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ESTATE PLANNING
TECHNIQUES
"PLANNING FOR THE FUTURE - ESTATE AND TAX PLANNING"
By: Robert E. McKenzie
INTRODUCTION
1.05 Estate planning for many people connotes the way assets will be disposed
of upon death. However, a large part of estate planning consists of the
disposition of assets during one's lifetime. There are numerous benefits to
making lifetime transfers rather than holding onto assets and transferring them
upon death. Furthermore, there are several different methods and vehicles that
may be used for making lifetime transfers depending on the desired result. Some
of these methods and vehicles include outright gifts of property, transfers of
property into trusts, and transfers of property to and interests in family
limited partnerships.
WHY YOU NEED A WILL OR LIVING TRUST
1.10 A will or living trust is the foundation of any good
estate plan. As a legal document, a will or living trust is the primary way to
ensure that the property in your estate will be distributed according to your
wishes after your death. In addition, a will or living trust can help you
accomplish the following:
provide financial security for your loved ones, allow for the special health or
educational needs of a family member, or make allowances for the varying income
needs of your heirs;
appoint a guardian for children under age 18;
determine who will be in charge of carrying out your wishes by naming an
executor or successor trustee;
minimize taxes and administrative costs; and
support worthy charitable organizations.
What is Probate and How It May Be Avoided
1.20 Probate is the process by which a person's estate is
administered. The first step is for the court to determine that the decedent's
will is valid. This is often called "admitting the will to probate."
Next, the court appoints a personal representative to administer the estate.
This is typically the person named as executor in the will. Next, the court
authorizes the personal representative to administer the estate. Estate
administration involves gathering the decedent's assets, discharging the debts
and liabilities, and distributing the remaining assets according to the will or
intestacy statutes. The court supervises the estate administration process and
discharges the personal representative from his or her responsibilities when
the process is complete.
Living Trust Option
1.30 For those who wish to avoid the time, expense, and
public nature of probate, the living trust is often a good supplement to a
will. The living trust is a three-part document that handles the financial
aspects of death and possible incapacity without taking these matters through
court. The first part of the living trust typically addresses the distribution
of your assets while you are of sound mind and body. Usually this involves
naming yourself as trustee and granting yourself the right to distribute your
assets as you see fit. The second part of the document often names a successor
trustee to handle your financial affairs after your death, or if you become
incapable of handling them yourself during your lifetime. The final part
provides for the distribution of your assets. Like a will, the living trust is
revocable, which means you can change it while you are living and competent. To
be effective, the trust must own all of your assets. Since some people don't
remember to transfer all of their assets to the trust, it is advisable to also
have a "pour-over" will, which transfers any forgotten assets into
the trust at your death.
If You Don't Have a Will or Living Trust
1.40 If you die intestate (with no legal estate plan) your
property will be distributed according to state law, without regard to your
personal wishes or the specific needs of your family members. Although
intestacy laws vary from state to state, they frequently provide that your
spouse and children receive equal amounts of your estate. Without a will or
living trust, these distributions will be made regardless of age, health, or
financial need and, of course, there can be no bequests to friends, more
distant relatives, or charitable organizations.
Tax Planning Through Your Will or Living trust
1.50 A carefully planned will or living trust can help you
avoid or reduce taxes so that you can leave as much as possible to your heirs
and/or charitable organizations. Should you want to take advantage of tax
planning opportunities, such as establishing a charitable remainder trust, you
should consult your attorney or financial advisor to achieve the best results
for yourself and your heirs.
OVERVIEW
1.60 Why is estate planning necessary generally?
a. Unless you decide to whom you would like your assets to
pass at your death, the State will make the decision for you
i. State Probate Acts set forth a priority of distribution
for individuals who die "intestate" (without a will or trust);
ii. The statutory scheme may not be what you intend, or even
what you would expect;
iii. It is not true, however, that if you die without a will
your property automatically will pass to the State (unless you have absolutely
no relatives living).
b. Unless you die with a will or trust in existence, the
State will also decide who has the right to administer your estate
i. The statute generally gives priority to relatives in the
order of closeness (i.e., first your spouse, then your children, etc.) --
The individual having priority, however, may not be the best person for the job
(i.e., your spouse or children might have absolutely no investment experience
or may be "spendthrifts" who are unable to manage their own funds);
ii. If you establish a will or trust, you decide who should
manage your estate -- you may decide to use an unrelated individual (such
as your accountant or investment counselor) or even a bank, having more
experience in these matters.
c. As a general rule, the costs associated with administering
an intestate estate are greater than if you die with a will or trust
i. The administrator of an intestate estate is required by
law to post a bond with corporate surety in an amount equal to 1-1/2 times the
value of your estate:
(a) The surety bond premium charged is generally 1 to 2
percent of the amount of the bond (i.e., for a $500,000 estate, the required
bond would be $750,000 (1-1/2 times), so the premium could be in excess of
$10,000 annually);
(b) With a will or trust on the other hand, surety on the
bond can be waived, thus decreasing the cost.
ii. Where a large number of statutory "heirs" are
involved, the general administration of the estate and the time expended by the
estate's attorney tend to be greater, thus increasing cost.
d. Without a will or trust, there is absolutely no
opportunity for planning for the minimization of Federal and state estate tax
(discussed below).
e. Moreover, in an intestate situation, there is no
opportunity for planning for special circumstances, such as a minor or disabled
child, or a "spendthrift" child who cannot properly manage funds.
i. With a will or trust, you can provide that a beneficiary's
share is to be held in trust, with a trustee making decisions as to the
beneficiary's need, and/or you can provide for the beneficiary's inheritance to
be held in trust until a more mature age;
ii. In an intestate estate, all property would simply be
distributed outright to your heirs, except in the case of a minor, in which
case a guardianship estate might need to be opened for the minor, or the
minor's share might need to be held in a special bank account subject to
further order of Court until the child reaches legal age.
f. Without a will, the Court will decide upon the appropriate
guardian for any minor children.
1.65 ESTATE, GIFT AND GENERATION-SKIPPING TRANSFER TAX CHANGES
Phase-out and Repeal of Estate and Generation-Skipping Transfer Taxes; and
Increase in Unified Credit Effective Exemption
a. Beginning in 2002, the top marginal estate, gift and
generation-skipping tax rate is reduced from 55% to 50%. In addition, as of
2002, the unified credit effective exemption amount (for both estate and gift
tax purposes) is increased to $1,000,000. The "unified credit effective
exemption amount" is the amount which an individual may shelter from
estate tax at his or her death (or from gift tax on lifetime gifts in excess of
such individual's annual $10,000 gift tax exclusions). Presently, this
exemption amount is $675,000. Beginning in 2002, the 5% surtax (which phases
out the benefit of both the graduated rates and the unified credit for estates
in excess of $10,000,000) is repealed.
1. In 2003, the estate and gift tax marginal rates in excess
of 49% are repealed. In 2004, the estate and gift tax rates in excess of 48%
are repealed, and the unified credit effective exemption amount for estate tax
and generation-skipping tax purposes increases to $1,500,000. The unified
credit effective exemption amount for gift tax purposes remains at $1,000,000,
as increased in 2002. In addition, in 2004 the family-owned business deduction
under Section 2057 of the Code is repealed.
2. In 2005, the estate and gift tax marginal rates in excess
of 47% are repealed. In 2006, the estate and gift tax marginal rates in excess
of 46% are repealed, and the unified credit effective exemption amount for both
estate tax and generation-skipping tax purposes is increased to $2,000,000.
3. In 2007, the estate and gift tax rates in excess of 45% are repealed. In
2009, the unified credit effective exemption amount for estate and
generation-skipping tax purposes is increased to $3,500,000. In 2010, the
estate and generation-skipping transfer taxes are repealed in their entirety.
4. It should be noted, however, that under the "sunset" provisions of
the Act, unless further action is taken to extend the tax relief provided prior
to 2011, the provisions of the Act will become ineffective as of December 31,
2010, reverting to a $1,000,000 exemption and a 55% top marginal estate tax
rate for 2011.
b. Thus, from 2002 through 2010, the estate GST and gift tax rates and unified
credit effective exemption amount for estate tax and generation-skipping tax
purposes are as shown below:
Calendar Estate and GST Highest estate, GST
and
Year transfer exemption gift tax rates
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 N/A (taxes repealed) top individual rate
applies for gift tax only
c. Beginning in 2010, the top gift tax rate will be the top individual income
tax rate, and, except as provided in Regulations, a transfer to a trust will be
treated as a taxable gift, unless the trust is treated as wholly owned by the
donor or the donor's spouse under the grantor trust income tax rules. The gift
tax exemption remains at $1,000,000, subject to adjustments for inflation.
d. Under the Act, from 2002 through 2004, the State death tax credit allowable
under present law against the Federal estate tax is reduced as follows: in
2002, the State death tax credit is reduced by 25% (from present law amounts);
in 2003, the State death tax credit is reduced by 50% (from present law
amounts); and in 2004, the State death tax credit is reduced by 75% (from
present law amounts). In 2005, the State death tax credit is repealed, after
which there will be a deduction in arriving at the Federal taxable estate for
death taxes (e.g., any estate, inheritance, legacy or succession taxes)
actually paid to any State or the District of Columbia, in respect of property
included in the gross estate of the decedent.
Basis of Property Acquired from a Decedent
e. After repeal of the estate and generation-skipping transfer taxes, the
present-law rules providing for a fair market value (i.e., stepped-up) basis
for property acquired from a decedent are repealed. After 2009, a modified
carryover basis regime generally takes effect, which provides that recipients
of property transferred at a decedent's death will receive a basis equal to the
lesser of the decedent's adjusted basis or the fair market value of the
property on the date of the decedent's death.
f. Several exceptions apply to the new carryover basis rules. First, a
surviving spouse will be allowed a stepped-up basis in up to $3,000,000 in
assets received by the spouse. An additional $1,300,000 of stepped-up basis
will be allowed to other heirs (whether or not a surviving spouse) on assets
passing to those individuals. The basis of an asset cannot be adjusted above
its fair market value. However, not all property will be eligible for an
increase in basis. Property acquired by a decedent by gift from a non-spouse
within three years of his or her death will be excluded (in order to prevent
"gifts" of low basis assets in anticipation of stepped-up bequests).
Property which constitutes "income in respect of a decedent" is
excluded, as is stock in foreign investment companies and personal holding
companies. Similarly, property subject to a power of appointment is excluded.
1. Surviving spouses and other heirs receiving stepped-up basis assets will be
required to comply with fairly complex identification and reporting procedures
to keep track of the stepped-up assets. Substantial penalties will be imposed
for noncompliance.
2. The Act also extends the income tax exclusion for $250,000 of gain on the
sale of a principal residence to a decedent's estate, revocable trust and
heirs. If the decedent's estate, revocable trust or an heir sells the
decedent's principal residence, $250,000 of capital gain can be excluded on the
sale of the residence; provided the decedent used the property as a principal
residence for two or more years during the five-year period prior to sale. In
addition, if an heir occupies the property as a principal residence, the
decedent's period of ownership and occupancy of the property as a principal
residence can be added to the heir's subsequent ownership and occupancy in
determining whether the property was owned and occupied for two years as a
principal residence.
Modified Generation-Skipping Transfer Tax Rules
g. The Act increases the generation-skipping tax ("GST") exemption to
parallel the estate tax exemption increases, and ultimately repeals the GST
beginning in 2010. In addition to these changes, the Act makes the following
modifications to the GST provisions:
(1) Provides for a deemed allocation of the GST exemption to lifetime transfers
to certain "generation-skipping transfer trusts" that are not direct
skips;
(2) Allows for retroactive allocation of the GST exemption when there is an
unnatural order of deaths;
(3) Authorizes a "qualified severance" at any time of trusts holding
property having an inclusion ratio of greater than zero. In order to be
qualified, the severance must be on a fractional basis and the new trusts must
provide, in the aggregate, for the same succession of interests as are provided
for in the original trust;
(4) Modifies certain valuation rules pertaining to timely and automatic
allocations of GST exemption;
(5) Authorizes the Treasury to grant relief from certain late elections and
allocations of GST exemption; and
(6) Allows for substantial compliance to satisfy GST allocation rules for any
particular transfer.
The changes to the foregoing GST provisions (other than the phase out of the
GST itself) are generally effective this year.
1.70 "Living trust" vs. will -- Which is right
for you?
a. What is a "living trust"?
i. You establish a trust agreement currently, naming yourself
(usually) or a third party as trustee;
ii. After establishing the trust, title to your various
assets is re-registered in the name of the trustee (this is known as the
process of trust "funding");
iii. During your lifetime and so long as you are competent,
you retain full control over all trust assets, and retain the right to amend or
revoke the trust at any time;
iv. If you should become incompetent during your lifetime,
the trustee (or the successor trustee designated in the trust if you were
acting as your own trustee) would manage the assets and make distributions for
your benefit;
v. Upon your death, the trustee or successor trustee, as the
case may be, pays all debts, taxes, and expenses, and then administers and
distributes all remaining property as provided in the trust -- thus, the
trust in effect substitutes for a traditional will.
Phase-out and Repeal of Estate and Generation-Skipping Transfer Taxes; and
Increase in Unified Credit Effective Exemption
1.80 Beginning in 2002, the top marginal estate, gift and
generation-skipping tax rate is reduced from 55% to 50%. In addition, as of
2002, the unified credit effective exemption amount (for both estate and gift
tax purposes) is increased to $1,000,000. The "unified credit effective
exemption amount" is the amount which an individual may shelter from
estate tax at his or her death (or from gift tax on lifetime gifts in excess of
such individual's annual $11,000 gift tax exclusions).
1.90 In 2003, the estate and gift tax marginal rates in
excess of 49% are repealed. In 2004, the estate and gift tax rates in excess of
48% are repealed, and the unified credit effective exemption amount for estate
tax and generation-skipping tax purposes increases to $1,500,000. The unified
credit effective exemption amount for gift tax purposes remains at $1,000,000,
as increased in 2002. In addition, in 2004 the family-owned business deduction
under Section 2057 of the Code is repealed.
1.100 In 2005, the estate and gift tax marginal rates in
excess of 47% are repealed. In 2006, the estate and gift tax marginal rates in
excess of 46% are repealed, and the unified credit effective exemption amount
for both estate tax and generation-skipping tax purposes is increased to
$2,000,000.
1.110 In 2007, the estate and gift tax rates in excess of 45%
are repealed. In 2009, the unified credit effective exemption amount for estate
and generation-skipping tax purposes is increased to $3,500,000. In 2010, the
estate and generation-skipping transfer taxes are repealed in their entirety.
1.120 It should be noted, however, that under the
"sunset" provisions of the Act, unless further action is taken to
extend the tax relief provided prior to 2011, the provisions of the Act will
become ineffective as of December 31, 2010, reverting to a $1,000,000 exemption
and a 55% top marginal estate tax rate for 2011.
1.130 Thus, from 2002 through 2010, the estate GST and gift
tax rates and unified credit effective exemption amount for estate tax and
generation-skipping tax purposes are as shown below:
Calendar Estate and GST Highest estate, GST
and
Year transfer exemption gift tax rates
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 N/A (taxes repealed) top individual rate
applies for gift tax only
1.140 Beginning in 2010, the top gift tax rate will be the
top individual income tax rate, and, except as provided in Regulations, a
transfer to a trust will be treated as a taxable gift, unless the trust is
treated as wholly owned by the donor or the donor's spouse under the grantor
trust income tax rules. The gift tax exemption remains at $1,000,000, subject
to adjustments for inflation.
1.150 Under the Act, from 2002 through 2004, the State death
tax credit allowable under present law against the Federal estate tax is
reduced as follows: in 2002, the State death tax credit is reduced by 25% (from
present law amounts); in 2003, the State death tax credit is reduced by 50%
(from present law amounts); and in 2004, the State death tax credit is reduced
by 75% (from present law amounts). In 2005, the State death tax credit is
repealed, after which there will be a deduction in arriving at the Federal taxable
estate for death taxes (e.g., any estate, inheritance, legacy or succession
taxes) actually paid to any State or the District of Columbia, in respect of
property included in the gross estate of the decedent.
Basis of Property Acquired from a Decedent
1.160 After repeal of the estate and generation-skipping
transfer taxes, the present-law rules providing for a fair market value (i.e.,
stepped-up) basis for property acquired from a decedent are repealed. After
2009, a modified carryover basis regime generally takes effect, which provides
that recipients of property transferred at a decedent's death will receive a
basis equal to the lesser of the decedent's adjusted basis or the fair market
value of the property on the date of the decedent's death.
1.170 Several exceptions apply to the new carryover basis
rules. First, a surviving spouse will be allowed a stepped-up basis in up to
$3,000,000 in assets received by the spouse. An additional $1,300,000 of
stepped-up basis will be allowed to other heirs (whether or not a surviving
spouse) on assets passing to those individuals. The basis of an asset cannot be
adjusted above its fair market value. However, not all property will be
eligible for an increase in basis. Property acquired by a decedent by gift from
a non-spouse within three years of his or her death will be excluded (in order
to prevent "gifts" of low basis assets in anticipation of stepped-up
bequests). Property which constitutes "income in respect of a
decedent" is excluded, as is stock in foreign investment companies and
personal holding companies. Similarly, property subject to a power of
appointment is excluded.
1.180 Surviving spouses and other heirs receiving stepped-up
basis assets will be required to comply with fairly complex identification and
reporting procedures to keep track of the stepped-up assets. Substantial
penalties will be imposed for noncompliance.
1.190 The Act also extends the income tax exclusion for
$250,000 of gain on the sale of a principal residence to a decedent's estate,
revocable trust and heirs. If the decedent's estate, revocable trust or an heir
sells the decedent's principal residence, $250,000 of capital gain can be
excluded on the sale of the residence; provided the decedent used the property as
a principal residence for two or more years during the five-year period prior
to sale. In addition, if an heir occupies the property as a principal
residence, the decedent's period of ownership and occupancy of the property as
a principal residence can be added to the heir's subsequent ownership and
occupancy in determining whether the property was owned and occupied for two
years as a principal residence.
Modified Generation-Skipping Transfer Tax Rules
1.200 The Act increases the generation-skipping tax
("GST") exemption to parallel the estate tax exemption increases, and
ultimately repeals the GST beginning in 2010. In addition to these changes, the
Act makes the following modifications to the GST provisions:
(1) Provides for a deemed allocation of the GST exemption to lifetime transfers
to certain "generation-skipping transfer trusts" that are not direct
skips;
(2) Allows for retroactive allocation of the GST exemption when there is an
unnatural order of deaths;
(3) Authorizes a "qualified severance" at any time of trusts holding
property having an inclusion ratio of greater than zero. In order to be
qualified, the severance must be on a fractional basis and the new trusts must
provide, in the aggregate, for the same succession of interests as are provided
for in the original trust;
(4) Modifies certain valuation rules pertaining to timely and automatic
allocations of GST exemption;
(5) Authorizes the Treasury to grant relief from certain late elections and
allocations of GST exemption; and
(6) Allows for substantial compliance to satisfy GST allocation rules for any
particular transfer.
The changes to the foregoing GST provisions (other than the phase out of the
GST itself) are generally effective this year.
Federal Estate and Gift Tax - The Mechanics
1.210 Estate - The total property owned by an individual
prior to the distribution of that property under the terms of a will, trust or
inheritance laws. An individual's estate includes all assets and liabilities.
1.220 Property - Property is described as either real or
personal. Real property is real estate, and personal property is everything
else. Personal property includes physical assets such as automobiles,
equipment, household items, etc. Personal property also includes financial
property, such as securities, notes or loans receivable, bank accounts, cash
and insurance policies.
BASIC ESTATE TAX PLANNING
1.230 For those individuals who expect to have assets at
death valued at $1,000,000 or more (or who are anywhere close to the $1,000,000
threshold amount), planning steps should be taken to avoid or minimize the
Federal and State estate tax
a. In this regard, the proceeds of any life insurance
policies and employee benefits should be considered, as well as the value of
any real estate, stocks, bonds, bank accounts or other assets;
b. Without proper planning, estate tax may unnecessarily be
paid, thus reducing the amount passing to your heirs;
c. The current estate tax brackets effectively start at 37
percent and may be as high as 50 percent for estates over $3,000,000 --
consequently, the tax exposure may be substantial.
1.240 In planning for estate tax minimization, two concepts
are key -- the $1,000,000 exemption and the unlimited marital deduction
a. Under current law, each individual may have up to
$1,000,000 at his or her death without paying any estate tax. This exemption
will increase in stages through the year 2010, at which time the estate tax
will be eliminated for one year;
b. In addition, for married individuals, an unlimited marital
deduction is allowed at the first death for any property which passes to the
survivor, regardless of amount;
i. Example: Husband owns $1,000,000 worth of assets, all held
in joint tenancy with Wife. Upon Husband's death, all property passes to Wife.
No tax is payable as a result of Husband's death due to the unlimited marital
deduction (BUT WHAT HAPPENS ON WIFE'S DEATH?. . . SEE BELOW);
ii. The unlimited marital deduction is not available,
however, if the surviving spouse is not a United States citizen (even though a
resident alien), unless a special type of trust, known as a QDOT, is
established;
iii. Any existing wills or trusts executed before 1982 should
be reviewed, as substantial changes in the estate tax law have occurred, and
the unlimited marital deduction may not be available for those documents,
unless revised.
1.250 Combining the $1,000,000 exemption and the unlimited
marital deduction to minimize estate tax for married couples
a. In most marital situations, there is a tendency to leave
all property outright to the surviving spouse, or to hold title to all assets
jointly;
i. From a tax planning standpoint, this is not recommended,
as it generally will not result in estate tax minimization (assuming combined
assets of over $1,000,000);
(a) Although there will be no tax at the first death due to
the unlimited marital deduction, the $1,000,000 exemption of the first spouse
will be wasted -- thus, at the second death, only $1,000,000 will be
sheltered from tax (assuming the 2001 exemption level);
(b) In the above Example, although no tax is payable upon
Husband's death, at Wife's death she will have a taxable estate of $1,000,000,
and will only have $1,000,000 of exemption available to shelter her estate from
tax.
b. The tax preferred approach would be the use of a Marital
Trust/Family Trust arrangement -- Here's how it works:
i. The estate plan of each spouse provides that upon the
first spouse's death, the first $1,000,000 of assets of the deceased spouse are
to be allocated to a separate trust known as the "Family
Trust" -- This trust is designed to use the deceased spouse's
$1,000,000 exemption
(a) The surviving spouse may receive benefits from this trust
including any one or more of the following:
(1) The right to receive all income;
(2) The right to receive principal from the trust for the
survivor's health, support and maintenance;
(3) A "power of appointment," allowing the survivor
to rearrange the ultimate distribution of the trust in favor of anyone other
than the spouse, the spouse's estate, the spouse's creditors, or the creditors
of the spouse's estate; and
(4) The unlimited right to withdraw the larger of $5,000 or 5
percent of the value of the trust each year, for any reason.
(b) The survivor may also act as his or her own trustee, and
consequently could make decisions on his or her own behalf;
(c) The tax advantage of this arrangement is that upon the
survivor's death, no portion of the Family Trust will be included in his or her
tax base, and consequently the property of this trust will pass tax-free to the
children or other beneficiaries.
ii. To the extent that the assets of the deceased spouse
exceed $1,000,000, any excess assets would be allocated to the Marital Trust
(a) The trust is designed to qualify for the unlimited
marital deduction, to ensure that no tax will be payable at the first spouse's
death;
(b) This trust will be taxable in the survivor's estate at
his or her death, but he or she may apply his or her own $1,000,000 exemption
against this trust, as well as the survivor's own assets;
(c) Since the Marital Trust will be taxable in the survivor's
estate, the survivor can be given an unlimited right of withdrawal or general
power of appointment over this trust, or this portion can be distributed
outright to the survivor.
iii. The net result of the Marital Trust/Family Trust
arrangement is that a total of $2,000,000 can effectively be sheltered from
estate tax after both spouses' deaths, with minimal restrictions having been
placed on the survivor's access to funds during his or her lifetime.
iv. Example: In the previous Example, if Husband had a
$1,325,000 estate and had a will or trust which provided for the foregoing
arrangement, the result would be as follows: Upon Husband's death, the first
$1,000,000 is allocated to the Family Trust, and is sheltered from tax by
Husband's exemption. The remaining $325,000 is allocated to the Marital Trust,
and qualifies for the unlimited marital deduction. Thus, no tax is payable at
Husband's death. Wife receives benefits from both the Marital Trust and the
Family Trust during her lifetime, but upon her death only the Marital Trust is
taxable in her estate. Assuming no other assets, Wife's taxable estate is
$325,000, but she applies her own $1,000,000 exemption against this amount,
resulting in no tax being payable at her death. Thus, the entire $1,000,000
passes to the children tax-free, saving taxes which would have been payable if
all property had been owned jointly or had passed directly to Wife at Husband's
death.
v. Note: The Marital Trust is also sometimes referred to in
literature as "Trust A" or the "Spouse's Trust", and the
Family Trust is sometimes known as "Trust B" or the "Exemption
Trust" or the "Shelter Trust" -- whatever the terminology
used, the net result is the same.
Planned Giving
1.255 A person may make gifts of up to $11,000 per year to an
individual without incurring
a gift tax. Therefore a husband and wife with three children could each make
gifts to their children each of their children for a total of $66,000 without
incurring a gift tax. The gifts may made to an individual or a trust for her
benefit. For clients of advanced age planned gifting can be used to
substantially diminish the taxable estate. The gifting provisions can be
combined with advanced trust family limited partnership concepts to leverage
the $11,000 gifts to the maximum.
1.260 ADVANCED ESTATE PLANNING TECHNIQUES
1. Irrevocable Life Insurance Trusts
a. For individuals having substantial amounts of life
insurance, this device may effectively remove the proceeds of life insurance
from the estate tax base altogether;
b. Irrevocable nature of the document requires careful
thought as to provisions contained therein;
c. For existing insurance policies, effectiveness of tax
avoidance depends upon whether owner of policies survives for three years after
policies are transferred to the trust.
2. Generation-Skipping Transfer Tax Planning
a. For individuals having estates valued at more than
$1,000,000, a generation-skipping trust can effectively reduce estate tax at
the level of the next generation (i.e., at your child's death);
b. Basically, trust is designed to continue through life of
first generation (i.e., child), with benefits being available to that
beneficiary, if needed, but not vesting in the beneficiary and upon the
beneficiary's death distributing to the next generation (i.e., grandchildren);
c. Since trust never vests in first generation, the trust is
not includable in the estate of the first generation beneficiary at death, but
instead passes tax-free to the next generation;
d. Usefulness of this device depends upon size of your estate
and likelihood that your children or other first generation beneficiaries will
have their own estate tax exposure (i.e., that their estates at their deaths
will be larger than $1,000,000).
3. Family Limited Partnerships
a. A limited partnership organized pursuant to a written
agreement following state law, with the partners consisting of members of the
family or perhaps corporations or trusts controlled by family members;
b. Vehicle to make gifts to younger family members,
particularly of business and real estate interests, that are neither convenient
assets to value nor divide for gift or estate tax purposes, while retaining
control over the management of partnership assets;
c. The primary advantage of the partnership arrangement from
an estate tax point of view is that when the grantor passes away, interests in
the partnership could give rise to valuation discounts from the underlying net
asset values of the partnership itself;
d. Family limited partnerships offer certain non-tax
advantages in the nature of creditor protection and protection from spousal
claims in a divorce proceeding;
e. Unlike irrevocable trusts which cannot be amended or
revoked, family limited partnership agreements offer more flexability.
4. Qualified Personal Residence Trusts
a. Creation of a Qualified Personal Residence Trust may
result in the realization of substantial transfer tax savings;
b. Transfer title to personal residence to an irrevocable
trust. The trust would last for a term of years,with the grantor retaining the
right to use and occupy the personal residence through the term of the trust.
Upon termination of the trust, the residence could pass on to a continuing
trust for the benefit of children;
c. The benefit to of establishing a qualified personal
residence trust is that a completed gift of the residence to the trust would be
made, but at a substantially reduced gift tax value.
1.270 PROPERTY POWERS OF ATTORNEY
1. A property power of attorney allows you to appoint an
agent for purposes of managing any property which may be outside of your trust
if you should become disabled.
a. The trust itself would govern as to any property titled in
the name of the trust, but the property power of attorney offers further
protection if for some reason you should become disabled and some assets remain
outside of the trust.
1.280 LIVING WILLS AND HEALTH CARE POWERS OF ATTORNEY
1. A "living will" or declaration is a document
whereby you indicate your desire not to be maintained on life support
procedures if you are suffering from an incurable and terminal condition, and
would not be able to survive but for such procedures
a. The decision to "pull the plug" is ultimately
left to the physician;
b. The statute does not require any doctor or hospital to
withhold or withdraw such procedures, but if he or she refuses to do so, the
statute requires that the patient be transferred to another physician who will
honor the directive.
2. A health care power of attorney is a relatively new device
in States and allows you to appoint an agent to make medical and health care
decisions if you are otherwise unable to do so
a. The statutory form also covers the life support situation,
and authorizes the agent to decide whether to withhold or withdraw such
procedures in accordance with your wishes as expressed in the health care power
of attorney;
b. On the one hand, the health care power of attorney is more
"personal" than the living will, since the designated agent, rather
than the doctor, ultimately makes the decision -- On the other hand, the
health care power of attorney forces your agent to make a very difficult and
emotional decision;
c. The health care power is broader than the living will,
since it authorizes all types of medical decisions to be made by the agent if
you are unable to do so (for example, if you are unconscious, but not otherwise
terminal, your agent could consent to recommended surgery).
d. The health care power and living will are not mutually
exclusive (you can have both at the same time). However, if a conflict arises
between the two documents, the health care power of attorney will be
controlling.
3. The "food and water" issue -- The Nancy
Cruzan Case
a. As a result of a series of Supreme Court decisions,
nutrition and hydration (food and water) may now be withheld or withdrawn as
"life support procedures" if there is evidence that you would have
desired such;
b. In view of the cases, it is best if you specifically
indicate in your living will or health care power of attorney whether or not
you intend for food and water to be considered to be "life support"
procedures which may be withheld or withdrawn under appropriate circumstances.
1.290 STEPS AND TIMETABLE FOR ESTATE AND
TRUST ADMINISTRATION
1. Initial Steps
Obtain certified copies of death certificate from local city authority.
Take possession of real and personal property. Move promptly to safeguard
assets which may require protection from theft (e.g. cash and jewelry),
immediate collection, management (e.g. margin brokerage accounts), or immediate
effects to sell (e.g. sole proprietorship or professional practice). Inspect
real estate and examine insurance coverage. Protect representative by adequate
liability and casualty insurance.
Make sure surviving spouse or other dependent has adequate cash to meet
immediate needs. Quick sources include joint bank accounts, life insurance
proceeds, and short term bank loans.
If estate is to be opened, apply for Employer Identification Number by calling
the Internal Revenue Service at 1-816-926-5999, and then either fax or mail IRS
Form SS-4 to the Internal Revenue Service Center, Kansas City, Missouri. Fax
number is 1-816-926-7988. In other areas use appropriate #. File notice of
fiduciary relationship (IRS Form 56) with Internal Revenue Service.
Determine whether ancillary(another state) administration is necessary.
2. Testate Estate
Petition for probate of will and for letters testamentary or for letters of
administration with will annexed. Indicate names and addresses of all heirs and
legatees. If administration with will annexed is requested, indicate names and
addresses of all persons having an equal or prior right to that of petitioner,
to administer or to nominate an administrator. Independent administration will
be granted unless supervised administration is requested.
Affidavit of Heirship, if this method of proof is to be used.
Order declaring heirship.
Affidavit as to copy of will with a facsimile which accurately and permanently
reproduces the will attached.
Oath and bond of individual executor.
Order admitting will to probate and appointing independent representative.
Notices to heirs and legatees.
Designation of newspaper for publication of claims and for notice of proof of
will, where required, and independent administration, where applicable.
3. Control and Management of Assets
Discover, collect and obtain information relative to all assets of decedent.
Consider whether jointly held assets belong to survivor or estate and if to
estate, file appropriate citation proceedings.
Arrange to have proper books of account maintained by the representative with
income and principal identified. Expenditures should be evidenced by receipts
or canceled checks.
Notify transfer agents of all securities held in name of decedent or jointly with
another, supply them with certified copies of letters, death certificates,
affidavits of domicile, IRS Form W-9 and advise where dividends and
correspondence should be sent. Consider transfer of registered securities into
name of representative or into the name of a nominee.
Open bank account for representative and transfer bank accounts of decedent to
the new account.
Collect title papers pertaining to decedent's real estate and ascertain status
of title.
Prepare claims for life insurance and obtain Treasury Department Form 712 for
each policy. Consider making copies of policies for estate tax examination,
especially if decedent was not the owner of the policies.
Ascertain status as a participant or beneficiary under IRA, Keogh or other employee
benefit and welfare plans and prepare claims, if applicable. Consider income
and estate tax impact.
Obtain appraisals of real estate, business interests and tangible personal
property.
Obtain date of death value for securities and other assets.
Determine cash requirements of estate and necessity of sale of estate assets.
4. Inventory and Appraisal
Independent administration: Copy of inventory must be mailed or delivered to
each interested person but need not be filed with clerk of court.
5. Sales of Personal Property
Securities: Consider transferring securities into name of representative or
into "street name" before ordering broker to sell. Delivery of
securities with legal documents does not comply with clearing house settlement
rules, so as to permit immediate sale or transfer. Submit to transfer agent
certificate or bond, assignment by representative, with signature guaranteed by
a bank or stockbroker, certified copies of letters issued within 60 days of
sale, IRS Form W-9, death certificate and affidavit of domicile.
Goods and Chattels: Motor vehicle - submit to Secretary of State certificate of
title assigned by representative, certified copy of letters issued within 60
days of sale, and application for new certificate of title. Transfer may be
expedited if application processed through a currency exchange.
6. Claims Against Estate
Claim may be filed with representative or the court or both. When filed with
representative, representative may, but is not required to, file with the
court.
Duty of representative to publish notice once each week for 3 successive weeks
and to mail or deliver to each creditor of decedent, whose claim has not been
allowed or disallowed, a notice stating the death of the decedent; the name and
address of the representative and his attorney of record; that claims may be
filed on or before the date stated in the notice, which date shall be not less
than 6 months from the date of the first publication or 3 months from the date
of mailing or delivery, whichever is later; and that any claim not filed on or
before that date is barred. The published notice must be published in a
newspaper in the county where the estate is being administered. Representative
must file proof of publication with the clerk of the court. For known
creditors, actual notice must be given.
Except with respect to a claimant whose claim is known to the representative
and is not paid or otherwise barred, a representative who acts in good faith to
determine and give notice to creditors is not personally liable to a creditor
of a decedent, but any claim barred may be asserted against (1) the estate, to
the extent that assets have not been distributed and (2) a distributee of the
estate, other than a creditor, but only to the extent that the distributee's
share of the estate will not be diminished below what distributee would have
received had the claim been paid by the representative.
Check monthly claim docket (for Cook County probates) on 4th Monday of each
month.
7. Disclaimer
Advise heirs, legatees, persons succeeding to a disclaimed interest and persons
taking pursuant to a power of appointment exercised under will, of their right
to disclaim within 9 months after death of decedent or of donee of the power,
or if a future interest, 9 months after the event as a result of which the
taker has become finally ascertained and his interest has become indefeasibly
fixed, both in quality and quantity. A disclaimer must be made no later than 9
months after the later of the day on which the transfer creating the interest
in such person is made or the day on which such person attains age 21.
Disclaimer will be barred if the disclaimant accepts any benefits from the
property to be disclaimed prior to the disclaimer.
8. Federal Estate Tax and Generation Skipping Transfer Tax
Secure information and documentation on (1) inter vivos trust agreements
executed by decedent; (2) pension, profit-sharing, IRA and Keogh plans; (3)
gifts and transfers made by decedent; and (4) contributions to acquisition of
property jointly held with persons other than spouses. In determining federal
estate tax credits (property previously taxed and gift tax credit), secure
information on all assets inherited by decedent during the 10 years prior to
his death and on all gifts made by decedent and his spouse during his lifetime,
together with copies of pertinent federal estate and gift tax returns.
Prepare and file federal estate tax return (Form 706) if gross estate exceeds
$1,000,000. The tax return is filed and tax must be paid within 9 months after
death, unless an extension is obtained under the Internal Revenue Code
provisions.
Consider whether to take expenses of administration as a deduction on the
federal estate tax return or on the federal estate income tax return or
partially on each.
Consider whether to elect to have any part or all of a trust for the surviving
spouse treated as qualified terminable interest property (QTIP) to obtain
marital deduction for federal estate tax purposes.
Consider making a request to the Area Director for a prompt examination and
audit of the return and discharge of the representative from personal
liability.
9. State Estate Tax
If a federal estate tax is due, prepare and file in duplicate an State estate
tax return with the State proper office and deposit any tax due. The return and
tax deposit are due within 9 months after death.
Obtain Certificate of Discharge and Determination of Tax proper state office.
Determine if any inheritance tax is due or if return must be filed in any other
jurisdiction.
10. Federal and State Income Tax
File notice of fiduciary relationship with IRS.
Obtain copies of decedent's income tax returns for past five years.
File tax returns for decedent for taxable year in which death occurred (IRS
Form 1040, Form IL-1040). Consider joint returns with surviving spouse.
Surviving spouse who qualifies as a "head of household", may file
return on joint basis for 2 additional years.
Consider filing request for prompt audit and assessment of all open years of
decedent's federal income tax return.
Consider electing to report accrued interest on U.S. Series E or EE bonds on
final return of decedent or return of the estate.
Unpaid medical expenses of decedent may be deducted on decedent's final income
tax return or on estate tax return, but not on both.
File annual tax returns for estate during period of administration.
If necessary, file state income tax returns for income derived from property
located out of state.
Advise beneficiaries of items to be reflected in their individual tax returns
with respect to distributions from the estate.
File final federal and State fiduciary income tax returns for estate. Send
copies to distributees.
11. Current Accounts and Distributions
All estates: Consider desirability of partial distribution. Court order may be
required in supervised administration. If distribution is made within 6 months
after issuance of letters, refunding bond is required in supervised or
independent administration.
12. Closing Estate
Representative must account to all interested persons for administration and
distribution of estate and file a receipt and approval of the residuary
legatees but need not present an accounting to the court unless an interested
person requests it. Representative must file report with court, have estate
closed and representative discharged.
13. Trusts
Apply for trust tax identification number by calling the Internal Revenue
Service at 1-816-926-5999 or appropriate # for your area.
Prepare Acceptance of Successor Trusteeship document.
Re-register any trust assets in the name of the successor trustee(s) using new
tax identification number.
Allocate and distribute assets to respective trusts. If an estate tax filing is
required, final allocation should not be made until estate tax return has been
filed, and preferably after receipt of estate tax closing letter. Interim
partial funding or distribution may be made prior to receipt of estate tax
closing letters, provided that an adequate audit reserve is maintained.
Review S Corporation status of stocks in trust. Determine whether trust
qualifies as QSST or electing small business trust. Make appropriate S
Corporation elections to maintain S Corporation status.
14. Partnerships
Review all partnership agreements relating to partnerships in which the
decedent was either a general or limited partner, and specifically review
buy-sell provisions which became applicable upon the decedent's death.
Arrange for the preparation of partnership income tax returns in any
partnership where the decedent had an obligtion to prepare such returns in his
role as general partner, tax partner, or otherwise.
If any partnership in which the decedent was a partner is currently undergoing
an IRS audit, the representative should provide needed information and take
whatever other steps are necessary in order to bring the audit to a successful
conclusion.
The partnership should consider the practicality of making an election under
Section 754 of the Internal Revenue Code in order to obtain a stepped-up basis
in a share of the partnership assets equal to the decedent's ownership share in
the partnership, to the value of those assets as of the decedent's date of
death. The election must be made in writing and must be submitted with the
partnership's income tax return for the year in which the decedent died.
Consideration should be given to the transfer of partnership interests into the
name of the representative.
A VOCABULARY OF ESTATE PLANNING
BASIS OF PROPERTY - The value used to determine gain or loss for income tax
purposes. The basis may be original cost or some different amount, depending on
the law affecting the transaction.
BENEFICIARY - The person (individual or corporation) receiving the benefit of a
transaction. (E.g., beneficiary of a life insurance policy, beneficiary of a
trust, beneficiary under a will).
CODICIL - An addition to a will. A codicil may modify, add to, subtract from,
qualify, alter, or revoke provisions in the will instrument. A codicil is a
separate document. It must be signed with the same formalities as the will. A
testator can change, revoke, cancel or destroy a codicil at any time.
COMMUNITY PROPERTY - Property, whether real property or personal property,
owned in common by husband and wife as a kind of marital partnership. Husband
and wife have management and control, but neither can dispose of ownership
without the other's consent. Community property includes all property acquired
during the marriage from earnings; earnings are also community property. (This
is an oversimplification of the law.)
ERTA - ECONOMIC RECOVERY TAX ACT OF 1981 - A comprehensive revision of the
estate, gift and other tax laws which made broad sweeping changes, including
the "Unlimited Marital Deduction" and increased "Unified Tax
Credits."
ESTATE - The total property owned by an individual prior to the distribution of
that property under the terms of a will, trust or inheritance laws. An
individual's estate includes all assets and liabilities.
ESTATE TAXES-FEDERAL - The taxes imposed by the U.S. Government on the transfer
of assets upon death.
EXECUTOR - The person (an individual or a corporation) nominated in a Will by
the Testator to take care, during probate, of the Testator's property. Also
called "personal representative," the Executor is appointed by the
Probate Court, has legal and business responsibilities, and functions under the
jurisdiction of the Probate Court. The executor selects the attorney who
performs the legal work for the estate.
EXEMPTION EQUIVALENT - The dollar amount of a decedent's estate that can be
left by will or operation of law to anyone, free of Federal estate taxes. The
current exemption equivalent equals $1,000,000, which corresponds to a
"Unified Tax Credit" of $345,800
(See Unified Tax Credit). The exemption equivalent amount is scheduled to be
increased as follows:
FIDUCIARY - A person charged with a duty of trust on behalf of a beneficiary.
Executors and Trustees are fiduciaries.
GIFT TAX ANNUAL EXCLUSION - The Federal government allows a donor to exclude up
to 11,000 per year of gifts that create a present interest gift in a specific
individual donee. A present interest gift is one in which the donee has an
immediate unrestricted right of use, benefit and enjoyment. For example, if
father gives son $5.00 and son can use it now, then father has made a present
interest gift. The State of California has a similar rule. The Taxpayers Relief
Act of 1997 indexes this for inflation but rounds to the nearest $1,000.00.
GRANTOR - The person (individual or corporation) who makes a grant of property
to another person (e.g., grantor of a trust; grantor of a deed of property).
GUARDIAN - The entity (individual or corporation) legally charged with
responsibility for the care and management of the person and/or property of (1)
a child during minority, which ends at age 18 in California; or (2) an
incompetent individual.
HEIR - A person who inherits property.
INHERITANCE TAXES - The taxes imposed by the State of California according to
the relationship of the person who receives property upon the death of a
person. These taxes have been repealed by referendum. Many states still have
such taxes on individuals or property subject to their jurisdiction.
INTER-VIVOS TRUST - A trust created "between the living," also known
as a "living trust." The grantor (settlor, trustor) is a living
person. Compare this to a testamentary trust. It can be either revocable or
irrevocable.
IRREVOCABLE TRUST - A trust whose terms and provisions cannot be changed,
modified, altered, amended, or revoked. Under certain limited circumstances, a
court may make limited changes.
JOINT TENANCY - A form of ownership of property by two or more persons,
expressed as "joint tenants with right of survivorship." When a joint
tenant dies, his or her interest in the property automatically passes to the
surviving joint tenant outside of and beyond the power of the will of the
deceased joint tenant; the property passes outside probate. However, joint
tenancy has dangers. Consult your attorney before taking title to property in
joint tenancy.
MINOR - A person who is under the age of legal competence. In California that
age is 18.
POUR-OVER WILL - A will that provides for transfer, during or at the conclusion
of probate court proceedings, of the net assets of the deceased person from the
control of the executor to a trust that was in existence immediately before the
testator's death. The executor "pours over" the assets into the open
vessel of the existing trust.
PROBATE - Court proceedings in which the probate court has jurisdiction over
(a) the executor, and (b) the assets of the deceased person. The purposes of
probate are:
(1) to protect the heirs from fraud and embezzlement
(2) to protect the federal, state, and local government
interests in taxes that are to be paid by the estate; and
(3) to protect the creditors of the deceased person.
Probate begins with (a) the will being admitted to probate and (b) the executor
being granted "letters testamentary." Probate concludes when all
assets have been accounted for, taxes and creditors paid and any residue
distributed as provided in the will.
PROPERTY - Property is described as either real or personal. Real property is
real estate, and personal property is everything else. Personal property
includes physical assets such as automobiles, equipment, household items, etc.
Personal property also includes financial property, such as securities, notes
or loans receivable, bank accounts, cash and insurance policies.
Q-TIP TRUST - (Qualified Terminable Interest Property Trust) A special type of
living trust that permits use of the "unlimited marital deduction."
The beneficiary spouse is entitled to all of the income from the trust property
for life, but no person has the power to appoint any part of the property to
any person other than the surviving beneficiary spouse during that spouse's lifetime.
This has the effect of protecting the ultimate beneficiaries of the trust from
having the trust property given away to or taken by another person.
The most widely used exception to the terminable interest rule is the IRC
2056(b)(7) exception for "qualified terminable interest property."
Qualified terminable interest property ("QTIP") is property which
passes from the decedent, in which the surviving spouse has a "qualifying
income interest" for life and to which an election under IRC 2056(b)(7)
applies.
The surviving spouse has a "qualifying income interest" for life if
the surviving spouse is entitled to all of the income from the property,
payable annually or at more frequent intervals, and no person has a power to
appoint any part of the property to any person other than the surviving spouse
(except for a power exercisable only at or after the death of the surviving
spouse).
Until recently, the executor of the decedent's estate had to make an
affirmative election on the Federal Estate Tax Return (Form 706) in order to
obtain an estate tax deduction for
QTIP-ed property. Unintended omissions by executors who neglected to make the
election on the decedent's estate tax return gave rise to countless private
ruling requests. Finally, in 1996, the I.R.S. adopted the rule in its revised
Form 706 that the executor is presumed to have made the election unless he
elects otherwise. An election, once made, is irrevocable.
Property for which a QTIP election is made need not be in trust. A legal life
estate in real or personal property may be QTIP-ed so long as the relevant
safeguards vis a vis income are present. In addition, the surviving spouse must
have a power to sell the residence. Reg. 20.2056(b)(7)(h), Example 1.
The appeal of the QTIP trust over the old-style power of appointment trust
sanctioned by IRC 2056(b)(5) is illustrated by the following example. Suppose a
re-married decedent with children from a prior marriage wants to provide for
his surviving spouse with a life estate, but wants to ensure his children get a
remainder interest. Suppose further that the children and the second wife are
not on the best of terms. Prior to the introduction of QTIP property, the
decedent's choices were limited. He could provide an old-style IRC 2056(b)(5) trust
and risk that his spouse exercise the power of appointment in favor of someone
other than his children, or he could draft the trust he really wanted (which,
prior to the QTIP rules, was a non-deductible terminable interest) and pay
estate tax. Under the QTIP rules, he can provide his surviving spouse with an
income interest for life with a limited invasionary provision for principal,
and, at the spouse's death, the remainder will pass to his then living
children. If the QTIP election is made (or not unmade, as it were), a marital
deduction will be allowed.
QTIP trusts receive their anointing of the marital deduction because their
purpose is only to defer estate tax. IRC 2044 directs that upon the death of
the surviving spouse, all previously QTIP-ed property must be includible in her
or his gross estate. This ensures that the property is taxed at least once at
the generational level of the decedent and his or her spouse.
Although beyond the scope of these materials, the eventual taxing of a QTIP
trust in the survivor's estate pursuant to IRC 2044 can have unintended
consequences for those residual beneficiaries of the estate of the surviving
spouse. Care must be exercised to be sure that the estate tax is fairly
apportioned, particularly if the remaindermen of the QTIP trust and the
residual beneficiaries of the survivor's estate are different.
REVOCABLE TRUST - A trust whose terms and provisions can be changed, modified,
altered, amended, or revoked. Such power is usually reserved by the person who
created the trust (the "trustor"), but it can also be assigned by the
trustor to a second person. The revocable trust is a popular means of avoiding
probate, but a will should be used with it. The revocable trust can be used by
aged people to protect themselves and their assets from the expense and delay
of conservatorship. Before using a revocable trust, a person should consult an
attorney who is experienced with revocable trusts.
SETTLOR - Another word for "grantor" or "trustor" of a
trust. The person who "settles" the assets into the trust.
SPENDTHRIFT TRUST - A trust that provides a fund for the maintenance of a
beneficiary, while, by its terms, insulating the beneficiary's interest from
any improvidence or incapacity of the beneficiary, as well as from claims of
the beneficiary's creditors.
TENANCY IN COMMON - A form of title to real or personal property held by two or
more persons. The legal relationships and results are very different from those
of joint tenancy. The best form of property title should be decided only after
consulting with an attorney because the effects on income tax, estate, tax,
death rights, etc. vary greatly.
TESTAMENTARY TRUST - A trust hat comes into being only as a result of the death
of the person whose will provides for its creation; hence, the term
"testamentary."
TESTATOR - The person who signs a will, and in it, disposes of property.
TRUST - A legal entity established either (1) by a trust agreement signed by a
living person (inter-vivos trust or living trust) or (2) arising after death
from a will (testamentary trust). The trust is governed by the terms in the
document. Trusts can last as long as 50 years or more. Thus, they must be
written with great care.
TRUSTEE - A person (individual or corporation) who, in a given trust, has bare
legal title to the assets and has the power given in the trust to carry out the
wishes of the trustor. The trustee has a fiduciary obligation to the
beneficiaries of the trust and is subject to strict legal regulation. Although
the trustee has legal title for convenience, the beneficiary owns the
beneficial or equitable title.
TRUSTOR - A person who establishes a trust. There can be more than one trustor.
UNIFIED ESTATE AND GIFT TAX RATES - Effective January 1, 1977, the separate
estate and gift tax schedules were combined into a single new tax schedule. Now
the cumulative value of taxable gifts made during life is added to the value of
the decedent's estate when determining the applicable estate tax rates. The
same tax rates apply to both lifetime gifts and to the estate left at death.
UNIFIED TAX CREDIT/APPLICABLE CREDIT AMOUNT/APPLICABLE EXCLUSION AMOUNT - A
specific dollar amount that can be deducted from the Federal estate taxes a
decedent's estate would have to pay in a given year, but for the existence of
the credit. For 2002, the Unified Tax Credit is equal to the amount of
$345,800, which corresponds to an "Exemption Equivalent" of
$1,000,000. IRC § 2001 & 2010.
UNLIMITED MARITAL DEDUCTION - A special provision of the estate tax laws that
permits a surviving spouse to receive all or any portion of the property of a
deceased spouse's estate without any Federal estate tax liability.
WILL - A signed document that provides for the orderly disposition of assets
after death in accord with the person's wishes. Wills are important tools to
provide for family security and protection and to minimize death taxes.
PLANNING FOR THE FUTURE - ESTATE AND TAX PLANNING
TABLE OF CONTENTS
INTRODUCTION
1.05 Introduction Page 1
1.10 Why You Need a Will or Living Trust
Page 1
1.20 What is Probate and How It May Be
Avoided Page 1
1.30 Living Trust Option Page 2
1.40 If You Don't Have a Will or Living
Trust Page 2
1.50 Tax Planning Through Your Will or Living Trust
Page 2
OVERVIEW
1.60 Why is Estate Planning Necessary
Generally Page 2
1.65 Estate, Gift and Generation-Skipping Transfer Tax
Changes Page 4
Phase-Out and Repeal Page 4
Basis of Property Acquired from a Decedent Page 5
Modified Generation-Skipping Transfer Tax Rules Page 6
1.70 Living Trust v. Will - Which is Right For
You Page 7
Phase-Out and Repeal of Estate and Generation-Skipping Transfer Taxes; and
Increase in Unified Dredit Effective Exemption
1.80 Top Marginal Estate, Gift and Generation-Skipping Tax
Rate Page 8
1.90 Estate and Gift Tax Marginal Rates in Excess of
49% Page 8
1.100 Estate and Gift Tax Marginal Rates in Excess of
47% Page 8
1.110 Estate and Gift Tax Rates in Excess of 45%
Page 8
1.120 "Sunset" Provisions Page 8
1.130 Estate GST and Gift Tax Rates Page 9
1.140 Top Gift Tax Rate Page 9
1.150 State Death Tax Credit Page 9
1.160 Basis of Property Acquired from a
Decedent Page 9
1.170 Exceptions - Carryover Basis Rules
Page 10
1.180 Surviving Spouses and Other Heirs - Basis
Assets Page 10
1.190 Extension - Income Tax Exclusion for
$250,000 Page 10
1.200 Modified Generation-Skipping Transfer Tax
Rules Page 10
Federal Estate and Gift Tax - The Mechanics
1.210 Estate Page 11
1.220 Property Page 11
BASIC ESTATE TAX PLANNING
1.230 $1,000,000 Threshold Page 11
1.240 Estate Tax Minimization Page 12
1.250 $1,000,000 Exemption/Unlimited Marital Deduction
Page 12
1.255 Planned Giving Page 14
1.260 Advanced Estate Planning Techniques
Page 15
Irrevocable Life Insurance Trusts Page 15
Generation-Skipping Transfer Tax Planning Page 15
Family Limited Partnerships Page 16
Qualified Personal Residence Trusts Page 16
1.270 Property Powers of Attorney Page 16
1.280 Living Wills and Health Care Powers of
Attorney Page 17
A Living Will Page 17
Health Care Power of Attorney Page 17
The "Food and Water" Issue - The Nancy Cruzan Case
Page 17
1.290 Steps and Timetable for Estate and Trust
Administration Page 18
Initial Steps Page 18
Testate Estate Page 18
Control and Management of Assets Page 19
Inventory and Appraisal Page 20
Sales of Personal Property Page 20
Claims Against Estate Page 20
Disclaimer Page 21
Federal Estate Tax and Generation-Skipping Transfer Tax Page
21
State Estate Tax Page 22
Federal and State Income Tax Page 22
Current Accounts and Distributions Page 23
Closing Estate Page 23
Trusts Page 23
Partnerships Page 24
A Vocabulary of Estate Planing Page 25-30
ILLUSTRATIONS Page 31-45
PLANNING FOR THE FUTURE - ESTATE AND TAX PLANNING
by
ROBERT E. McKENZIE, EA, ATTORNEY
ARNSTEIN & LEHR
SUITE 1200
120 SOUTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
(312) 876-7100
REMCKENZIE@ARNSTEIN.COM
http://www.mckenzielaw.com
PORTIONS REPRINTED WITH PERMISSION OF
WEST GROUP, INC.®
FROM
REPRESENTATION BEFORE THE COLLECTION DIVISION OF THE IRS
BY
ROBERT E. McKENZIE
ARNSTEIN & LEHR
120 SOUTH RIVERSIDE PLAZA, SUITE 1200
CHICAGO, ILLINOIS 60656
(312) 876-7100
REMCKENZIE@ARNSTEIN.COM
http://www.mckenzielaw.com
©2003