due when the first spouse dies, but the assets will be subject to
tax on the death of the surviving spouse.
o There is no limit to charitable deduction for any assets transferred to charity. Assetes
passed to both "public charities" and "private foundations" are equally eligible for the
charitable deduction, and there are no percentage limits.
The Generation-Skipping Transfer Tax
o The generation-skipping transfer tax (GST) is most typically levied in two situations: (1)
a grandparent transfers assets to a grandchild, by gift or Will, while the child is still alive
(the donor skips a generation) and (2) a trust is created by a parent for the benefit of a
child and the assets transfer to the grandchildren upon the child's death. In the latter
example, the "generational skip" happens at the child's death. The GST is a flat rate, and
equals the highest estate tax rate. FSince lifetime trusts for children provide many
benefits, such as marital property protection and creditor protection, maximizing the GST
exemption is a very popular estate planning tool.
Note: Using the GST exemption will not reduce your estate tax. It simply reduces the
estate tax payable when your children die, not when you (and your spouse) die.
For estates of married couples with a combined value of probate and non-probate assets over $2
million, it is recommended to take the full estate tax exemption in the couple’s state, as well as
the marital deduction in the estate upon the death of the first spouse. This shelters a great deal of
assets and defers estate tax on excess until the death of the surviving spouse.
In order to put this estate plan into action, the Will of the first spouse to die should divide his or
her estate between a trust that shelters the exemption as well as a marital deduction gift of the
remainder of the estate. See the chart below as an illustration of this A-B Trust Plan.
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Bequests Specified Bypasses Trust Residuary Estate
to Surviving Spouse (up to $2 million) Goes to Marital Trust
Surviving Spouse Dies
No taxes Taxes
Trusts for Children
or Given Outright to
Additionally, non-probate assets should be coordinated with this plan, as they will not
pass directly under the Will. Here are some examples of how to do this:
o Life insurance lists trustee as beneficiary under the Will, and is divided
between the surviving spouse and any trusts under the Will of the insured
based on the value of the other estate assets.
o Retirement benefits may be paid to the surviving spouse as the beneficiary. It
may be recommended to continue income tax deferral by rolling over benefits
into an IRA.
o Any assets held in joint tenancy with right of survivorship may be changed to
another form so that they do not bypass the plan.
MORE PLANNING SUGGESTIONS
The basic estate plan above takes advantage of the marital deduction and provides the full exemption
for both spouses. However, for individuals who still have a large tax to pay upon the death of the
surviving spouse, here are more techniques that may help reduce this tax.
o This may use the unified credit exemption through lifetime gift, as well as
aggressive use of annual exclusion gifting. For those with high income, gifts
that generate gift tax can help save taxes by taking advantage of the tax
exclusive nature of the gift tax.
Irrevocable Life Insurance Trusts
o While this technique does not reduce tax, it does offer liquidity for its
payment or replaces wealth that is lost to tax. Examples of this include joint
and survivor life insurance.
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o When gifts are made to children, either in life or through a Will, giving the
gift in the form of a trust that skips multiple generations can shelter all or
part of the GST exemption. Beneficiaries have access to assets, but the assets
will not be taxed in each generation because no beneficiary actually owns
Family Limited Partnerships
o Business and family goals can sometimes complement tax planning goals.
This technique does not eliminate assets from your estate, but rather converts
assets of a certain value into partnership units that may have a lesser value.
This is done for transfer tax purposes because of discounts associated with the
restrictions imposed by law on limited partnership interests. Because
partnerships are flexible and can help you retain significant control from
assets after they are gifted, this is a popular estate planning option.
Grantor Retained Trusts
o The Qualified Residence Trust, Grantor Retained Annuity Trust, and the
Grantor Retained Unitrust are techniques that involve gifting assets and
keeping an income or annuity-type interest in them for a set number of years.
For tax purposes, the gift is discounted because of the retained interest, but all
post-gift appreciation avoids being taxed as long as you live beyond the term
of the trust.
o These trusts are divided between a charity organization and an interest that
you retain or gift to a family member. Through this vehicle, you can maintain
a partial charitable deduction while still having control of assets.
Charitable Remainder Trusts
You retain an interest or give interest to a family member and,
after death or a fixed number of years, the assets go to charity.
You may take a charitable income tax and gift tax deduction
for the present value of the gift that occurs in the future.
Charitable Lead Trusts
The charity receives an interest for a set number of years, after
which the assets go back to your control, or are given to a
o If it is expected that an asset will significantly appreciate in the future, selling
the asset to children or trusts for their benefit can hold the value and allow all
future appreciation to benefit the purchasers. With low basis assets where the
purchaser is a trust that is taxed for income tax purposes, this method can
avoid capital gains tax on the sale by the grantor to the trust.
Asset protection planning is a good accompaniment to estate planning, or can sever well on its
own. The majority of asset protection techniques work well if there are no known creditors and
when there are other purposes, like estate planning, that justify the efforts.
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Some of the more popular techniques include:
o Typically, your home, or homestead property, is exempt, though laws vary
o Other items that are typically exempt, based on state laws, include: In and
limited personal property, qualified retirement plans and IRAs, life
insurance, and some annuities.
Marital Property Rules
o Creditors of one spouse cannot touch certain types of marital property
owned by the other spouse:
Contract claims: Creditors cannot access the separate property or
sole management community property of the other spouse.
o Having separate property for each spouse through periodic partitions can
be helpful. A non-pro rata partition can provide for equal value to each
spouse, while allocating exempt assets such as the homestead to the
spouse with creditors.
Gifts and Trusts
o You may not create a trust for yourself and gift assets to it in order to keep
the trust exempt from creditors. However, you may transfer assets to
others through gift, including a spouse. Transferring assets to children
additionally provides estate planning strategy.
Offshore and Similar Trusts
o While the rule on creating a trust for your own benefit applies in most
states, it may be possible to create an offshore trust in your own name that
is protected from creditors. However, the grantor must have no creditor
problems when the transfer to the offshore trust is made.
o While offshore trusts may make it easier to shelter large sums of non-
exempt assets, grantors may experience a loss of control and high fees
Family Limited Partnerships
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o The family contributes assets to a partnership so that a creditor of a partner
can become only an assignee of the debtor partner, not a substitute partner.
This can help control distributions, while the assignee pays taxes on the
income. While a family limited partnership may result in settling a claim
at a discount, this tool is a creditor deterrent, not protection. Some
bankruptcy judges may dissolve the partnership to control cash flow.
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