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