Estate Planning Techniques
NO WILL
When a person dies without having any form of Estate Planning
documents in place, he is said to have died Intestate. The
transfer of his property is then controlled by the laws of the state in
which he lived at his death. In this case, the estate must be
handled through the Probate Court. The court will appoint a
person, called an administrator, to handle the assets and state law
governs who the beneficiaries will be. The court will also appoint
a guardian for any minor children.
SIMPLE WILL
When a person dies after having prepared and signed a will, the
Probate Court must still be involved to oversee the administration of
the estate. In a will a person nominates an executor who
administers the assets. The executor must still be appointed by
the court in order to have the power to deal with the assets. The
will also sets forth the beneficiaries that a person desires to receive
assets and the amounts or percentages of assets each beneficiary is to
receive.
The will specifies who should be appointed guardian of any minor
children. Any property that is to be distributed to minor children
will typically be left under the control of a custodian for the child's
benefit until such child reaches a certain age. This age can be
specified any time between 18 years and 25 years old.
REVOCABLE LIVING TRUST
In order to avoid being under the control of the Probate Court, a
person can execute a Revocable Living Trust. This requires that
all assets owned by a person be transferred to a trustee of the trust.
This trustee is typically the same person who is creating the trust.
The trust document also names a successor trustee. This is the
person who will take over the management of the assets at the original
trustee's death or upon the original trustee's incapacity. Similar
to a will, the trust also names the beneficiaries and the desired
distributions to those beneficiaries.
A trustee is the person who manages and controls the assets in the
trust. The beneficiary is the person who receives a benefit from
the assets in the trust.
Once a Living Trust is created, the assets must be transferred into
such trust in order for it to be effective in avoiding the probate
process.
Even when a person creates a Living Trust, a will is still needed to
nominate guardians for minor children and to distribute any assets that
may have been left out of the trust. This is typically called a
Pour Over Will.
The benefits of a Living Trust are the avoidance of the time and
expense of the probate process as well as the avoidance of the expense
and other issues associated with establishing a conservatorship in the
event the Trustor becomes incapacitated.
The disadvantages of the Living Trust are that it is a more costly
document than a simple will and the trustors need to transfer title of
all assets to themselves as trustees (i.e. fund the trust).
REVOCABLE LIVING A-B TRUST
The A-B Trust is type of Revocable Living Trust that is typically
used for tax-planning purposes. It minimizes the estate tax that
will be due by allowing both spouses to utilize the applicable exclusion
amount. Since each spouse owns 1/2 of the community property assets
plus any separate property assets, each spouse is entitled to an
applicable exclusion amount at death. This applicable exclusion
amount is currently $1,500,000. The assets owned by the first
spouse to die (the Deceased Spouse), up to the applicable exclusion
amount, are allocated to the B trust (also known as the Bypass or
Exemption or Credit Shelter trust). The assets owned by the
Surviving Spouse are allocated to the A trust (also known as the
Survivor's trust). The A trust also includes any of the Deceased
Spouse's assets over the applicable exclusion amount.
The terms of the B trust typically allow the Surviving Spouse to
receive all the income from that trust as well as any principal that is
needed for the Surviving Spouse's health, education, support, and
maintenance. Any property remaining in this trust at the death of
the Surviving Spouse passes tax free to the designated beneficiaries.
The Surviving Spouse is generally not allowed to change the
beneficiaries of this trust, although both spouses can stipulate in the
original document that the Surviving Spouse have limited power to change
the beneficiaries among a certain ascertained group.
The terms of the A trust allow the Surviving Spouse complete control
over this trust. The Surviving Spouse is entitled to any of the
income and principal and can also change the beneficiaries as he/she
desires. The assets in this trust are subject to estate tax at the
death of the Surviving Spouse if the total is over the Survivor's
applicable exclusion amount.
In addition to the tax benefits provided by the A-B trust, it can
also be used to protect future beneficiaries. As mentioned above,
the Surviving Spouse has no or very limited power to change the
beneficiaries who are ultimately going to receive the assets in this
trust. This allows a person to benefit a Surviving Spouse during
such spouse's lifetime while retaining control over the ultimate
distribution of his/her assets. This can be particularly important
in the case of a second marriage where there are children from a prior
marriage. It can also be useful in the case of a young couple with
children where there is a possibility that the surviving spouse will
remarry if one dies prematurely at a young age.
QUALIFIED TERMINABLE INTEREST PROPERTY (QTIP or A-B-C) TRUST
This trust is very similar to the A-B trust described above. It
also allows both spouses to utilize their applicable exclusion amounts
while still providing for the Surviving Spouse during his/her lifetime.
There is no additional tax benefit to this trust. The benefit of
this trust comes in the form of additional protection for the future
beneficiaries. If the Deceased Spouse's assets are greater than
the applicable exclusion amount, the excess will be allocated a third
trust called the C trust (also known as the QTIP or Marital Trust).
The terms of this third trust are similar to the B trust. It
provides for all the income to be distributed to the Surviving Spouse
and any principal needed for the Surviving Spouse's health, education,
support and maintenance to also be distributed. Thus, this trust
is only needed if the assets are greater than the applicable exclusion
amount and a spouse wishes to control the ultimate distribution of such
assets.
EXAMPLE
To illustrate the differences among the above techniques, assume a
couple has an estate made up solely of jointly owned property worth
$3,500,000. Each spouse has children from a prior marriage.
The following is what would happen at the death of the couple under each
of the above estate planning techniques. Assume there is no growth
in the assets between the first death and the second death.
NO WILL
At the death of the first spouse, the surviving spouse would inherit
all the assets. The surviving spouse would be free to do what
he/she wished with all the property. At the death of the surviving
spouse, assuming again no will in place and that the surviving spouse
dies at least 10 years after the death of the first spouse, the estate
would have to go through probate at a cost of approximately $48,000
(statutory fee) and the assets would all pass to the children of the
surviving spouse. The estate tax on such estate at the death of
the surviving spouse would be approximately $930,000.
SIMPLE WILL
The assets would pass to the beneficiary(ies) under the will of the
first spouse to die. The result of this would be either that the
surviving spouse again inherits everything or the children would receive
something which would reduce the assets available to take care of the
surviving spouse. There may also be a probate required at the
first death depending on who the beneficiaries were and how the assets
were titled. At the death of the surviving spouse, the assets
would again be subject to probate and would pass to the beneficiaries
chosen by the surviving spouse.
The estate tax would depend on the beneficiaries of the first spouse
to die. If everything went to the surviving spouse, the tax would
be approximately $930,000 at the survivor's death. If $1,500,000
(the amount of the applicable exclusion went to the children) then there
would be no tax at the first death and the tax at the second death would
be approximately $225,000. If the deceased spouse gave his/her
entire estate of $1,750,000 to the children then the tax would be
approximately $112,500 at the first death and $112,500 at the second
death.
REVOCABLE LIVING TRUST
The result would be similar to the case where there was a simple
will; however, there would be no need for probate. Any assets
passing under the trust to the surviving spouse would be subject to the
control of the surviving spouse and would pass to the beneficiaries
chosen by the surviving spouse.
The estate taxes would be the same as above also.
REVOCABLE LIVING A-B TRUST
The assets of the first spouse to die would be allocated first to the
B trust up to the applicable exclusion amount and the balance would be
allocated to the A trust. This means that $1,500,000 would go to
the B trust while the A trust would have $2,000,000. The B trust
would be available to the surviving spouse during lifetime and would be
distributed, upon the death of the surviving spouse, to the children of
the deceased spouse. The A trust would be distributed to the
children of the surviving spouse. No probate would be needed.
The estate taxes would be $0 at the first death and approximately
$225,000 at the second death. Thus, assuming the surviving spouse
did not need any of the principal of the trusts, the children of the
first spouse to die would receive $1,500,000, and the children of the
second spouse to die would receive $1,775,000.
QUALIFIED TERMINABLE INTEREST PROPERTY (QTIP or A-B-C) TRUST
The assets of the first spouse to die would be allocated as follows:
$1,500,000 to the B trust and $250,000 to the C trust. The
surviving spouses assets of $1,750,000 would be allocated to the A
trust. Both the B trust and the C trust would benefit the surviving
spouse during lifetime. At the death of the surviving spouse, the
B and C trust would be distributed to the children of the first spouse
to die and the A trust would be distributed to the children of the
surviving spouse. Again, no probate would be needed.
The estate taxes would be $0 at the first death and approximately
$225,000 at the second death. Thus, again assuming that the
surviving spouse did not spend any principal, the children of the first
spouse to die would receive $1,637,500, and the children of the second
spouse to die would also receive $1,637,500. |