What is Estate Planning?

Quite simply the term estate planning refers generally to the process of ensuring that someone is authorized: (i) to take care of your person and your assets in the event you become incapacitated and/or unable to do so for yourself; and (ii) to handle the payment of your debts and the distribution of any remaining assets upon your death. It's impossible for an individual without a legal and tax background to effectively plan an estate without assistance. On the other hand, it's impossible for a professional with legal and tax background to plan an estate without an in-depth knowledge of a client's goals, needs, and overall family and financial situation. Too often, lack of communication prevents clients and estate planning professionals from adequately coordinating personal desires with legal and tax considerations. Without this coordination, an estate plan which carries out individual desires and takes advantage of beneficial planning techniques cannot be designed.

At Legacy Legal Group, we work to ensure that all aspects of your plan work together to accomplish your goals. Our attorneys will work hand-in-hand with you, your family, and your trusted advisors to avoid the most common issues that can arise when dealing with assets if you become incapacitated. Your estate plan should ensure that your assets are distributed according to your wishes upon your death while reducing the time and costs involved. We will explain how you can use trusts to avoid probate, allowing for the transfer of assets to your beneficiaries with no court involvement. Income, estate, and gift tax issues will be outlined, and methods of minimizing or eliminating tax will be used in your plan if needed. We take the time necessary to thoroughly understand your goals and wishes and design a plan specifically suited to your individual needs.

Many people would be unsure or inaccurate in their answer if asked, "What would happen to your assets if you were gone tomorrow?" This should be an easy question to answer. It's certainly an important one! We work all of our lives to accumulate assets, and we should have control over where those assets go after we're no longer here to enjoy them. However, due to various rules of law, determining the current estate plan is not always easy. For example:

        Wills do NOT control the distribution of all assets. Many assets are distributed outside of the will, so the plan of distribution in a will does not describe the total plan. Property passing under a will does NOT avoid probate.

        Making lifetime gifts to children or other beneficiaries can have serious income tax and capital gains ramifications for both parents and children, particularly if the gifted property has appreciated in value since the parents acquired it, or if the parents' personal residence is gifted. In addition, lifetime gifts can have adverse gift and/or estate tax consequences unless done correctly (and reported, if necessary).

        If you could no longer manage assets due to incompetency, a court proceeding would be required in order to take over management of your solely owned assets even if your spouse was available to manage assets. In some instances, court involvement would be necessary, even with assets owned jointly with a spouse or someone else. Accounting records showing every penny earned and every penny spent would be mandated by the court and expenditures must often be “approved” by the court. These protections may be beneficial in rare instances, but planning allows individuals to customize the rules that they would want to apply in their individual situations and avoids and/or minimizes court involvement and the additional attorney’s fees and delays connected with judicial proceedings.

        If minor children or grandchildren inherit property and provisions for management of that property are not specified in a will or trust, the child will receive the entire inheritance outright at the age of majority (age 18 in Missouri).

        Including an analysis of tax planning options is an important part of your estate plan. Federal and state estate, inheritance, gift, and income tax ramifications must be assessed and planning techniques applied to minimize or eliminate tax to the greatest extent possible.

The following is an estate planning checklist to help determine whether estate planning may be needed. Please answer each of the following questions YES or NO and write the answer next to each question.

1. ____________  Has it been more than one year since you reviewed your estate plan, including your will, life insurance policies, and any other documents?

2. ____________   If you or your spouse passed away today, are you uncertain about what would happen to your assets?

3. ____________   Does your will leave property to someone other than your spouse?

4. ____________   Do you have minor children or other people who are dependent on you? If you were not here to provide for them, would they be in financial trouble?

5. ____________   If a death occurred and court approval was required to release accounts for working capital, could it disrupt a farm, business, or overall family financial well-being

6. ____________   If you became incapacitated, would your family have to go through court proceedings to carry on your affairs?

7. ____________   Do you have children by a previous marriage?

8. ____________   Could your business cause liability due to contract or an accident

9. ____________   Do you own assets in your sole name?

10. ____________  Is anyone other than your present spouse listed as beneficiary on any life insurance policy or account?

11. ____________  Would you like to avoid probate of your estate?

12. ____________  May the total value of you and your spouse's assets be large enough to create estate tax? (Amounts vary depending on the year, and the state(s) in which assets are owned. Include life insurance, pensions, real estate, and any other assets and consider inflation and growth in calculations.)

13. ____________  Do you plan to gift any property prior to death?

14. ____________  If your current plan of distribution was followed, would assets have to be sold to pay expenses?

15. ____________  Are any members of your family unsure about their economic future in a family business?

16. ____________  Do you own any property which has substantially increased in value since you originally acquired it, or which has been depreciated for income tax purposes?

17. ____________  Would you be concerned if any inheritance left to your beneficiaries would be lost due to divorce, creditor issues, or bankruptcy?

18. ____________  Do any of your beneficiaries have special needs or rely on public or governmental benefit programs?

19. ____________  Would potential nursing home expenses create a hardship for your

family?

An Easy Guide to Estate Planning

Helping you save taxes, minimize

administrative costs, preserve assets, and

protect your loved ones and yourself while

ensuring that your wishes are honored and your legacy is preserved.

If you answered any of the above questions YES, you may be in need of estate planning. YES answers indicate potential issues in the areas of tax, cost and delay of probate, or simply lack of a plan which carries out your wishes. Estate planning allows you to apply the law to achieve your goals, to preserve assets for your chosen beneficiaries, and to minimize bureaucracy andadministrative expenses.

Estate Planning: What is it and who needs it?

Wills, trusts, and other estate planning documents can be very important in preserving assets and in ensuring distribution of assets to chosen beneficiaries. Without a will or trust, upon a person's death, that person's assets are disposed of according to state law. State law, called the law of intestacy, may, or may not match what the decedent's desires were as to who should get the property or how the property should be handled.

Even if current law does match a person's wishes for distribution of his/her estate, intestacy law at the time of that person's death may have changed. Unless a person wants to constantly keep up with changes in the law, it is wise to have a will or trust.

Will and trust provisions are usually accepted as written, and are generally not affected by changes in the law. However, there are some restrictions on what will and trust provisions will be accepted. For example, a spouse cannot be totally disinherited unless specific steps are taken, such as agreements entered into during lifetime where the spouse agrees to total disinheritance.

Without a will or trust, a person has no opportunity to personally select guardians for minor children, to name the person who should manage the beneficiaries' assets until they are distributed at a particular age, or to select the person who should handle the details of distributing the estate. Without estate planning, these important decisions are left to be made by a judge who can only apply statutes and attempt to determine what would be reasonable under the circumstances.  Most people would prefer to set their own standards and plan for distribution and management of assets. If no special provisions are made, beneficiaries receive their share of the estate immediately upon reaching the age of majority. Through trust provisions, parents can give directions and restrictions on how and when assets should be distributed.

Clearly written wills and trusts can minimize the cost of administering an estate. If a will is used and probate is required, the will tells the probate court what the decedent's wishes were so the court can more quickly and inexpensively approve procedures to carry out those wishes. A trust can be used to avoid the probate process, allowing for transfer of assets to beneficiaries with no court intervention. (See chapters on probate avoidance and the living trust.)

Tax planning as part of the estate plan can save significant amounts of money, regardless of the size of the estate. Whether capital gains tax will be recognized on appreciated assets can depend on how those assets are titled or the content of estate planning documents. Planning is essential to be certain that all tax relief available under the law applies to you in every way possible.

Provisions can be added to your estate planning documents to prevent unnecessary bureaucracy.  For example, the document can provide that if a beneficiary does not survive by at least 60 days, that beneficiary will be deemed not to have survived. This provision could save the cost and delay of probating assets through the estate of the deceased beneficiary to get them to the actual recipient.

A survivorship clause also prevents an unintended distribution of property. Suppose William and Susan are a married couple with no children, and have no will or trust. Under the law of intestacy, the distribution of property is determined according to the order of death. If an accident occurs and only one spouse survives, the surviving spouse inherits all property. If the surviving spouse lives for only a week due to injuries incurred in the accident, all assets are inherited by the relatives of the second spouse to die, since the predeceased spouse's relatives are not considered heirs of the spouse who survived one week. Since the spouse who survived legally owned all assets, only that spouse's heirs receive an inheritance.

Many states have statutory survivorship requirements, stating that if a beneficiary does not survive for a specified time period, for purposes of distribution, the beneficiary will be treated as if he or she had not survived. However, statutory survivorship requirements are generally only a few days, and the laws are always subject to change. A survivorship clause in a will or trust allows you to establish the amount of time a beneficiary must survive in order to inherit.

It is very important that wills and trusts are drafted according to statutory requirements, are clearly written, and cover all details of the estate plan since, if ambiguities arise after a death, the person whose document is being discussed is not available to answer questions. Professional help is highly recommended.

Thinking about death, accident, or illness is never pleasant. However, if something does happen, that is not the time for family members to be forced into making important decisions or to be burdened with excessive administrative details. Planning ahead is much more efficient, inexpensive, and thoughtful than burdening a family during a period of grief. We all work too hard to accumulate property to allow it to be wasted on unnecessary bureaucracy or to allow it to go to someone other than the people or cause of our choice.

Probate Avoidance: A Logical Goal

Most people, if asked, would prefer to avoid the expense and time delay of having their estate probated. According to a national survey, sixteen months is the average length of time involved between a person's death and completion of all paperwork required to conclude the probate process. Some of these delays occur in order to analyze various tax savings opportunities, and to gather information on current assets and outstanding liabilities, and may occur whether probate is required or whether non-probate techniques are used to transfer assets after death.  Other delays occur due to notices and mandatory waiting periods required under probate statutes and can be avoided through estate planning.

Although avoiding probate is generally less expensive than probate, avoiding probate does not necessarily avoid all fees. Expense is involved in gathering asset information, paying debts and expenses, tax planning and filings, distribution of assets, and other activity whether probate is required or not. However, utilizing probate avoidance techniques does avoid requirements of signed waivers from heirs, various notices and waiting periods, paperwork required to be filed with the court, and potential court hearings. In many cases, use of probate avoidance techniques is advantageous to minimize expense, but also to implement tax planning methods, prepare for management in the event of incapacity, and to coordinate titling and beneficiary designations on assets so your wishes are carried out.

Various methods of avoiding probate exist. Probate takes place when the owner of property dies. If a joint owner or beneficiary exists for an asset, the asset avoids probate.

Examples of situations where a joint owner or beneficiary exists if one legal owner dies are:

1. Ownership in joint tenancy with right of survivorship. Upon the death of one joint tenant, the surviving joint tenant remains the legal owner, and probate is not required. Probate will be required upon the death of the last surviving joint tenant, since no other owner will survive. 

2. Life insurance with a named beneficiary. Upon the death of the insured, the surviving beneficiary is legal owner of the life insurance proceeds and probate is avoided. However, probate is NOT avoided if the insured's estate is listed as beneficiary or if the beneficiary is deceased. Therefore, it is very important to have a primary and a contingent beneficiary listed, so the proceeds are paid to the contingent beneficiary if the primary beneficiary is not available.  Then the proceeds still avoid probate but may be subject to court oversight if a beneficiary is a minor or is incapacitated. Beneficiary designations may also be used on IRA's, annuities, and various other types of assets.

3. Accounts payable on death (P.O.D.) to another person upon death of the primary owner. These accounts work like a beneficiary designation in that ownership rights remain with the person whose name is on the account, and ownership rights are not transferred until the death of the owner. P.O.D. accounts should not be confused with Power of Attorney (P.O.A.) designations which allow another person to sign on the account but do not transfer ownership or avoid probate in the event of the owner's death. Transfer on Death (T.O.D.) accounts work in the same way as P.O.D. accounts, and typically apply to securities.

Although in some situations all assets can be structured so they fall into the above categories to avoid probate, multiple issues exist with these methods of probate avoidance.

With joint tenancy, probate is avoided IF there is a survivor. If a husband and wife own all property as joint tenants and they are both killed (e.g., in a common accident), no joint tenant survives and the property must be probated. Even if a joint tenant survives, when the surviving joint tenant passes away, probate is required. Therefore, when husband and wife own property as joint tenants, when one is deceased, the survivor must do estate planning to avoid probate of his or her own estate. A period of grief is not a good time to be in need of estate planning.  In addition, the surviving spouse could be elderly, ill, or legally incompetent at the time of the first spouse’s death, and further planning might not be possible at that time. 

Probate could be avoided by the surviving joint tenant by adding other joint tenants as owners of the property. This would avoid probate since a surviving joint tenant would remain if one joint tenant died. However, most people prefer NOT to add other joint tenants upon the death of their spouse, since this is giving up part ownership in the property. This also makes the jointly held property subject to claims of the creditors of those added as joint tenants, including the joint tenant’s spouse in the event of a subsequent divorce.

Tax ramifications should also be considered before entering into joint tenancy with a non-spouse.  The exemption from income tax on the sale of a personal residence may be lost if the second joint tenant does not live in the home. Gift taxes should also be considered, since the joint ownership will be considered a gift to the new joint tenant (either immediately, or later depending upon exactly how the account is titled and the type of asset involved). Additionally, if property which has appreciated in value is gifted, rather than inherited, substantial income tax benefits can be lost. (See discussion under Death Taxes, State and Federal Income Tax.)

Another issue arises with the use of joint tenancy and payable-on-death accounts to avoid probate.  Many people intend to divide all assets equally among their children or chosen beneficiaries.  Even if a will exists that gives all property in equal shares, these provisions of the will do not apply to non-probate assets. This can cause difficulties in dividing assets equally, since interest can accumulate on accounts, property can appreciate, or accounts may be used unequally during lifetime. Even if values are equal initially, values will probably not remain equal and beneficiaries will not be treated equally in the end. Furthermore, if all assets are distributed pursuant to beneficiary designations, no one is authorized (or required) to pay expenses, and assets are not available with which to pay expenses and creditors.

If an asset is transferred to a child outside the will or trust through titling or beneficiary-designations on an account, life insurance policy, or other asset, the child will receive the asset at the age of majority, even though the will or trust provides that children will not receive assets until a later age.  Assets given to children or other beneficiaries outright will not have the benefit of creditor protection.

The Revocable Living Trust:

Avoiding Probate While Maintaining Total Management and Control of Assets

A revocable living trust is a method of avoiding the probate process. If assets are owned by a trust, no court is involved in the transfer of assets upon death. Therefore, no records become public and no statutory waiting periods apply. It is still necessary to determine what assets exist, to pay creditors, to file required tax returns, to provide certain information to beneficiaries, and to ultimately distribute assets to the beneficiaries, but avoiding court proceedings and requirements simplifies and expedites the process significantly.

Probate only arises when the legal owner of property dies, leaving no joint owner or beneficiary.  In order for a living trust to avoid probate, ownership of assets is transferred to the trustees (managers) of the trust. Instead of owning property as William and Susan Clark, the name on the deed, account, security, or other asset is changed to "William Clark and/or Susan Clark, trustee(s) of the CLARK TRUST, dated ___________________.”

The trustees of the trust own the assets. William and Susan, as trustees of the trust, have total control over all property just as they did before. William or Susan could spend money, mortgage, sell or give away assets, or do anything they could do if the trust did not exist. Since the trust owns the property and it is physically impossible for the trust to die, the owner of the assets never dies and probate is never required. If either William or Susan pass away, probate is avoided and the trust remains as it was before. In most cases, the survivor, either William or Susan, still has complete control over the assets. The only exception to the surviving spouse receiving total control of all property is if those setting up the trust choose to have someone else manage it or if federal estate tax planning is included in the estate plan.

Upon the death of the survivor, no probate is required since the trust is still the legal owner of the property. According to the provisions of the trust agreement, when both William and Susan are deceased, the party they named as successor trustee will have the power to distribute the assets of the trust according to the terms provided in the trust. The successor trustee is typically the same person or institution who would be named as personal representative in a will. This should be someone who is capable of completing paperwork, who is responsible with money, and who can get along with the named beneficiaries. The successor trustee can be one of the named beneficiaries, any other individual, or a trust company. If, during lifetime, the original owners of the property decide that they prefer to have someone else manage assets, the role ofprimary trustee of their trust can be given to anyone they choose. If both spouses agree that only one spouse should have management rights on some or all assets, the trust agreement can provide for management by one spouse solely.

A living trust works well for either married or single people. Joint trusts may be used in situations where joint tenancy would typically be used, but where probate avoidance on both estates is desired.  In cases where married couples choose to keep their assets separate, such as when spouses have children from previous marriages or in some cases to implement estate tax planning, a separate living trust may be executed by each spouse, with the plan of distribution of each spouse outlined in that spouse's trust.

For single people, the living trust is especially advantageous since the alternative of joint tenancy is usually not practical. If William's mother, Olivia Clark, chose to avoid probate with a living trust, she would execute a trust agreement and change the name on her assets to "Olivia Clark, trustee of the CLARK TRUST, dated _____________."

The date that the trust was signed is ordinarily included in the name of the trust to ensure that assets are credited to the correct trust.

For purposes of illustration, let's assume that, at this time, Olivia Clark has only one asset or parcel of real estate worth $450,000. She owns this property in her sole name. Olivia has a will which leaves everything to her son, William. Upon Olivia's death, William takes the will to his attorney and asks what needs to be done. William's attorney explains that various papers must be filed with the probate court so the court can authorize William to manage the property during the pendency of the probate proceeding. Newspaper notices must be published and a statutory waiting period must pass in order to give creditors time to file claims against the estate. After the waiting period passes, required tax returns must be filed and taxes paid, and an accounting of activity which occurred since the date of death must be completed. Administrative fees for this process must be paid, although there may be no cash available in the estate.

William stares at the attorney and asks, "What do I get for this expense and time delay?" The attorney responds, "You get a court order saying that the property is yours." William stammers, "But the property is mine. Mom wanted it to be mine, her will says it's mine, and no one is disputing the fact that it's mine."

William leaves the attorney's office and does nothing. He wonders why anyone would spend money on probate. Then, three years later, William receives an offer from a buyer who wants to purchase the building. The offer is for $700,000, but is contingent upon a quick sale. William is tired of managing the building, could use the cash, and knows that several repairs will be needed soon.

Much to William's dismay, he discovers that he cannot sell the property. The deed to the real estate is in Olivia's name, and she is in no position to sign a deed transferring the property to the buyer. William returns to the attorney and asks how to clear title so the sale can be consummated. The answer: probate must be initiated to get William nominated as personal representative with the authority to transfer the property. Initiation of probate procedures and issuance of a document authorizing William to act as the estate representative may be expedited in order to clear title prior to the buyer's deadline. However, William's failure to get tax releases may constitute a cloud on title which could take several weeks to clear. In the meantime, William's buyer may be lost. If the sale doesn't go through and William keeps the property, and if he ever wants to mortgage it, the same title problem will arise. In order to clear title the probate process must be commenced, but substantial additional costs will now be included since tax returns and accounting of all expenses and income must incorporate the entire period of time since the date of Olivia's death. Tax penalties and interest may apply, income tax rates applicable to income earned may be higher than would have been required if returns were filed promptly and planning was done, and time delays will increase administrative costs.

The moral to this story:

Probate cannot be avoided unless planning is done in advance.

If Olivia decided, during lifetime, that she wanted to avoid probate on the real estate, she could have used various techniques.

First, she could transfer the property to William during lifetime. If she did this, Olivia would no longer have a legal right to income from the building, and even if William gave her the income from the building, the income would be taxable on William's 1040 and at William's income tax rate and the income given back to Olivia could be a reportable or taxable gift. William's creditors could reach the building, and, if William got a divorce, the building could affect the divorce settlement. Additionally, a great income tax advantage would be lost by gifting the property to William rather than letting him inherit it and receive a “step up” in basis which would reduce or eliminate capital gain on sale of the property. Possible gift tax ramifications must also be considered before any gift is made. In addition to other considerations, Olivia must keep in mind that if William predeceased her, the building would be probated through his estate.

A second technique which Olivia could use to avoid probate of the building would be to transfer the building to William and her as joint tenants with right of survivorship. This form of ownership would eliminate probate of the property as long as either William or Olivia survived. However, the concerns outlined earlier regarding putting property in someone else's name, such as tax, creditor, and management issues, would apply to William's one-half ownership in the property.  Whether Olivia changes the name on her deed to William's name solely or to William and Olivia as joint tenants, Olivia will need William's permission in order to mortgage or sell the building.

A third option to avoid probate of Olivia's estate would be execution of a living trust. In order to put the trust into effect, Olivia must sign a revocable living trust agreement, and must execute a deed which transfers the real estate from Olivia Clark to "Olivia Clark, trustee of the CLARK TRUST, dated _________________. "

William is named as successor trustee of the trust. Pursuant to the trust agreement, William has two duties. If Olivia becomes incompetent as evidenced by written affidavits from two physicians, William would step in and manage the trust assets - in this case the real estate – for Olivia's benefit. This would eliminate the requirement of taking Olivia into court to prove that she is incompetent to manage her affairs. Upon Olivia's death, the legal owner of the property does not die, so no probate is required. The deed shows the trustee of the trust as owner of the real estate. The trust agreement appoints William as Successor trustee so that upon Olivia's death, William becomes the trustee of the trust and has legal authority to transfer the property to the beneficiaries named in the trust agreement. In this case, William is the beneficiary, so he issues a deed which transfers the property from the trustee of the Clark Trust to William Clark.

Tax returns must be filed, but no probate, statutory waiting periods or notice requirements apply, and time requirements and costs of administration are reduced.

If probate avoidance is desired but Olivia does not want to name William as successor trustee, a family friend or other individual or a trust company could be appointed as successor trustee.

A Living Trust is an estate planning document which:

• Avoids probate of the assets in the trust, so no court involvement is necessary.

• Eliminates the requirement of public notices.

• Keeps your plan of distribution private.

• Is acceptable in all states, so avoids probate of out-of-state property as well as assets located in the state of residency. (A will requires probate in each state where real estate is owned and in the state where the decedent lived on the date of death.)

• Provides for management of assets by a family member or an institution (whichever you select) if you are unable to manage assets due to health problems and avoids proving incompetency in a court proceeding.

• Helps in organizing lists of assets for personal financial planning and helps beneficiaries in locating assets.

• Allows for optimum tax planning using federal and state income, gift, and estate tax law.

• Does not affect your ability to manage and control your own property and does NOT require management fees to be paid to anyone unless you wish to appoint an outside manager.

As with all estate planning, each person's individual situation and wishes must be analyzed before a decision is made as to the most effective planning technique. In considering living trusts or other probate avoidance and estate planning techniques, it is very important that a professional knowledgeable about living trusts be consulted. Just as an obstetrician may not be the one to do heart surgery, all attorneys are not familiar with the most effective methods of estate planning.

Living trusts may not be for everyone, but for many people, a bit of extra planning now in establishing a living trust can save much time, money, and frustration for loved ones in the future.  Estates take a lifetime to create, and can be protected with proper planning.

Other Estate Planning Documents

In addition to wills and living trusts, various other documents may be used to carry out your wishes, either in case of death or in case of illness or accident. Methods are also available for giving family members an opportunity to learn management of a family business before the business is sold or given to them. Management rights may also be given for limited periods of time in order to free the actual owners for a long-awaited vacation. The following documents are commonly used to accomplish these types of life and estate planning goals.

Powers of Attorney

Powers of attorney give another person the power to act in place of the principal (the person signing and authorizing the power of attorney). The power of attorney can be drafted so that it would only become effective upon the disability or incapacity of the principal, or so that it is effective immediately. However, powers of attorney which only become effective upon incapacity may create issues in determining when incapacity occurs.

The power of attorney allows someone else to handle affairs such as payment of bills, cashing checks, and selling assets. A specific power of attorney may be drafted which grants only very specific, limited powers to the person named as agent (the person given power to act for the principal). This could include the power to manage a particular piece of real estate, or a particular account, investment, or business.

Powers of attorney terminate upon the disability or incapacity of the principal unless the power of attorney is durable, specifically stating that it will remain effective after the disability or incapacity of the principal. Powers of attorney terminate upon death, so are not effective to manage or transfer assets after the principal's death.

Medical or Health Care Directives

Medical or Health Care Directives contain directions regarding prolonging life by artificial means if the condition is terminal.  These documents provide family members or others appointed by the document with authority to make medical decisions for you if you are unable to do so.  In Missouri, Medical or Health Care Directives usually contain both a living will and a durable power of attorney for health care and these documents are governed by two sets of statutes.

HIPAA Release

A HIPAA Release authorizes health care providers to release your health information and medical records to those you have designated in the form. HIPAA is the term used to refer to the federal "Health Insurance Portability and Accountability Act of 1996."  This Act requires hospitals, physicians, and other health care providers to take certain measures to protect patient information from unauthorized use or disclosure, and noncompliance by providers can result in severe penalties. Most people don’t realize that unless you have given your doctor or other health care provider permission to discuss your personal, medical information with others, they may not be able to provide this information to your family members or even a spouse!

Instructions and Location of Information

It is a very good idea for everyone to make a list of assets and directions for loved ones to use in case of death or incapacity. This list can include instructions for funeral arrangements and memorial services, location of documents, including insurance policies, deeds, securities, and evidence of other assets, location of bank accounts, and names and addresses of professionals who would have information regarding the estate, including your attorney, accountant, insurance agent, and other financial advisors. Location of the records, safe deposit box, wills, trusts, and any other pertinent documents should also be listed. This is not a legal document, but certainly is a practical one.  Legacy Legal Group provides binders that include copies of your estate planning documents as well as numerous organizational aids, detailed instructions, and places for you to note the location of all documents and information that your loved ones may need in the future.

Trusts

Various types of trust arrangements may be very beneficial, and can be individually suited to meet each specific need or desire. Trusts are very commonly used when minor children or other dependents are involved, when a business exists which will need continued management, for tax planning purposes, and to avoid or minimize probate.

Trusts come into being during lifetime, whereas testamentary trusts only come in to being upon death. Testamentary trusts do not avoid probate, but are an effective method of providing for management of assets for beneficiaries and for tax planning.

Prenuptial/ Antenuptial/Marital/Community Property Agreements

The terminology depends upon whether the agreement is signed before or after marriage, and on the individual state of residency. Since many people move from state to state or own property in more than one state, we will discuss rules applicable to all states here.

It is important for all married couples to assess the impact of their state law on their situation.  If you have in the past or may in the future, reside in one of the community property states, you share ownership of property with your spouse regardless of whose name is on an asset. In common law states, such as Missouri, the name on the title of property affects ownership rights more completely. However, both community and common law states have various rules protecting spousal interests in property. If the effect of your state law is not beneficial for you, you and your spouse may adapt its effect by written agreement. Various types of documents are available, depending upon the individual circumstances and upon whether both spouses are capable and willing to sign an agreement.

If a specific need or concern exists regarding spousal property interests, a solution can usually be found. The law is very flexible for those who plan ahead. Problems arise after incompetency or death has occurred, when the party involved is no longer able to express his/her wishes. An estate planning professional can be very helpful in sitting down with you to analyze your situation and to suggest methods of preventing future issues.

Death Taxes

In order to accomplish tax planning which results in the lowest possible overall tax bill, four different types of tax must be considered. Each type of tax has very different, and sometimes conflicting, rules, so the impact of each type of tax on the individual situation must be balanced before the overall tax effect can be determined. 

The types of tax which must be considered before completing any estate plan are:

•  Federal Estate Tax

• State Inheritance and Estate Tax

• State and Federal Gift Tax

• State and Federal Income Tax

Federal Estate Tax

Federal estate tax is federal tax upon the estate itself. Many estates are exempt from the tax. A transfer between spouses is always exempt, provided, that no restrictions are placed on the interest inherited by the spouse, and provided that both spouses are U.S. citizens. Asset values which may be transferred free of federal estate tax vary depending upon the year in 12,060,000 with such amount to be indexed annually for inflation.  

It is easy to assume that tax planning is not necessary with such a large exclusion. However, many people underestimate the value of their future estates and although Congress may elect to continue the current $12,060,000 exclusion amount, there is currently no guarantee that the exclusion amount will remain at those levels indefinitely. It is currently scheduled to revert back to $5,00 and is scheduled to revert back to $5,000,000 (indexed for inflation) at the end of 2025, if Congress does not act sooner.

Almost all assets are includable in the taxable estate, and substantial appreciation will likely occur between now and the time that the taxable estate will be valued for tax purposes (either the date of death or the alternative valuation date of six months thereafter). With appropriate planning, a husband and wife are able to transfer assets using TWO exclusions, since each spouse is entitled to transfer their applicable exclusion amount free of tax. However, wills or joint tenancy designations often give all property of one spouse to the other spouse. If the total estate of the husband and wife exceeds the amount of one applicable exclusion amount, the effect of an estate plan of this type can be VERY costly. Some planning techniques may be utilized upon the first spouse's death, but methods are much more limited after death than if planning is completed during life.

Although current law permits “portability” of the applicable exclusion amount between spouses, such portability must be correctly elected or it may be lost.  In addition, reliance on estate tax portability does not exclude the appreciation of assets from the time of the first spouse’s death until the surviving spouse’s death.  This can result in more estate tax paid upon the surviving spouse’s death than if basic estate tax planning had been included in the couple’s estate planning documents. 

In order to receive the federal estate tax credits of both spouses upon the first spouse's death with relying solely on portability, an estate plan can provide that assets be transferred to a credit shelter trust or by-pass which makes use of the deceased spouse's credit. During the lifetime of the surviving spouse, all income of the credit shelter trust and access to trust principal may also be provided to the spouse as long as certain Internal Revenue Code requirements are followed. When neither spouse survives, the assets of the credit shelter trust are distributed according to the plan of distribution designated by the estate planning documents of the first spouse to die. Assets retained by the surviving spouse are tax exempt up to the applicable exclusion amount available to the surviving spouse. Using this relatively simple planning technique can save hundreds of thousands of dollars in federal estate tax!

State Inheritance and Estate Tax

Estate tax is a tax on the estate itself, so the tax is based upon the total value of the estate upon death. Although a state estate tax is often linked to the federal estate tax, several states, including Illinois, assess their own state estate tax that can create a significant increase in estate tax liability. It is essential to balance the effect of federal and state estate tax and to use planning techniques to minimize or eliminate both taxes.

Inheritance tax is applied against the property received by each beneficiary or heir. Tax rates and exemptions usually depend upon the relationship between the decedent and the person receiving the property. Inheritances of spouses and children are typically subjected to fewer taxes than are inheritances of people who are distantly related or not related at all. Many states, such as Missouri, no longer have an inheritance tax. Individual state laws of both the decedent and the beneficiaries should be reviewed in order to calculate and plan around any potential state inheritance or estate tax.

State and Federal Gift Tax

One method of estate planning is to make lifetime gifts in order to lower the value of the future taxable estate. State and federal gift and income tax ramifications should be considered prior to making any gift. Gift taxes vary from state to state. Some states have no gift tax, others follow the same rules as federal gift tax, and other states have totally different gift tax regulations. Gift tax for the individual state should be checked at the time that gifting is contemplated.

On the federal level, in 2024, a gift of up to $18,000 per person, per year, may be made with no gift tax due, and there is no limit on the number of people who can receive a gift from you. A spouse may also make $18,000 gifts, so a married couple can give up to $36,000 per year to any number of people. The lifetime applicable exclusion applies to lifetime gifts as well as property passed at death, and changes periodically, based on inflation indexing. For example, in 2024, no gift tax is due unless lifetime gifts exceed $13,610,000 plus the available annual gift tax exclusion per person, per year. Gifts in excess of the annual exclusion limits reduce the federal estate tax applicable exclusion amount that is available for future gifts or upon death. Gift tax returns must be filed for gifts over the annual exclusion amount even if no tax is due. Current gift tax rates can be as high as 40% of the excess gift.

State and Federal Income Tax

In making gifts, keep in mind that the person receiving the gift may forfeit some income tax benefits which are available only on inherited property. This is especially important if the basis (original cost plus improvements minus depreciation) in the property which you are considering gifting is very low. For example, John bought real estate in 1992 for $10,000, and it is now worth $210,000. If John gifts the property to his son, Sam, Sam's tax basis in the real estate is $10,000. If Sam sells the property for $210,000, he will have taxable income of $200,000 in the form of capital gains. If Sam inherits the property upon John's death, Sam receives a basis in the real estate which equals the fair market value of the property at the time of John's death. Therefore, Sam's basis would be $210,000 and if he sold the asset for $210,000, he would pay no income tax on the gain! If the property is used as rental property or is other depreciable property, the asset may be re-depreciated using the increased basis after inheritance. 

There are certain limitations which exist on the exclusion of capital gains tax on inherited assets.  As a result, a good estate plan may include variations on the titling of highly appreciated assets in order to take advantage of all allowable forgiveness on capital gains tax.

Tax planning can be incorporated into either a will or a living trust. However, although a will allows for tax-planning provisions, assets transferred by will must go through probate. If property is held in joint tenancy, probate is avoided but the tax planning in the will is also bypassed.  With a living trust, tax planning can be achieved and probate is avoided.

Answers to Commonly Asked Questions

1.        What if I change my mind? Can a living trust agreement be changed or revoked?

Living trusts may be set up in any way that is desired by the person or people putting assets into the trust. Revocable living trusts allow you to amend any provision of the trust or to totally revoke the trust.

2.         If I have a living trust, do I still need a will?

If all assets are held in the name of the living trust, a will is not used at the time of death.  However, a will should be signed in conjunction with a living trust in case an asset is inadvertently left out of the trust. The will simply states that any property not already in the living trust should be transferred to the trust. This document is called a POUR OVER WILL since it POURS assets over into the trust.

3.         Does a living trust have to file income tax returns?

Generally, speaking as long as the person or people who put the assets into the trust are alive, the individuals will continue to file and pay income tax in exactly the same way they did before the trust was created. Income generated by trust assets, is simply treated as income of the individuals, so no extra tax returns are required.

4.         Can a living trust save money on taxes as well as avoid probate?

Use of a living trust may save on income, gift, estate, and inheritance taxes, depending upon the value of the estate and the makeup of the assets. Other documents may also be used for tax planning, but the living trust incorporates both tax planning and probate avoidance.

5.         When my spouse passed away, no probate was required. Why should I be concerned with probate of my estate?

Don't be fooled into thinking probate is not required because probate did not arise on the death of the first spouse. It is very likely that no probate was required on the first death since many couples own all property jointly. This form of ownership allows the surviving joint owner to inherit property without going through the probate process. However, when only one joint owner survives, probate will be required to transfer assets upon the remaining joint owner's death.  If the surviving joint owner is incapacitated at the time of the first death, he or she may not be able to engage in further planning to avoid probate upon his or her own death.

6.         How large must an estate be to make a living trust worthwhile?

One benefit of a living trust is that it allows assets to be transferred to beneficiaries with no court involvement. Prior to executing an estate plan, cost of completing the estate plan and expense of steps required upon disability and/or death utilizing various types of planning tools should be compared. Specific probate fees vary from state to state.

Although administration of a living trust is generally less costly than probate, a trust will not eliminate all fees of administration since, even with a trust, when a death occurs titling must be verified, values determined, expenses paid, and distributions made. The trust does eliminate court involvement, maintains more privacy than probate, minimizes notice requirements, and, in many cases, simplifies implementation of tax planning techniques and reduces the amount of time necessary for administration.

The benefit of a living trust also depends upon the personal desires and goals of each individual. In some cases, regardless of whether dollars can be saved in the long run, an individual may not want to spend time or money completing estate planning during lifetime. The right estate planning tool for you depends upon your personal goals.

In some cases, the desire to keep affairs private and to allow for transfer of assets without statutory waiting periods required in probate may make use of a living trust beneficial regardless of the level of cost savings. The primary goal of any estate plan must be to achieve the individual's desired objective. No minimum estate value is required in order to benefit from a living trust. The type of assets involved and overall goals should be assessed to determine whether a living trust would be beneficial.

7.         What is the cost to set up a living trust?

Costs of a living trust will vary substantially from attorney to attorney and from state to state, and costs will vary depending upon your particular estate planning needs. Many attorneys will provide an initial consultation at no charge to allow you to meet the attorney and to discuss your individual situation. At the conclusion of that meeting, a cost estimate should be made available to enable you to balance cost versus the benefit of available planning techniques.

The cost of a living trust may exceed the cost of a will. However, a comprehensive estate plan, whether a will or trust is utilized, should include an analysis of titling and beneficiary designations on existing assets as well as the drafting of a number of ancillary documents. Otherwise, the will or trust will not effectively transfer assets to the correct beneficiaries and/or assets cannot be effectively managed in the case of incapacity. If this analysis is properly completed, the investment for estate plans utilizing wills or trusts will not significantly differ and a trust-based plan may actually be more cost effective in the long run.

In order for a living trust to work properly, it is important that the law office provide comprehensive advice, guidance, and forms to help in changing the name on the title of assets to the trust. It is also important that the living trust agreement is coordinated with a will, a durable power of attorney, a medical or health care directive, and various other documents which all work together to accomplish your goals.  When comparing costs of living trusts, services provided should also be considered. If letters to transfer assets, consultations, and all documents are not included in the fees quoted or each will or trust created for all clients are substantially the same, a bargain may not be such a bargain. Prior to deciding to invest in a trust, you should be aware of total cost involved and ensure that your plan accomplishes your goals and objectives.

8.         Will a living trust protect my assets from potential nursing home costs?

Revocable living trusts, which allow you to continue to manage your own assets and which can be revised or revoked at any time, have been discussed in this booklet.  Revocable living trusts will not shield assets from nursing home costs. Assets held in a revocable living trust will be considered to be your assets for purposes of eligibility for government programs which cover costs of nursing home care. Eligibility is available only to those whose income and assets are under allowable levels. If you can manage and control assets, the assets in the trust are still considered as yours for purposes of eligibility. Various planning techniques do exist to protect some or all assets from potential nursing home expenses and if potential nursing home costs are a concern to you, you should discuss the possibility of including more advanced planning with your attorney.

Trusts are like any type of estate plan. They must be customized to your individual situation.  As a client, what you pay for is individual advice and application of tax, probate, and other state and federal law to your specific needs and goals.