GENERATIONS – Planning Your Legacy Practical Answers from America’s Foremost Estate Planning Attorneys



Chapter 1: Basic Estate Planning Concepts
The Fundamentals of Estate Planning
The Unified Tax System
Living Probate

Chapter 2: Methods of Estate Planning
Traditional Methods of Estate Planning
Alternative Methods of Estate Planning
The Revocable Living Trust
The Need for Proper Estate Planning



Chapter 3: Creating a Revocable Living Trust
General Considerations
Living Trust—Centered Planning Strategies
Planning for Family Members
Using Powers of Appointment for Tax Planning
Planning for Disability
Disinheriting a Family Member
Ultimate-Remainder Planning

Chapter 4: Trustees and Guardians
Pour-Over Wills

Chapter 5: Funding and Maintaining a Revocable Living Trust
Funding Your Revocable Living Trust
Maintaining Your Revocable Living Trust



Chapter 6: Retirement Planning
The Importance of Retirement Planning
Qualified Retirement Plans
Individual Retirement Accounts
Distributions from IRAs and Qualified Plans
Beneficiaries of IRAs and Qualified Plans
Retirement Plans and Taxes
Differences between IRAs and Qualified
Retirement Plans



Chapter 7: After-Death Administration
Immediate Action Steps upon the Death of a Family Member
The Need for a Lawyer
Probate Administration
After-Death Trust Administration
Qualified Disclaimers
The Spousal Election
Income Taxes after Death
Federal Estate Taxes


Proper Planning
Do-It-Yourself Estate Planning
One-Size-Fits-All Estate Planning
Attorneys Qualified to Do Estate Planning
Fees and Costs of Estate Planning
The Team Approach to Estate Planning
How to Begin the Estate Planning Process



Chapter 1: Basic Estate Planning Concepts


What is an estate?
There is a common misconception that “estates” are exclusive to multimillionaires. Most people do not realize what actually makes up an estate and only have an idea about estates from watching television reruns of Dallas, where they see the “Southfork Ranch” estate. A residence, no matter how large or small, is part of an estate. An estate is, quite frankly, everything a person owns in his or her own name or owns with another person, everything payable to his or her estate, and everything controlled by that person. Your estate can comprise your residence, cash, stocks, bonds, and other investments, as well as businesses that you may own. Your estate also comprises retirement plans, such as IRAs and Keoghs, and life insurance death benefits. It even includes personal property, such as vehicles, collectibles, and other treasured items.

What is estate planning?
The definition of estate planning adopted by the National Network of Estate Planning Attorneys is:
I want to control my property while I am alive and well, care for myself and my loved ones if I become disabled, and be able to give what I have to whom I want, the way I want, and when I want, and, if I can, I want to save every last tax dollar, attorney fee, and court cost possible.
A good estate plan will meet this definition of estate planning.

Is estate planning just having a will?
For centuries, that is about all it was. Today, the field of estate planning has grown to be one of the most technically demanding and comprehensive areas of the law.
Estate planning is ensuring that your hopes, dreams, and concerns for yourself and for your loved ones will be accomplished if you become incapacitated or die. It is protecting you and those you love by keeping you, your family, and your sensitive business information out of probate court when you become legally incapacitated or die.
Estate planning is designing a trust agreement which contains your loving instructions for your family’s continued well-being after your death and also contains provisions to eliminate estate taxes.
It can include planning for redirecting what would have been paid in estate taxes to useful charitable projects, at no net cost to you or even at a net gain—you and your heirs may have more money for yourselves than would be the case if you had left nothing to charity.
If you are a business owner, estate planning is planning for the survival of that business after your death or the efficient disposition of that business in order to use the proceeds to care for and educate your loved ones.
In this day and age, you never know when you might be sued or what the result might be, even if you have done nothing wrong. For individuals who are particularly at risk from such lawsuits, estate planning can include increased protection from creditor attack.
Through devices such as private foundations, estate planning can keep your family members together and involved for generations in community services while giving them entree into influential circles they would not otherwise have had.
Estate planning can help you unlock the value of highly appreciated assets which have a built-in capital gain liability and devise retirement vehicles which have the benefits of qualified plans without the restrictions.

What are some of the most common misconceptions about estate planning?
Here are the “Great Myths,” as we call them:
MYTH 1: “I’m too young to worry about estate planning.”
REALITY: If you’re young, you especially need to map out an estate plan to help protect your loved ones.

MYTH 2: “My estate isn’t large enough to need estate planning.”
REALITY: If your estate is fairly small, it will likely suffer a greater percentage of shrinkage from final expenses, probate costs, and so on, than will a larger estate.

MYTH 3: “My estate won’t be taxed, regardless of its size, because I can use the unlimited marital deduction to transfer all of my assets to my spouse tax-free.”
REALITY: Poorly planned usage of the unlimited marital deduction can simply postpone estate tax problems until your spouse’s death. Without proper use of estate tax planning, your estate shrinkage at that time could be substantial, with your children and grandchildren feeling the losses.

MYTH 4: “Most people just have a will; that’s all I need.”
REALITY: Depending upon whose statistics you read, only about 40 to 60 percent of the population has a will, and it’s true that a will is a must in every estate plan. But understand, a will guarantees the probate process. To avoid the probate process, use a funded revocable living trust as the centerpiece of your estate plan with a pour-over will as a supporting document, not the centerpiece.

What are the traditional methods of basic estate planning?
There are six techniques that are traditionally used in basic estate planning, and everyone, in some manner, is using at least one of these techniques. Let us briefly look at each one, along with its advantages and disadvantages.

A majority of Americans die without a will or a trust. This is called intestacy. Intestacy is considered a method of estate planning because by leaving no will, a person has given the state the right to decide who will receive his or her property. Assets that pass by intestacy go through a probate process called administration which is almost identical to the probate process for a last will and testament.

A last will and testament is essentially a legal document that states how a person wants his or her estate distributed at death. Many people plan their estates by creating a last will and testament.
Unfortunately, wills have major disadvantages: (1) A will does not control how or when all of the will maker’s property is distributed. Property owned in joint tenancy with another person, life insurance proceeds, and retirement benefits all pass outside of a will. (2) A will is not effective until the death of its maker, so it is of no help with lifetime planning. (3) Upon the maker’s death, the will must be filed with the probate court, where it becomes a public document and is available to anyone who wants to read it.
Death probate is a court and administrative proceeding. It is required to manage and distribute a decedent’s estate at death. Once a will enters the probate process, a person’s estate is no longer controlled by his or her family. It is in the hands of the court and the probate attorneys. Because a will guarantees that a decedent’s estate will go through probate, it is a very poor estate planning document for families who want to maintain control.

There are different forms of how people hold title to property, one of which is joint tenancy with right of survivorship. The right of survivorship means that the survivor acquires the entire interest in the property upon the death of the other joint tenant.
Because a joint tenant’s interest automatically passes by law to the surviving joint tenant at death, its ownership is not controlled by the deceased joint tenant’s will. For example, two brothers, Bob and David, own a piece of property as joint tenants. Bob dies and his will says that upon his death all of his estate should go to his wife, Pat; however, because the property passes automatically at Bob’s death to the surviving joint tenant, David will own the entire property and Pat will get nothing. This is only one of the many unforeseen problems that joint tenancy creates.

Some types of property pass, at the death of their owners, to those listed in their beneficiary designations. Life insurance policies, annuities, individual retirement accounts, qualified retirement accounts, and pension plans are examples of these types of property.
The advantage of having named beneficiaries is that the property avoids probate. The disadvantage is that since the proceeds from beneficiary-designation property pass directly to the named beneficiaries and are not controlled by terms in the will, the proceeds may not pass to whom the owner wants or in the way he or she wants. Like joint ownership, beneficiary designations supersede the terms of a will.

Giving assets away can be a valuable part of an estate plan, but it should not be done without professional advice.

Finally, many people have living trusts, but these documents may be “bare-bones” living trusts. Bare-bones trusts often do not achieve basic planning objectives or avoid probate because their makers failed to transfer their property into their trusts. Bare-bones living trusts are usually sterile documents written in legalese and devoid of meaningful instructions for loved ones. They seldom reflect the hopes, concerns, dreams, values, and ambitions of their makers. However, when someone has a properly drafted and funded living trust, he or she can be confident that the many disadvantages of the five preceding traditional forms of estate planning have been eliminated.


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What are incidents of ownership?
Incidents of ownership are IRS-specified attributes that put policy proceeds into your estate. These attributes include the ownership of the policy, power to change the beneficiary, right to borrow against the policy, and right to surrender or cancel the policy.

Who values life insurance?
Life insurance is valued at the amount of the policy proceeds and is usually valued by the insurance agent of the estate or trust and the trustee or personal representative.

Is the federal estate tax a one-time tax?
Estate tax applies to transfers to each generation, for example, from father to son and from son to grandson.

When is the federal estate tax due and payable?
Subject to a limited exception, estate taxes must be paid, in cash, usually within 9 months of the person’s death.

Are there any situations in which my estate can pay the federal estate tax in installments?
Yes. When an individual dies and his or her interest in a closely held business exceeds 35 percent of the adjusted gross estate, the executor may elect to pay estate taxes attributable to that business in installments over a maximum period of 14 years at special interest rates that are lower than those normally charged by the government for installment payments of taxes.

Does my estate have to file a federal estate tax return if it is under the current applicable exclusion amount?
If you do not use up any unified credit by making taxable gifts during your lifetime, a federal estate tax return needs to be filed only for a gross estate that is equal to or exceeds the applicable exclusion amount in effect for the year of death.

Can I leave money or property to charity free of tax?
You can leave any amount of money or property to qualifying charities without having to pay federal estate tax.

Are there any deductions, exemptions, or credits?
Generally, a decedent’s gross estate is reduced by the following:
• Funeral and administration expenses
• Debts, mortgages, and liens
• Bequests to a surviving spouse (the marital deduction)
• Charitable bequests


Unlimited Marital Deduction
How much property can I leave to my spouse without my estate having to pay federal estate tax?
The federal estate tax law permits leaving an unlimited amount to one’s surviving spouse without incurring the immediate obligation to pay tax. However, to the extent that the surviving spouse owns this property at his or her death, it must be included in the surviving spouse’s estate.
If your spouse is not a U.S. citizen, the unlimited marital deduction is available only for property that passes by way of a qualified domestic trust, which is explained in later.

Why, then, can’t I leave everything to my spouse and not worry about tax?
If you rely upon the unlimited marital deduction without thought, the applicable exclusion amount for the first of you to die will be wasted and result in unnecessary taxes. This happens because the marital deduction “swallows up” the deceased spouse’s applicable exclusion amount. If you take advantage of both the applicable exclusion amount and the marital deduction through proper planning, it is not difficult to save additional taxes. The amount of savings varies depending on the year of death. Table 1-4 shows the potential tax savings for each year as the applicable exclusion amount is being phased in.

Can my husband and I combine our annual exclusions?
Yes, married individuals can combine their annual exclusions; strangely enough, this is called gift- splitting. For example, if you are married and have three children, you and your spouse can jointly give each child up to twice the annual exclusion each year. It does not matter from whose assets a gift is made. For example, if you give one child money or property that exceeds the annual exclusion and your spouse consents to split the gift on a federal gift tax return, then both your spouse’s annual exclusion and yours can be applied to the value of the gift.

Are there other types of tax-free gifts that I can make in addition to annual exclusion gifts?
Yes. Payments of any amount for school tuition and medical expenses that are made directly to the school or medical provider are tax-free and are in addition to the annual exclusion.

Can I use my annual exclusion to make gifts in trust?
The annual exclusion amount is only for gifts “other than gifts of future interests in property.” Gifts to a trust are gifts of a future interest and usually do not qualify. However, there are ways to qualify gifts in trust for the annual exclusion.

How do I qualify gifts in trust for my annual exclusion?
To qualify gifts to a trust for the annual exclusion, the trust must contain “demand-right” language or instructions. This means that the beneficiaries of your trust must have the current right to withdraw the money given to the trust. If they do not request withdrawal of the money within a preset period of time, the trustee will then be able to use the money as you specified in the trust and the gift will qualify for the annual exclusion.

When is a gift “complete” for federal gift tax?
A gift is complete when the donor gives up complete dominion and control over the property. The donor must give away the tree and the fruit that is produced by the tree before the gift is “complete” for gift tax purposes.

How do I value gifts for federal gift tax purposes?
For gift tax purposes, you must value a gift at its fair market value as of the date the gift is transferred to the recipient. The same standards for valuing an asset in an estate apply to valuing a gift.

Who pays the gift tax, the donor or the recipient?
The donor is responsible for filing a gift tax return and paying the tax. If the donor does not pay the tax, payment becomes the responsibility of the recipient. If the recipient does not, or cannot, pay the tax, the property will be used to pay the tax.

Can we review the basic methods of making gifts?
There are five basic methods of making gifts without creating a gift tax:

  1. You may give unlimited amounts to your spouse during your life or at death because of the unlimited marital deduction.
  2. You may give the annual exclusion amount to any person in any calendar year. If you are married, you and your spouse, by “gift splitting,” may together give as much as twice the annual exclusion amount per year to anyone provided your spouse consents to the gift. A gift tax return (Form 709) must be filed for the spouse to consent to a split gift.
  3. In addition to annual exclusion gifts, you may give your applicable exclusion amount, or any part of it, to any one person or to several people during your lifetime or at death.
  4. You may pay school or college tuition for any person provided you pay the tuition directly to the educational institution. This, too, is in addition to the annual exclusion and the applicable exclusion amount.
  5. You may pay medical bills of anyone provided you pay the sums due directly to the doctor or hospital. This is in addition to the annual exclusion and the applicable exclusion amount.


Step-Up in Basis/Capital Gain Tax

What is a step-up in basis, and why is it important?
In general terms, basis is your attributed cost of a particular asset. Usually this is the purchase price. Gain or loss on the sale of an asset for tax purposes is computed by subtracting your basis from the sales price. When you receive assets as a result of another person’s death, your basis in the assets received is “stepped up” to the value of the assets at the date of death or, in some cases, the date that is 6 months after the date of death. This results in a very large tax savings when highly appreciated property is inherited.
For example, Mrs. A owns a stock at her death which she purchased for $1 but which is now worth $10. If she sold it for $10 while alive, she would have a $9 taxable gain. The $9 gain is the difference between the basis of $1 and the current value of $10. However, at Mrs. A’s death, the stock is valued at $10 for federal estate tax purposes. In other words, the $1 basis is stepped up to the current value of $10 at her death. Therefore, if Mrs. A’s heirs sell it for $10, they will pay no income tax because the stepped-up $10 basis is the same as the current $10 value.

Is there a step-up in basis on assets I give away before my death?
Under the Internal Revenue Code rules, property that is given to an-other has a “carryover” basis. This means that the cost basis of an asset in the hands of the recipient is the same as the cost basis was in the hands of the donor. To receive a step-up in basis, property must be included in the decedent’s estate.

If my husband dies and we have jointly held property, do I get a step-up in basis?
If you purchased the property after 1966 and before 1982, you could get a 100 percent step-up in basis if your husband purchased the prop-arty himself. Outside that period, you would normally be entitled to a step-up in basis on one-half of the property.

Are the step-up-in-basis rules different for property held in joint tenancy with right of survivorship when the owners are not married?
Yes, they are, and they are complex. If property is held jointly between persons who are not married and one of the owners dies, there are several possible outcomes, as follows:

  • If the joint owner who died paid for the entire property, the full value of the property is included in the deceased owner’s estate. The property receives a 100 percent step-up in basis. For example, if Mrs. A owned stock, put it in joint tenancy with her daughter, and subsequently died, the full value of the stock would be included in Mrs. A’s estate. Her daughter would then inherit the property with a 100 percent step-up in basis.
  • If both joint owners contributed to the value of the asset, the value of the deceased joint owner’s share is included in his or her estate. That portion of the property receives a step-up in basis. If Mrs. A and her daughter bought stock for which Mrs. A paid 60 percent and her daughter paid 40 percent, then 60 percent of the value of the stock would be included in Mrs. A’s estate and would receive a step-up in basis.
  • If the joint owners received the property by gift or inheritance, only the decedent’s portion is included in his or her estate. For example, if three children inherited real estate from a parent and the property was jointly held by all three, one-third of the value of the property would be included in the estate of a child who dies. This one-third interest would receive a step-up in basis.

These examples represent the general rules for step-up in basis. Other consequences may occur depending on the situation. Before you make any gift, especially if it is to be titled in joint tenancy with right of survivorship, you should consult your attorney.

What if my spouse and I own property together in a community property state?
Community property receives a 100 percent step-up in basis on the death of either spouse. It does not matter which spouse dies first; all of the community property will receive a new basis equal to its fair market value as valued for estate tax purposes.

If I am terminally ill, can my brother give property to me which I can then leave to him so that he can get a 100 percent step-up on my death?
Some individuals who know about the step-up-in-basis rules try to take advantage of them when they find that family members or friends are about to die. A person will give property to the dying person with the agreement that the dying person, in his or her will or trust, will leave that same property to the person who gave it. The result these people are looking for is a 100 percent step-up in basis.
To prevent such transactions, the Internal Revenue Code contains a provision that denies a stepped-up basis for any property which was transferred to a decedent within 1 year of his or her death and which is returned to the donor after the decedent’s death.

I own an annuity and a lift insurance policy on my spouse’s life. Will these items receive a step-up in basis at the time of my death?
Generally, neither the annuity nor the cash value in the life insurance policy you own on the life of your spouse will receive a step-up in basis at the time of your death. There could, however, be an effective adjustment to basis in circumstances where your estate incurs an estate tax and these items contribute to that estate tax liability

Doesn’t the gift of appreciated assets generate capital gain tax at the time of the gift?
No. A capital gain is triggered only when an asset is sold. Thus, there is no capital gain tax when you make a gift of an appreciated asset, but if the recipient later sells the gift, his or her gain will be taxed.

What is capital gain?
Capital gain is the profit an owner realizes on the sale of investment property, such as real estate, stocks, art, or collectibles. Simply put, it is the difference between the price paid for an item and the price it is ultimately sold for.


Tax Planning
Why should I do estate planning—don’t I have a duty to pay tax to my country?
Consider a concept called the “hand of taxation.” Count the fingers on one hand and review the following five major taxes you face:

  1. Point to your thumb—you’re taxed when you earn it; that’s income tax.
  2. Point to your index finger—you’re taxed when you spend it; that’s sales tax.
  3. Point to your middle finger—you’re taxed just because you own certain assets; that’s called property tax.
  4. Point to your ring finger—you’re taxed when you sell something that has appreciated in value; that’s called capital gain tax.
  5. Point to your pinkie finger—you’re taxed when you’re through with it and want to give it away to someone you love either while you’re alive because that person needs it more than you do or after you’ve died and truly have no use for it; that’s called gift and estate tax.

Given all the taxes you pay, you may conclude that you have a duty to your family and loved ones to use every deduction and exemption Congress has given you to reduce federal estate tax.

Can I take advantage of my applicable exclusion amount during my lifetime?
In addition to using your annual exclusion, you may also give away your assets tax-free up to the amount of your applicable exclusion amount to any one or more persons however you please. To the extent that you use your applicable exclusion amount during your lifetime, your estate will not have the benefit of it on death.

I plan to leave my property to family members or charities on my death, but should I consider giving it to them now instead?
If you are comfortable that you will not need the property to sustain your standard of living or to meet future emergencies, you should consider this option. It will remove not only the property from your estate but, as we said earlier, the appreciation from your estate as well.

Can I make gifts to my spouse and qualify for the unlimited marital deduction?
You have an unlimited marital deduction when making gifts to your spouse. There are no restrictions on how large these transfers can be or how often you can make them as long as your spouse is a U.S. citizen.
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Death Probate and Administration

What are the origins of the probate process?
In our country’s earlier times, a person would homestead a particular piece of land and obtain a document called a “patent,” from the president of the United States, which proved that the homesteaded land was his or hers. As the people who held these patents died, a question arose as to how to remove their names from the patents and put the names of living persons on them. State legislatures had to create a system for transferring property from a deceased person to a living person while protecting family members who might have a claim or interest in the property and giving them an opportunity to be heard. The probate process was “invented” to accomplish such transfers in a fair and orderly way.
Probate also addresses the claims of a decedent’s creditors. The process gives creditors an opportunity to make and prove their claims so that valid claims can be paid out of the assets of an estate before they pass to the decedent’s heirs.

What is probate?
Probate is the court-supervised administration of your estate. It generally has three purposes:

  1. To marshal all of your assets
  2. To pay your bills and resolve disputed creditor issues
  3. To oversee distribution of your estate as you directed

I know probate varies from state to state. In general, what are the mechanics of the probate process?
If you have a will, filing a petition to admit your will to probate is usually the way to initiate the probate process. If you die without a will, a petition to appoint a personal representative, sometimes called an administrator, is filed with the court. In either case, notice to all of your heirs and beneficiaries is generally required before the hearing. (A notice is often published in a newspaper of general circulation within the county of the decedent’s residence.) As a practical matter, this means a delay of approximately 30 days between filing the petition for probate and having a hearing. Until the hearing and court appointment, unless action is taken to authorize the immediate appointment of a special administrator, even your named personal representative (sometimes called an executor, if male, or an executrix, if female) is not empowered to deal with your estate affairs. Once a personal representative is appointed, the court will issue documents, often called letters of personal representative, which serve as proof of that person’s authority to take action concerning the estate. Unless you have a will which specifically relieves the personal representative from certain court-imposed duties, he or she may be required to post a bond and file an inventory of assets of the estate, as well as an annual accounting of all transactions.
Probate also involves a particular process for handling creditors. This process is designed to ensure that all creditors have notice of the death and have the opportunity to file creditor claims. Practically speaking, the process is unnecessary in the vast majority of cases since the bills and creditors could simply be paid as statements are received.
Even if all the bills and obligations of the estate are paid immediately, most probate laws require that estates remain “open” for a mini-mum period of time, usually 4 to 6 months, to give all creditors time to file claims against the estate. During this time, the law generally restricts the ability of the personal representative to make distributions from the estate.
The personal representative is charged with gathering all the assets of your estate so that they can be used to pay creditor claims and then the remainder can be distributed to your heirs or beneficiaries. Most states allow that estates with a limited amount of assets (for example, in California, estates consisting of personal property valued at less than $100,000) can be collected by an affidavit procedure rather than go through probate. Assets held in a living trust do not require probate administration.

What must be done to “close” a probate?
In many states, before an estate can be closed, the personal representative must file with the court an inventory of all the estate’s assets with an appraisal of the value of those assets. The inventory and appraisal which are filed with the court are part of the public record. The intimate details of your estate are open to anyone who cares enough to open the court file. There is no screen to ensure that your estate records are reviewed only for legitimate purposes. If your estate is not liquid and there is a need to sell assets to pay claims or taxes, a potential buyer can inspect your probate file to gain negotiation advantage.
Once the assets are collected, the estate obligations are satisfied, and the minimum waiting period is satisfied, your personal representative can file a final accounting and petition for distribution of your estate. The details of distribution, including who will receive what, are also matters of public record.

How long does probate usually take?
Even though statutes allow estates to be closed in a limited period of time, for example, 6 months, experience demonstrates that the actual time of closure is much longer; 15 to 18 months is a realistic estimate of the time required to close an estate. In some cases it can be even longer if disagreements arise among the beneficiaries.

What is estate administration?
If a will is proved invalid or if a person dies without a will or a proper will substitute, the public, legal process which ensues is technically called administration, not probate. However, estate administration is equally as time-consuming and costly as probate, if not more so. Under administration, the disposition of the deceased’s assets is governed by state law, not by the deceased person’s desires, and thus there is greater opportunity for dispute and disagreement among heirs, family, and friends.
For purposes of this book, we’ll treat the terms “probate” and “administration” as meaning the same thing. The primary difference between the two is that in probate a will has to be “proved,” whereas in administration there is no will to prove.

What goes through probate, and what doesn’t?
Anything you own in your own name alone or as a tenant in common with others (including community property) is subject to probate and administration. Beneficiary-designation property for which the “estate” is named as the beneficiary also goes through probate.
Property held in joint tenancy with right of survivorship (including tenancy by the entirety), property held in a living trust, or property distributed by beneficiary designations (as long as the beneficiary is not your estate) does not go through probate. Property held in a life estate, in which you are entitled to the use of the property and all its income only during your life, also does not go through probate.

What are the disadvantages of the probate process?
The disadvantages of death probate proceedings include:

When your estate goes through probate, you lose all privacy your will, your assets, and your liabilities all become public record just like any other litigation at the courthouse. Con artists have been known to submit false claims against a probate estate and use the probate record to target heirs and beneficiaries for their next swindle.

Wills can always be contested and put aside—it happens all the time. When a will is contested, the estate is frozen and the assets cannot be transferred to loved ones. It is easy for any disgruntled heir to file a will contest since the will is already in probate court.

The court charges the estate either a set fee or a fee based on the size of the estate. In addition, attorneys, executors, guardians, and any other fiduciaries acting within the realm of probate (or administration) charge their own fees. The total cost of probate can easily range from 3 to 10 percent of the gross estate—or more. For example, if a person dies owning a house that has a fair market value of $300,000 and other assets amounting to $100,000, the value of the gross estate is $400,000. A conservative estimate of the probate costs would be 5 percent of that gross amount, or $20,000. If the house was mortgaged for $200,000, the value of the net estate is $200,000. Thus, the probate costs would actually amount to 10 percent of the net estate!

There must be a probate proceeding in every state in which the decedent owned real property.

Probate can last from several months to several years. This only adds to the frustrations and anxieties of a grieving spouse and family.
Probate has been defined as “the lawsuit you bring against yourself with your own money to benefit your creditors.” This description is quite accurate, but people usually come to appreciate its veracity only after undergoing the probate of a family member or close friend.

You mentioned fiduciaries’ fees. Can you give more details on this probate expense?
Two of the authors of this book, Robert A. Esperti and Renno L. Peterson, commissioned a scientific survey of probate costs for another book they wrote called The Living Trust Revolution. They also compared the results of this study to a 1990 report by the American Association of Retired Persons (AARP). They came to the conclusion that the attorneys’ fees for probate are usually about 3 percent of the gross estate. If the personal representative or the executor of the estate is also paid a fee, the total cost, including both sets of fees, is 5 to 6 percent of the gross estate.

Can my heirs do the probate themselves, or do they have to hire a lawyer?
They may be able to do it themselves, especially if the estate is small and there is no real estate involved. But even a modest-size estate usually requires a somewhat more formal process (even though in many states it is categorized legally as either “formal” or “informal”). In some states, the process is complicated for those not familiar with it. If that is the case in your state and if your heirs must probate your estate, they will have to hire a lawyer.

Can my agent under a durable general power of attorney settle my estate without probate?
No. By law all powers of attorney automatically terminate at the death of the grantor of the power.

If I avoid probate, do I avoid estate taxes?
Nice try. No, your taxable estate includes pretty much everything you own at death or had too much control over. So your gross estate will include joint tenancy property (except the half owned by your U.S. citizen spouse, or any portion to which any non—U.S. citizen spouse contributed), your half of community property, the entire value of life estate property, everything in your revocable living trust, and life insurance proceeds from policies you own.
In addition, if you have the power under a trust someone else created to take some assets out of that trust for yourself, the value of those assets will also be included in your gross estate, even if you never exercised that power.
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What is meant by “living probate”?
It is possible that, prior to your death, you may become mentally disabled due to disease, stroke, or accident.
Legally referred to as a conservatorship or guardianship, a living probate is a legal proceeding in the probate court which is designed to protect a mentally disabled person who is unable to manage his or her financial affairs. It is the duty of the probate court to protect the disabled person’s assets, creditors, and personal rights and to appoint someone to manage and assume the mentally disabled person’s financial affairs.
There are disadvantages to a living probate:

Inasmuch as it is a court proceeding, a living probate often requires the services of an attorney who will prepare the necessary court documents and make court appearances. The court may require the filing of inventories and accountings, along with periodic reports, which may necessitate the hiring of an accountant. The conservator or guardian may be required to post a bond in order to qualify for service before the court. He or she may be also required to make periodic reports to the court during the period of disability and will often utilize the services of attorneys and accountants, as well as other professionals, throughout that entire period. All these factors are very expensive to the estate.

The court will determine how your assets are to be spent for your benefit.

Just like a death probate, a living probate is a public proceeding which may result in a substantial invasion of privacy and loss of personal dignity.

Why can’t I avoid a living probate by giving a general durable power of attorney to a trusted family member?
Unfortunately, general powers of attorney are not always honored by banks, title companies, brokerage firms, and other financial institutions. These institutions have been increasingly fearful of the potential liability inherent in honoring such powers of attorney. Some have established their own specific requirements regarding powers of attorney. The requirements vary from one institution to another, but in general the older a power of attorney is, the less likely it is that an institution will accept it.
Also, the power of attorney, by nature, is a general one and usually gives the designated agent full power and control to do anything with the disabled party’s assets. Without caring instructions on how the agent is to apply the funds, this general power can sometimes be abused.
Finally, even if you execute a power of attorney, there is no guarantee that you will not be taken before the probate court by a third party who seeks to have you declared incompetent and himself or herself appointed as your financial guardian. In such a case, your power of attorney would become useless. All too frequently, the general power of attorney causes more problems than it corrects.
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Chapter 2: Methods of Estate Planning


Ownership of Assets

What does “title” mean in relation to property ownership?
Title is the legal concept of ownership. When you take “title” to any piece of property, you specify what type of legal rights you wish to hold in the property and what legal rights others have in the same property. Title to property consists of two, often confused, subparts: legal title and beneficial title.
Legal title, quite simply, reflects who owns the property for the purposes of buying, selling, or otherwise disposing of the asset. Legal title does not, in itself, confer the right to use or enjoy the property. The beneficial title owner retains that right. For example, if you were to lease an automobile, the leasing company would retain legal title to the car. That is, you could not sell or otherwise transfer the car because the leasing company remains the legal owner on the formal written title to the automobile. Nevertheless you, as lessee, have exclusive beneficial, or equitable, title in the car. You, and not the leasing company, have the full right to drive, use, and enjoy the car.
Legal title of many assets is evidenced by a written document naming the owners and the form in which they own the asset—joint tenancy, tenancy in common, and so on. Title to real estate is evidenced by a deed naming the legal owners and describing the property. Title to stock is evidenced by a stock certificate stating in whom legal title is vested. Title to bank, brokerage, mutual fund, and IRA accounts; insurance policies; and certificates of deposit is reflected in an agreement the individual signed when he or she established the account or purchased the asset. Quite often you can determine the legal title to an asset simply by inspecting the bank or brokerage statement, the stock certificate, the insurance policy, and so on.
Beneficial title, on the other hand, is not so easily determined. By simply identifying the legal registered owner of property, one cannot be certain as to the identity of those having the right to use or enjoy the property. Fortunately, however, for estate planning purposes, you need only be concerned with what you own and in what form you own it.

What are the most common forms or methods of owning (titling) property?
The six most common methods of property ownership are:

  • Individual (fee-simple) ownership
  • Individual ownership with beneficiary designations
  • Joint tenancy with right of survivorship (in some states called tenancy by the entirety if between spouses)
  • Tenancy in common
  • Trustee ownership (The trustee of a revocable living trust holds legal title to the trust property, while trust beneficiaries hold beneficial title to the trust property.)
  • Community property
  • Why should I be concerned about the title to my assets?

Knowing who has the title to all of your assets is essential to successful estate planning. Title defines the legal owner or owners.
For those who use a will as the primary basis of their estate planning, title to most, if not all, of their assets usually remains in their names until death. In such circumstances, most of those assets will have to undergo probate for the title to be transferred to others.
Holding title to an asset jointly with right of survivorship with another person has traditionally served as a simple estate planning technique. When title to an asset is held jointly with right of survivorship, at death, title to the asset vests in the survivor or survivors—without probate or other proceedings. The advantage of holding title jointly with another is that doing so is inexpensive and simple. The principal danger is that it may lead to unintended and unpleasant results, such as when one of the owners dies unexpectedly and the heirs of the decedent are left with nothing. Other forms of joint ownership of title include tenancies by the entirety (a form of joint ownership for married couples in some states) and tenancies in common (in which property is held jointly, but each owner may transfer his or her part interest to third parties at death). Your attorney will suggest different planning alternatives depending upon the type of asset and how it is titled.

What if don’t know how I hold title to my assets?
How you hold title, or the form in which you hold title, to any asset, whether it be real estate, stocks and bonds, or automobiles, can be determined easily from documents you have. Obtaining that information is one of the first tasks in proper estate planning. For example, if you own real estate, the deed to that real estate will reveal how you hold title to it. Stock and bond certificates, or the documentation for the accounts in which you may hold those items, and the documentation for your bank accounts will reveal the forms of title. If you have questions, you should ask your estate planner to help you.


Individual Ownership of Property

How does individual ownership work, and what are the advantages and disadvantages of owning property this way?
Individual ownership, legally known as fee-simple ownership, means you own both legal and beneficial title to the asset. For example, if you own a bank account, stock, or a car in your sole individual name, you have both the right to control and sell the asset (legal title) and the right to spend the money in the bank account, use the proceeds from the stock sale, or drive the car (beneficial title).
Accordingly, the first advantage of fee-simple ownership is that, because you have full and exclusive ownership of the asset (legal and beneficial title), you can control and distribute the asset at your death in your will. A second advantage is that your heirs will receive a step-up in the cost basis of the property to the fair market value of the property as of your date of death. For example, if you sold this property, you would pay the capital gain tax on the difference between the cost basis and the fair market value. Cost basis is essentially the purchase price of the property, plus any improvements, less depreciation. The cost basis for your heirs, however, will be the fair market value of the property as of your date of death. A step-up in basis can result in significant capital gain tax savings to the person who inherits the property.
There are some disadvantages of individual ownership. Solely owned property may be subject to both living and death probates in the event that the owner becomes disabled and dies. This can create unnecessary expenses and delays. The public nature of the probate process may also cause problems for the owner or for the person who ultimately inherits the property.


Joint Tenancy With Right of Survivorship

What is joint tenancy with right of survivorship property?
Most married couples own their property as joint tenants with right of survivorship, often referred to as joint tenancy. Frequently you will also see an elderly or infirm person name a child or close friend as a joint tenant on a bank or brokerage account to facilitate the payment of bills and expenses.
The key element in joint tenancy is its survivorship quality. The last to survive of the joint tenants receives the entire property, thus dissolving the joint tenancy and vesting both legal and beneficial title in the survivor individually. As such, joint tenancy ownership of an asset dramatically affects to whom the asset will be distributed at death.
For example, if you own real estate in joint tenancy with another person, at your death the asset will pass automatically to the surviving joint owner by operation of law.

What is tenancy by the entirety?
Tenancy by the entirety is a type of joint tenancy with right of survivor-ship. It is available only in some states and only between spouses.
Tenancy by the entirety’s unique characteristic is that the creditor of one spouse cannot take any part of the property to satisfy the spouse’s debt. The creditor may only be able to get a lien on the property. In some states, this creditor protection is not permanent. When the property is sold, its value may no longer be protected. However, if the proceeds are paid to an account which is also owned in tenancy by the entirety, the proceeds may escape seizure by the creditor.
Except for this creditor protection and the fact that it is available only in some states and exclusively for spouses, tenancy by the entirety is almost identical to joint tenancy with right of survivorship.

Are there any disadvantages to owning property jointly with right of survivorship?
Owning property in joint tenancy with right of survivorship has several drawbacks. For example, joint tenancy:

  • Only postpones probate
  • Supersedes your will or trust regarding distribution of the jointly held property
  • Can increase estate taxes
  • Can lead to capital gain tax
  • May cause some children to be disinherited
  • May create unintended heirs

Other problems arise if you own an asset in joint tenancy with one of your children. Joint tenancy with a child:

  • Can lead to gift taxes
  • Can restrict your ability to sell or transfer the property
  • Subjects the property to possible claims against it by the children’s creditors
  • Might prevent other children from sharing in the property after your death

Since joint ownership will pass my assets to another joint owner immediately upon my death without probate, isn’t this a good arrangement?
On the surface, joint ownership may appear to be a good and simple arrangement for one’s assets since jointly owned assets will immediately pass to a joint owner free from probate. However, joint ownership can (and typically will) have a number of traps hidden within:

  1. When you name a person as a joint owner of an asset, you are subjecting your asset to the liabilities and creditors of the other person. As an example, if your chosen joint owner enters into a divorce proceeding with his or her spouse, your asset may become involved in the divorce proceeding!
  2. The naming of a joint owner may be construed as a gift to the chosen joint owner at the time you name the joint owner. Thus you may be generating a gift tax obligation if the portion you transfer exceeds the gift tax annual exclusion.
  3. In joint tenancy ownership with one or more persons other than a spouse, the full value of the assets will be included in the deceased joint owner’s estate unless it can be proved that the other owner or owners paid for their shares in some way. When the full value of the joint property is included in one owner’s estate but passes to the other owner or owners, it is the worst of all worlds: the decedent’s estate has all the taxes but none of the property
  4. If you or your chosen joint owner should become mentally incapacitated, a court proceeding will likely be necessary and the court will assume the role of the incapacitated joint owner. Once the court assumes this role, any transactions regarding the joint asset instantly become subject to complex and arduous rules.
  5. A joint tenancy arrangement completely bypasses any provisions you may leave in a will or a trust. This is true even if your will or trust addresses the purpose of the joint tenancy arrangement.

Is transferring property into joint ownership with my children a good way to avoid probate?
No. Transferring property to your children subjects your property to the claims of your children’s creditors and could be a taxable gift.

I own joint tenancy property with my brother. Upon my death, can I leave my interest in this property to my children?
No, you cannot. A will or a trust cannot control joint tenancy property. When one joint tenant dies, the property, by operation of law, passes to the surviving joint tenant. This greatly misunderstood concept of joint tenancy causes no end of problems and heartache for families.

How can joint tenancy result in increased estate taxes?
Joint tenancy between spouses can cause increased estate taxes in taxable estates because the property automatically passes to the surviving spouse tax-free under the marital deduction. Marital-deduction property is not subject to estate tax, so the first spouse to die cannot take advantage of his or her applicable exclusion amount.

I have heard that joint tenancy can cause children to be disinherited. How can this happen?
If you and your husband own property as joint tenants and you die, he owns all the property by law. If your husband happens to remarry and puts the property in joint ownership with his new wife and then dies, she owns the property by law and your children will be disinherited. The property belongs to her, and she can do anything she wants with it.

How can joint tenancy result in “unintended heirs”?
Here is an example: Dad, about 62 years old, was obsessed about losing everything to a nursing home. His father had to spend his entire estate on nursing home care, and Dad was determined not to let this happen to himself. Dad focused on this to the exclusion of all other estate planning considerations.
Dad talked to a local attorney who did not have much estate planning experience. This attorney recommended that Dad transfer ownership of his home by deed to his two daughters as joint tenants with right of survivorship. Dad retained no ownership interest in his home, relying instead on the loving relationship he had always had with his daughters to allow him to continue living there as long as he could.
Both daughters were married and lived in another state. The older daughter, Ann, had one daughter, Dad’s only grandchild. Ann and her husband had a well-thought-out, living trust—centered estate plan. The younger daughter, Betty, and her husband were newlyweds and had no planning. Dad liked Ann’s husband but had a very bad relationship with Betty’s husband.
Tragedy struck. Ann and Betty were killed in an automobile accident. You might think that since the sisters died together, Ann’s joint tenancy interest in the home would go to her husband and daughter under the terms of her living trust. But there was litigation in which Betty’s husband proved that the truck killed Ann first and then Betty about .02 seconds later.
The court held that the laws of joint tenancy controlled instead of Ann’s trust. When Ann died, her part of the remainder interest in Dad’s home passed automatically to Betty. When Betty died, her remainder interest passed by the laws of intestacy to her husband. Ann’s and Betty’s entire remainder interest passed by intestacy to Betty’s husband, who now owns the home and can legally charge Dad rent or even evict him if he chooses to do so.

I am single and I would like to avoid probate upon my disability or death. Why shouldn’t I just re-title my home in joint tenancy with right of survivorship with one or more of my children?
If you die first, your estate will in fact avoid probate. Of course, when your child later dies, the property could be part of your child’s probate estate.
If your child predeceases you, the property will automatically return to you (outside of the probate system), leaving you with no provision as to where the property will ultimately go upon your death. You would be right back where you started, and by then it might be too late to do any further planning.
Also, if either you or your child is disabled and cannot handle your own financial affairs, a living probate might be required—a guardianship or conservatorship—with respect to the entire property.
Further, you might create a taxable gift when you put your child’s name on the deed with you as a joint tenant. Re-titling your home in such a manner is considered a gift because, among other things, after the re-titling either you or your child can go to court and obtain an order to divide the property into two separate parcels. So re-titling your home in joint tenancy with your child is treated the same as dividing your home into two parcels and giving one parcel to your child. Depending on the value of the property, you might be required to pay a gift tax. (Generally, if the value of a gift exceeds the annual exclusion, you will incur a gift tax. If the jointly held property is a bank account or brokerage account in street name, the gift is not deemed to have been made until the child withdraws the funds.)
Another problem with re-titling your home in joint tenancy with your child is that you may lose control over your home, because your child as a joint owner must consent to any sale or transfer of the property.
Also, if your child has creditors, say, from a business transaction or from an automobile accident, you are in jeopardy of losing your home to the creditors. The child’s joint tenancy ownership in the property can be taken. An even bigger problem can occur if the child gets divorced. His or her joint tenancy interest may be considered marital property under state law and, as such, be subject to the whim of the judge in dividing the marital assets.
All these rules and results are the same whether the joint tenant is your child or anyone else other than your spouse.

Before my father died, he put all his property in joint tenancy with right of survivorship with my oldest brother, with whom my father was living. My father recently died. Soon after, my brother told me that he had “done more for Dad than the rest of us had” and that he was keeping all of Dad’s property instead of dividing it equally among the six children. Can my brother legally keep title to the property and not share it with the rest of us?
Probably so, unless you are willing to go to court and try to prove that your father didn’t intend this result. Part of the tragedy of joint ownership is this kind of unintended consequence. Even if your brother decides to share the property with the rest of you, there can be a gift tax if the value of each sibling’s share is more than the annual exclusion.


Tenancy-in-Common Property

What is tenancy in common?
Tenancy in common is ownership of property between two or more people. Each of the owners owns a percentage of the property, called an undivided interest. An undivided interest means that each tenant in common owns a part of the property but there is no way to identify which part he or she owns.
All the owners of tenancy-in-common property have the right to use and possess the property during their lives, no matter what percentage each person owns. Unless some other agreement is reached, tenants in common may give away or sell their interest in the property. Typically, in dealing with their property, tenants in common are very much like sole owners.
They may also leave their interest in the property to anyone they choose at their death.

Does tenancy in common have a right of survivorship feature?
No. Property owned by tenants in common does not automatically pass to the surviving owners. If you and your two siblings own a cabin in the mountains as tenants in common, you would have legal title to an undivided one-third of the cabin. Not only are you free to dispose of your interest in the cabin as you determine during your lifetime; you are also free to pass your interest at your death to your beneficiaries under your will or trust or by intestacy if you have no formal estate plan.

What are some of the advantages of owning property as tenants in common?
Much like a sole owner, a tenant in common is considered to be in control of his or her share of the property. Each tenant has the freedom to give away or sell his or her interest in the property and to leave it to whomever he or she chooses at death.
Tenancy-in-common interests receive a step-up in cost basis for tax purposes. For example, if two tenants in common own a parcel of real estate and one dies, the decedent’s interest in the property will receive a step-up in basis but the surviving tenant’s interest will not.

What are some disadvantages of owning property as tenants in common?
Property that is held by tenants in common may be subject to both living and death probates if an owner becomes disabled or dies. This can create unnecessary expenses and delays. The public nature of the probate process may also cause problems for the owner or for the person who ultimately inherits the property.
In addition, since a tenancy-in-common interest is freely transferable, an owner might, involuntarily, become a tenant in common with someone other than the original co-owner of the property. The co-tenants may not be able to agree regarding the management or sale of the property, creating legal battlefields over control issues.

Is tenancy in common better than joint tenancy with right of survivorship?
In many respects, tenancy in common is superior to joint tenancy as a form of property ownership. Not only can you control to whom the property will pass at your death, but you can utilize estate tax planning strategies unavailable with joint tenancy property. The major pitfall with tenancy in common is that, as with individual ownership, the property may be subject to the probate process.

When would you recommend that couples own property as tenants in common?
A married couple often will have one or two assets which are very valuable and which make up the bulk of their combined estate. They may be uncomfortable assigning sole ownership of the assets to one spouse or the other. In this situation, it may make sense because of estate tax planning considerations to have each of them own an undivided one-half of the property as tenants in common. This solution meets the need to allocate assets to each of them for estate tax purposes and allows them to continue as co-owners of the property.
For unmarried persons, holding their property as tenants in common rather than as joint tenants ensures that the property will pass to an owner’s intended heirs rather than to the remaining co-owners.


Trustee Ownership

What is meant by “trustee ownership”?
The form of property ownership most rapidly expanding in the estate planning field is that of trustee ownership. By establishing a revocable living trust, you can control who will receive your property at your death and avoid the probate process as well.
When you establish a revocable living trust, you will put most of your assets into that trust. A common misunderstanding is that the trust owns the property within it. This is not really true. The trustee of the trust holds legal title to the trust property. The trust beneficiaries hold beneficial title to the trust property. Accordingly, the trustee has the power to invest, reinvest, buy, sell, and trade the trust property (as defined in the trust agreement), while the trust beneficiaries have the right, as provided in the trust, to use the trust property and receive the income or principal of the trust.
It is both common and generally advised that the maker of a revocable living trust be the trustee and the beneficiary of his or her trust (married couples can be joint trustees and beneficiaries of a joint trust). Thus the maker alone can control both the managerial and investment decisions as trustee while using or otherwise spending the trust assets without limitation as beneficiary.
Upon the maker’s death, all the trust property will pass to the beneficiaries named by the maker in the trust upon the terms and conditions that the maker chose. These trust assets are not subject to the legal hoops, costs, and delays of the probate process.
As in the case of sole ownership, the trust assets that are included in the estate of the trust maker receive a step-up in basis at death.

Is nominee ownership the same as trustee ownership?
A nominee is any person or organization that takes title to property on behalf of someone else. Nominees are sometimes used so that the real owner of the property can hold title to it in another name. For example, some people do not want it known that they hold property in trust. In these circumstances, the trustees will form a partnership to hold title to the property. The partnership is the nominee for the trust; the trust owns the property indirectly, but the partnership’s name is on the title of any property.


Community Property

What states require community property?
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

What is community property?
While the community property laws vary in each of the nine community property states, community property is generally defined as all property acquired by either spouse during marriage which is not considered separate property.
Separate property falls primarily into three categories:

  1. Any property owned or claimed by a spouse prior to marriage
  2. Any property acquired by a spouse during marriage by partition of community property, by gift, by inheritance, or by devise under a will or trust
  3. Any property acquired from recoveries for personal injuries to a spouse’s body or reputation during marriage, excluding any recoveries for loss of earning capacity during marriage

All earnings from personal efforts and income from community property are community property. In some community property states, income from separate property remains separate property; in other community property states, income from separate property becomes community property unless the spouses have a written agreement that such income is to remain separate property.
Spouses who own community property are deemed to be partners, each owning an undivided one-half interest in the property. In that respect, community property is much like tenancy by the entirety.

If I look at a deed or title to a car, can I tell if the property is community property?
Not always. Community property is ownership created by law. Who owns the actual title is irrelevant. It is how and when the property is acquired that determines if property is community or not.

What is community presumption?
All property of a marriage is presumed to be community property. This presumption can be overcome if the spouse who is asserting that property is separate property does so with clear and convincing evidence of the separate nature of the property. This evidence is usually found by tracing the property to the time it was acquired, that is, to its inception of title.
Separate property acquired with separate property or with the proceeds from the sale of separate property will remain separate property as long as adequate records are kept to properly trace its inception of title.

If my spouse and I have community property, what rights do we have in the property?
Community property is similar to property that is owned by tenants in common in common law property states. As with tenancy-in-common property, each spouse owns 50 percent of the property. This interest is called an undivided interest because neither spouse knows which 50 percent he or she owns. For example, if a horse is community property, one spouse doesn’t own the front part of the horse and the other the rear. Each simply owns 50 percent of the whole horse.
As a general rule, if one spouse wants to give away or sell his or her interest in community property, the other spouse must approve the sale or gift. Some community property states recognize the concept of special controlled community property, that is, community property titled in just one spouse’s name. Even though both spouses own the special controlled community property equally, the spouse whose name is titled on that particular property has sole management of and control over it. He or she may dispose of or transfer it without the agreement of the other spouse as long as doing so does not fraudulently affect the other spouse’s 50 percent ownership.
A spouse can, on death, leave his or her undivided interest in community property to others by will or trust. If a child inherits his or her father’s interest in community property, that child becomes a tenant in common with his or her mother.

Are there any tax advantages to community property?
Yes, there is one very important income tax advantage that community property has over any other type of property. At the death of one of the spouses, community property receives a 100 percent step-up in basis. This means that if a married couple bought a vacation home for $100,000 and, at the death of one of the spouses, the house was worth $200,000, the surviving spouse could sell the house for $200,000 and there would be no capital gain tax.
Let’s contrast this to the situation in a common law property state.
If the home was owned in joint tenancy or tenancy in common, at the death of the spouse only one-half of the house would receive a step-up in basis. In this example, if the surviving spouse sold the house for $200,000, there would be a capital gain tax on $50,000. This is because the deceased spouse’s half of the house would get a new basis of $100,000, and the surviving spouse’s half would retain its cost basis of $50,000 (one-half its original cost).

Since we are married and live in a community property state, the fact that we hold our property as joint tenants doesn’t defeat the presumption of community property for estate planning and income tax purposes, does it?
In some community property states it does. Unless provided otherwise by statute, joint tenancy and community property cannot exist at the same time on the same piece of property. This seemingly inconsistent result is a product of two conflicting types of law. Community property is a concept inherited from French and Spanish law. Joint tenancy is a concept inherited from English law. Like oil and water, they do not mix. Their legal incompatibility creates an anomaly in the law that can be rectified only by statute.
Without a law to the contrary, joint tenancy property that is owned by spouses in a community property state will lose the full step-up in basis allowed for community property. In addition, joint tenancy property passes to the surviving spouse by law; it is not subject to the control of the deceased spouse’s will or trust. Community property can be controlled by will or trust and is therefore much better for estate planning purposes.

We have been married 54 years in a community property state and all our property is community property. Why do we need powers of attorney or a trust to handle our affairs if one of us becomes incapacitated? Can’t one spouse act for the other?
Not always. Although community property states allow either spouse, with one signature, to manage most property, this is not true for all property. Any sale or transfer of real estate or agreement to mortgage requires both signatures. Liquidating or borrowing from an employer-sponsored retirement plan [a qualified plan, such as a 401(k)] requires the consent of both spouses under federal law. If, for example, one of you becomes incapacitated and the other has to sell or borrow against real estate or tries to dip into a qualified pension plan to pay expenses, the healthy spouse will be forced to go to court for authority to sign for you if you do not have a trust or an appropriate power of attorney. In many cases, a court will stay involved to ensure the proceeds are handled properly.

What are the three ways to change the character of community and separate property?

If separate property is commingled with community property to the extent that, even through tracing, clear and convincing evidence of its separate nature cannot be shown, the separate property will become community property.

The laws of all the community property states allow spouses to enter into an agreement to divide (partition) their community property into separate property and to declare that certain property is separate property. The agreement must be signed and acknowledged before a notary public. It is now possible under the laws of most community property states for spouses and prospective spouses (through a prenuptial or postnuptial agreement) to agree not only to partition community property or declare the separate character of separate property presently in existence but also to partition or declare that certain property to be acquired in the future will be the separate property of a particular spouse. Thus, it is possible to agree that income from personal efforts, separate property, and property produced from separate property (such as offspring of livestock) is or will be separate property.

If one spouse makes a gift of either separate or community property to the other spouse, this property, and all income or property produced from it, is presumed to be the separate property of the recipient spouse. Also, gifts made jointly to the spouses from a third party are deemed to be separate property held jointly, not community property.

What is the character of property owned by a spouse who moves from a non-community state to a community property state? What is the character of property acquired in a community property state by a person in a non-community state?
If a spouse was domiciled in a common law state at the time he or she acquired property, the property is generally treated as his or her separate property and will remain separate regardless of whether he or she moves it to a community property state, as long as commingling does not occur. Further, if a spouse domiciled in a community property state acquires property outside the state, its character as to that spouse will be governed by the rules of the community property state. Thus, if the property is acquired with community property, it will be community property; if it is acquired with separate property or by gift, inheritance, or bequest, it will be the separate property of the acquiring spouse, as long as adequate records are kept to trace its inception of title and no commingling occurs. If a spouse who is domiciled in a common law property state acquires real estate in a community property state, the real estate will generally be deemed to be that spouse’s separate property since it was acquired with separate property.

Can spouses own community property with right of survivorship?
The laws of most community property states allow spouses to own community property with right of survivorship. Spouses can agree be-tween themselves that all or part of the community property which they presently have or will acquire in the future will become the property of the surviving spouse on the death of a spouse.
Such agreements avoid probate at the first death of a spouse. However, it is strongly recommended that spouses not enter into joint community survivorship property agreements for several reasons. First, the same disadvantages that characterize joint tenancy also exist with joint community survivorship ownership. In addition, such an agreement may have to be adjudicated to the satisfaction of creditors or other third parties. That is, a court hearing may be required to obtain a court order stating that a particular agreement satisfies the statutory requirements for such agreements.
Even though the surviving spouse may prevail, either with or without the necessity of a court hearing, he or she would still be subject to all the severe shortcomings of joint tenancy. Joint community survivorship property can create more problems than it can solve. Stay away from such ownership.



What is a will?
A will is any written document in which the maker states his or her intention to devise or bequeath his or her real or personal property at death. For a will to be legally enforceable, it must conform to the specific legal requirements of the state in which it is created.
The important features of a will are as follows:

  • A will must be prepared and executed with the formalities required by the laws of the jurisdiction in which it is created.
  • A will takes effect only on its maker’s death.
  • A will affects only assets which are owned by the maker alone and which do not pass to others by the operation of law or by contract (joint tenancies and beneficiary designations).

Is a will the best way to plan my estate?
There are many advantages and disadvantages to planning your estate with a will. Whether the advantages outweigh the disadvantages is a function of many personal factors: the size and complexity of your estate, the degree to which you want to ensure that your assets will, in fact, be transferred to the individuals you choose in the manner you choose, the value you place on privacy, and the importance of minimizing taxes, costs, and attorney’s fees.

What are some of the advantages of a will?
The most significant advantages of will-based planning include the following:

  1. Wills avoid intestacy. If a person dies without a valid will (or funded living trust), all of that person’s probate assets will be transferred by the laws of intestacy. State intestacy laws vary considerably depending on whether the decedent is survived by a spouse, the number of children surviving the decedent, and so on. Generally speaking, however, all intestacy laws, in varying degrees and percentages, seek to provide for the decedent’s spouse, children, parents, and then more remote relatives. If no individual entitled to inherit the decedent’s estate is found within the time prescribed by state law, the property will revert (escheat) to the state.
    Thus, the primary advantage of having a will is that it permits distribution of your probate estate pursuant to your wishes rather than the state’s wishes.
  2. Wills permit the nomination of a personal representative and a guardian for minor children. In addition to identifying who will receive your probate assets, a will allows you to nominate your personal representative (often referred to as your executor if a male or executrix if a female). If you do not name a personal representative, the probate court will appoint an individual (often a close family member) who may or may not be the individual you would have chosen.
    In a similar vein, a will permits you to name a guardian or guardians of your children. For most people, choosing a guardian of their minor children is a carefully reasoned decision and one that is best made by the parents and not the court.
  3. Wills are easily implemented and maintained. In most instances, creating a will is an uncomplicated event. While certain individuals wish to hand-write their own wills (called holographic wills) or use one of the many forms or computer software applications available to the public, most individuals engage the services of an attorney to ensure that their wills conform to the peculiarities of local laws.
    Moreover, as attorneys become more technologically advanced, there is decreasing reliance on amendments, or codicils, to wills. Rather, once your will is part of the attorney’s electronic files, the attorney often simply incorporates your intended changes directly into your will, reprints the document, and has you execute a new, updated will.
  4. Wills can provide maximum tax savings, protect your children’s inheritance from their creditors, and/or establish trusts to “ease” children into their inheritance. In theory, a “complex” will can provide many of the advantages found in a living trust—based estate plan. In fact, from a legal perspective, the actual language found in a complex will can be almost identical to the trust language of a living trust. Separate trust shares can be created for the benefit of a surviving spouse in an attempt to minimize or eliminate federal estate taxes, and separate sub-trusts can be established to provide for the needs of children and loved ones.

What are the primary disadvantages of wills?
The one overreaching caveat regarding wills is that although in theory they may provide tremendous advantages, in practice their usefulness and effectiveness often fall far short of the theoretical optimum. While wills can be effective planning tools for smaller estates, the more complex a person’s affairs are, the less effective a will is in planning the estate. Here are some of the major shortcomings of wills:

  1. Wills often fail to control a great deal of the maker’s property. The greatest disadvantage of planning your estate with a will, especially if you have a larger, more complex estate, is that your will may fail to actually control the distribution of much of your property. A will controls only the property that is part of your probate estate. Your probate estate includes:
    – All property that is titled in your individual name and does not have a beneficiary-designation clause
    – All property that is payable to your estate or subject to a power of appointment
    – Your share of any tenancy-in-common property that you ownA will cannot control your joint tenancy assets; they pass automatically to the surviving joint tenant. Nor can your will control assets such as certificates of deposit, individual retirement accounts, Keogh plans, and life insurance for which you have named your spouse, children, or other loved ones as beneficiaries
  2. Wills offer no protection against conservatorship of the maker. While a will can effectively appoint your personal representative and the guardians of your minor children, it cannot name or appoint an individual to protect you or handle your affairs in the event of your disability. Quite simply, your will is ineffective until after your death. Hence, should you become disabled, your financial affairs may well become subject to your state’s guardianship or conservatorship proceedings.
  3. Wills do not easily cross state lines. In order for your will to transfer the property that makes up your probate estate, it must be filed with the court in the state and county of which you were a resident at your death. While a will executed in one state is valid in another state, it will nonetheless be interpreted according to the laws of the state in which you were domiciled at your death. For example, if your will does not contain a specific clause directing that taxes be apportioned among a certain class of beneficiaries, state A may assess tax liability against each beneficiary according to the amount received by the beneficiary and state B might assess all tax liability against the “remainder” of your estate. Thus, unwittingly, by moving from state A to state B, you could shift the entire tax burden of your estate from each of your beneficiaries to just a select few who were named the recipients of the balance, or remainder, of your assets. Wills are not very portable from state to state.
  4. Wills are fully public. Despite the fact that most people are reticent to discuss their financial affairs in public, give their latest income tax return to a stranger, or discuss their net worth or cash-flow difficulties at a cocktail party, a person who dies leaving a will to transfer his or her assets may well be exposing this very information. Quite simply, a will, all accompanying inventories, tax returns (in some states), statements of assets and liabilities, the identity of your beneficiaries, the amounts they receive, and the manner in which they are to receive your legacy typically may be filed with the probate court and open to public inspection.
    No doubt, the late Jackie Kennedy Onassis had some of the finest lawyers prepare her estate planning documents. Nonetheless, because a will was the cornerstone of her estate plan, it took only a simple drive or a phone call to the courthouse to obtain a complete copy of all such information, and it was a top story on the news.
    Your privacy cannot be maintained under a will, and the financial condition of your family and business can be open for inspection by anyone.
  5. Wills ensure probate. Any asset controlled, disposed of, or transferred by a will must go through probate. Many believe that just having a will (or, more often, their particular will) avoids probate, but this is impossible. If your will is used to transfer any of your property, it must first be submitted to the probate court and then be administered in accordance with each and every rule inherent to your state’s probate code.
  6. Wills are easily challenged. Probate of a will provides an open door for any disgruntled heir to challenge the terms of the will.
    Can you give me an example of what you mean when you say that a will does not control all my property?
    Consider Mr. Smith. Mr. Smith, age 57, is married and has two children, ages 17 and 22. He and his wife have a gross estate for federal estate tax purposes of $1,592,000, of which $1,118,000 is deemed for tax purposes to be owned by Mr. Smith.

For the purposes of this example, we assume that Mr. Smith made an appointment with a respected attorney and received a complex will that contains tax planning trust provisions for his wife and creates trusts for his children which, upon his wife’s death, are designed to retain the remaining principal in trust until each child reaches the age of 35.
Mr. Smith signed his will with great peace of mind, confident that his affairs were finally in order. Assuming that Mr. Smith passes away and is survived by his wife and two children, what does his will control?
Unfortunately, Mr. Smith’s will controls only the disposition of his automobile and personal property valued at $54,000! His one-half interest in the family residence, his stocks and bonds, checking account, and artworks will all pass automatically to Mrs. Smith because she is the surviving joint owner. The cabin in the mountains will pass not to Mrs. Smith or to the Smiths’ children but to Mr. Smith’s brother, despite the fact that Mr. Smith did not name his brother as an heir in his will.
Mr. Smith’s certificates of deposit, life insurance proceeds, and IRA will pass to Mrs. Smith, not by virtue of his will but by the beneficiary-designation clauses naming Mrs. Smith as primary beneficiary.
In total, not accounting for court costs, attorney fees, or taxes, Mrs. Smith will receive $1,018,000 in assets from Mr. Smith (all of his assets except for the cabin, which went to his brother), yet only $54,000 pursuant to his will. At first blush, the fact that the will did not control $1,064,000 of Mr. Smith’s assets may seem moot because Mrs. Smith did receive the majority of the property her husband intended. Such a cursory conclusion is flawed.
Mr. Smith’s will had federal estate tax planning provisions which sought to hold all assets for the benefit of Mrs. Smith during her lifetime, while paying her the income and, if needed for her health, education, maintenance, and support, the principal as well. By creating such a trust, the will was designed to prevent the assets from being included in Mrs. Smith’s taxable estate upon her death. Nevertheless, as Mr. Smith’s will failed to control most of his property, $1,018,000 was transferred outright to Mrs. Smith. Since Mrs. Smith already had assets of her own valued at $474,000 for tax purposes, her taxable estate now totals $1,492,000. If Mrs. Smith were to die in 2006 or later, this would generate a federal estate tax of $206,560. If Mrs. Smith lives for several years after Mr. Smith’s death, the appreciation in the value of her estate could cause a much higher federal estate tax liability and added probate costs.
Now let us assume the same set of facts except that Mrs. Smith predeceases Mr. Smith. Her one-half interest in the joint tenancy property passes by law to her husband, thus altering Mr. Smith’s federally taxable estate.
Now what does Mr. Smith’s will control? It still fails to control a great deal of his property, and thus his intended estate plan will not be fully implemented. First, the cabin in the mountains will still pass to his brother, not his children. Second, $490,000 of his estate (again without taking into account taxes, court costs, and attorney’s fees) will be transferred outright to his two children as a result of their being listed on beneficiary designations. These assets will not be held in trust for the children until they reach age 35, contrary to Mr. Smith’s intentions. Moreover, if Mr. Smith dies while his youngest child is still a minor, a guardian will have to be appointed to receive that child’s one-half share of the $490,000 passing outside of Mr. Smith’s will. If Mr. Smith dies in 2006 or later, the federal estate tax due will be $251,400. Properly planned, the Smith estate could have been structured to avoid most, if not all, federal estate tax and probate fees.
Accordingly, if your estate planning goals are to minimize federal estate taxes, court costs, and attorney’s fees, to protect your legacy from your children’s creditors, or to ensure that your children receive their inheritance when they are mature and not simply of “legal age,” but your estate includes assets that are owned in joint tenancy or controlled by beneficiary designations, then you need a comprehensive estate plan that controls your property in a way that will accomplish your goals.

Is it true that if I have a will my estate will not be subject to probate?
If you own property in your name when you die, no matter how clearly you may set forth your desires in your will, your will guarantees that a probate proceeding will be necessary. Every state has laws which affect the timing and manner in which your assets are distributed, and nothing you say in your will can avoid those laws.

Won’t a will satisfy the definition of estate planning?
The definition of estate planning that is used by the National Network of Estate Planning Attorneys is:
I want to control my property while I am alive and well, care for myself and my loved ones if I become disabled, and be able to give what I have to whom I want, the way I want, and when I want, and, if I can, I want to save every last tax dollar, attorney fee, and court cost possible.
Let’s take a look at this definition of estate planning and see how a will stacks up.
A will does allow you to control your property while you are alive and able to do so. A will can do nothing to protect you if you are incapacitated; a will is effective only upon your death.
Does a will actually control property at death? It controls only the property that is not titled in joint tenancy or governed by beneficiary designations.
As far as giving your property to whom you want, the way you want, and when you want, the only thing a simple will can do is give property outright, which may not be in the best interest of the beneficiaries. Often it is not. In order to meet these objectives, your will would have to include one or more testamentary trusts and make sure there is no property titled in joint tenancy or passed through beneficiary designations.
As far as avoiding court costs such as probate, a will does not avoid them. A will guarantees probate as to the property it controls, so it also guarantees that there will be professional fees such as those for attorneys and appraisers. Only a will with testamentary trust provisions will provide any type of tax planning or tax savings; but such a will would have the added disadvantage of requiring continued court supervision and control until all purposes of the testamentary trust have been satisfied. For example, the court will often require the filing of annual, or more frequent, accountings that are available for public inspection.
As you can see, a will, in almost all respects, falls short of meeting the definition of proper estate planning.

Does my will take care of transferring property that I have in another state?
Generally, states will recognize as valid a will admitted to probate in another state. However, this does not mean that real property outside your home state will automatically transfer according to the terms of your will. Instead, a process known as ancillary probate or ancillary administration is required. Although another state will recognize and accept the beneficiary you have named, each state can determine the method and requirements for transferring real property located within its borders. Ancillary administration is a probate procedure which requires the filing of documents in the probate court of the state where the real property is located. Going through ancillary administration amounts to probating the will twice but under different requirements depending on the states involved. Sometimes taxes must be paid on the value of the property before it can be transferred to the beneficiaries.
In most instances, ancillary probate proceedings require that an attorney in the ancillary state be retained, and if the executor of the estate is not a resident of that state, he or she may be required to post a bond with the court. Needless to say, ancillary probate involves additional costs and fees, leaving even less for loved ones.

I have homes in two states, and I spend a considerable amount of time in both. I understand that this can cause tax problems. What should I know?
Although you may have more than one residence, you technically have only one “domicile.” It is important to determine which state is considered your domicile, because it is the law of that state which will control the operation of your estate plan and the taxation of your estate. Sometimes, by putting certain language in your estate planning documents, you can select the law of another state to control the operation of those documents in order to obtain more favorable results; your advisors can assist you with the details.
The indications of domicile in a state include the following:

  • You vote in that town and state.
  • You spend more than half the year in that state.
  • You have your major religious and other community and social activities in that state.
  • You have a driver’s license for that state, and you have a car registered there.
  • You file an income tax return in that state.

If it is not clear from the above indicators which of the two states is your domicile, it is important that you make an informed decision and develop facts and circumstances to support your domicile in the state which you choose. Otherwise, both states may consider themselves your domicile and impose state death taxes on your estate.


Beneficiary Designations

What is beneficiary-designation property?
While you may have title to certain assets in your individual name, the very nature of an asset may dictate to whom it will be transferred at your death. For example, certificates of deposit, individual retirement accounts, and life insurance contracts typically contain a beneficiary-designation clause, wherein you specify who will receive the asset or the proceeds at your death. While you retain legal and beneficial title to such an asset during your life, and thus can consume the asset or change the beneficiaries, by designating beneficiaries on the asset, you are, in essence, predetermining who will take legal and equitable title to that asset at your death. As such, your will, despite its provisions, will not control the asset.

Is designating a beneficiary a good way to avoid probate?
A beneficiary designation directs the proceeds of life insurance policies, individual retirement accounts, and annuities to particular persons or entities without the need for probate in most situations. However, designating a beneficiary can lead to consequences other than probate avoidance. For example, your choice of beneficiary can have a tremendous tax consequence for the person to whom you intend to be generous! Failing to name the proper person on beneficiary designations can result in a requirement that money be paid out and taxed immediately, instead of over a much longer period. In addition, payment made directly to a person may leave your estate without funds to pay taxes or debts.
Beneficiary designations do not always guarantee the avoidance of probate or court-supervised administration. If you name your estate as a beneficiary, the proceeds will go through probate. If you name a minor as a beneficiary, a financial guardian may have to be appointed by the court to hold and invest the proceeds. Finally, if the beneficiary you name is mentally incompetent to take the property, a financial guardian will have to be appointed.
Naming a beneficiary is something that should be considered care-fully and should be accompanied by expert advice.

Can life insurance policies and proceeds become living or death probate assets?
We usually think of life insurance policies as non-probate assets. This is because a life insurance contract is a third-party beneficiary contract. Upon the death of the insured, the policy proceeds are payable by the life insurance company to the beneficiary. Probate courts usually have no jurisdiction over non-probate assets such as life insurance, living trust assets, jointly owned assets, and retirement death benefits.
There are a number of ways, however, that your life insurance policies and the proceeds can get caught up in either a living probate or a death probate, or both. Let’s explore the ways this can occur:

  • You fail to name a beneficiary or a contingent beneficiary. If you fail to name a beneficiary on your life insurance policy or if the beneficiary you have named fails to survive you, the insurance company will pay the proceeds to your probate estate. Most policies provide that the insured’s probate estate is the final backup, or default, beneficiary when there is no named living beneficiary.
  • Your named beneficiary survives you, but dies shortly thereafter. Suppose you and your spouse were involved in an auto accident and you died instantly but your spouse died several days, hours, or even minutes later. If your spouse is named as the beneficiary on your life insurance, the insurance company will pay the proceeds of your policy to your spouse’s probate estate. Since your spouse did survive you, your contingent beneficiaries are not eligible to receive your insurance proceeds.
  • Your beneficiary or contingent beneficiary is under a legal incapacity such as minority or incompetence. If your insurance proceeds are payable to a minor or to an incompetent adult (such as a brain-damaged or comatose spouse who survived the disaster that killed you), the insurance company will have to pay the proceeds to a court-appointed guardian of the minor or of the incompetent adult until he or she gains or regains legal capacity.
  • You become legally incapacitated, and a guardian of your estate is appointed to take control of all your assets including your cash-value and term life insurance. If you lose your mental capacity or become physically incapacitated due to age, illness, or injury, the probate court may have to appoint a guardian to take control of your assets to conserve your estate from the claims of creditors and other possible losses.

If you own cash-value life insurance, your policy will come under the control of the probate court. The life insurance company will not allow your spouse or anyone else to have access to your cash value, even if it is for your benefit, unless or until your spouse or someone else is appointed by the probate court as the conservator of your estate. Furthermore, once appointed, the conservator will have to get the probate court’s permission to withdraw the cash value from the policy, plus post a bond for the amount withdrawn.
Both cash-value life insurance and term insurance carry with them very valuable policy rights which can be exercised only by an owner who is competent. If you become incapacitated, you will not be able to exercise any of these rights, such as your right to convert your term insurance to cash-value life insurance. Approximately 98 percent of all term life insurance never pays off because the policy lapses for nonpayment of premium, the term expires, or the policy is converted to cash-value life insurance. If your insurance policy lapsed or if the term of your term insurance policy expired, an insurance company would declare you uninsurable for purposes of acquiring any new life insurance on your life. If you become incapacitated, only a probate court—appointed guardian can exercise your policy rights for you, and you will have no say over how these policy rights will be exercised.

May I leave all my lift insurance benefits to my spouse?
Many assets, such as insurance policies, individual retirement accounts, qualified retirement plans, and some bank accounts, require a beneficiary designation. ‘When you die, these assets will be paid directly to the person you have named as your beneficiary, without having to go through probate. At least that is the way it is supposed to work.
Spouses often need help and guidance when their marriage partners pass away. Grief, confusion, and lethargy all take their toll during the period of bereavement. By leaving property outright to a surviving spouse through a beneficiary designation, you have no opportunity to provide him or her with guidance and assistance in managing the money. Often, an outright distribution creates more, not fewer, problems after the death of a spouse. At the death of one spouse, the survivor is an easy target for children, relatives, or unscrupulous people who want something. Leaving property outright makes it easier for those predators to feast.
If your spouse is disabled when you die, the court will probably take control of the funds. If your spouse dies before you, or you both die at the same time, the assets will have to go through probate so that the court can determine who will receive them.
Many people want to control how their property is to be used after they pass away. Leaving property outright to a spouse affords absolutely no control. If, for example, the surviving spouse remarries, there is no assurance that any property he or she received will ever pass to the deceased spouse’s children. Or if the surviving spouse has creditor problems, any property left outright to that spouse is fair game for creditors. If control of your property or creditor planning is important to you, leaving property outright to your spouse is a mistake.

What is a POD bank account?
A payable-on-death (POD) designation is sometimes placed on bank accounts to direct that, at the owner’s death, the proceeds are to be paid to a specific individual or entity.

What is a TOD account?
A transfer-on-death (TOD) designation is sometimes placed on broker-age accounts. TODs accomplish the same results as PODs but for different types of accounts.

Can POD and TOD accounts avoid probate?
POD and TOD accounts do avoid death probate. But they do nothing to avoid living probate. That is, if you are legally incapacitated, no one can touch either type of account without a court order or a specially drafted durable power of attorney.

Can’t I simply designate my estate as beneficiary of my certificates of deposit, individual retirement accounts, and life insurance policies and then have my will control them?
If you name your estate as the beneficiary of these assets, your will can indeed control them. Doing this, however, does have pitfalls and generally should be avoided. By making your estate the beneficiary of these assets, you are subjecting otherwise probate-free assets to the jurisdiction and lengthy process of the probate court. In addition, these assets may be free from the claims of creditors when paid to a beneficiary other than your estate, but if your estate is the beneficiary, creditors may very well have access to these assets.


Living Wills
What is a living will?
A living will, or advanced medical directive, is a legal document which directs your physician to discontinue life-sustaining procedures if you are in a terminal condition or a permanently unconscious state.
It is considered a final expression of your right to refuse medical treatment which should be followed by your physician. Many people execute living wills so that family members or other loved ones are not put in the position of having to decide whether to terminate or continue life-sustaining treatment when there is no hope of recovery.
The living will is now recognized in virtually all states. Most states have very detailed laws setting forth the language that must be included in order for the document to be valid. As each state has different laws, it is a good idea to check with an attorney in your state to get more information on your state’s requirements.

Who decides whether or not to invoke the terms of my living will?
You should be aware that most major hospitals have created “ethics” panels or independent review boards which consist of physicians, nurses, and other personnel not currently involved in the treatment of the individual in question. These panels or boards review the situation and give the treating physician(s) direction.
You should ask your local hospital (or the hospital where you may be taken if you have a severe or terminal condition) what its policies are in regard to living wills.

How are living wills misinterpreted?
Living wills are sometimes misunderstood as the equivalent of a “do not resuscitate” (DNR) order, which is an agreement between the patient and the physician that the patient will not be resuscitated if sudden unconsciousness occurs. This situation could occur even if there is no terminal illness meeting the narrow conditions described above for invoking the living will.
For example, a woman who had just had a hip transplant was being wheeled to the recovery room when she suffered a cardiac arrest and lapsed into unconsciousness. The hospital personnel made no attempt to resuscitate her “because she has a living will.” This was an improper use of that document because a hip transplant is not a terminal illness from which there is no reasonable prospect of recovery.

What is a power of attorney for health care?
Beyond expressing your wishes as to life-sustaining issues, you may also express your wishes with regard to courses of medical treatment. In a power of attorney for health care, you name a surrogate or attorney-in-fact to make medical decisions for you if you are unable to do so yourself. For instance, if major surgery or long-term treatment is proposed and you are too ill to make your feelings known, your surrogate would invoke the power of attorney to facilitate your wishes.

What are some of the issues that I may wish to address in my living will and other medical directives?
Some of the issues you may want to address specifically are terminal conditions or illnesses (such as certain types of cancer, stroke, and major heart problems), vegetative states, and the types of treatments you may want to have withheld (such as tube feeding, artificial nutrition, hydration—in all their various forms). Your personal medical concerns may dictate other issues that should be included. Be sure to address quality-of-life issues and make an express statement of your desire and philosophy regarding your right to die with dignity.
It is impossible to create the perfect document when you cannot know what the specific situation will be at the time help is needed. With comprehensive medical directives, however, you should have some peace of mind that your wishes have been made known and that your desires will be carried out.
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Why can’t I just give my property away while I’m living?
There are several reasons. First, by giving your property away, you give up control of your property. Regardless of your good intentions, and the good intentions of the person you give the property to, you no longer have any guarantee that the property will be used as you wish or that the property will be used to take care of you.
If you give the property away, it becomes subject to the claims of the recipient’s creditors, including his or her spouse. Also, if the recipient predeceases you, the property will pass in accordance with that person’s estate planning. If no planning is in place, the property will pass to the recipient’s spouse or children. If the children are minors, their share cannot be used for any purpose other than the care of the children. If the recipient divorces, his or her spouse will have a valid claim against the property.
Also, if the property you give away is valued at more than the gift tax annual exclusion, you must file a federal gift tax return and pay the appropriate taxes.

If I taped the names of family members to the bottoms of different items in my home, such as lamps and paintings, to show who is to get the items at my death. Is this okay? How can I make sure that my favorite niece receives the cameo my grandmother left me?
Tape might be okay for the first relative who gets into your home after you pass away, but it would be hard to predict what the slower relatives will get! There are better ways, with appropriate documentation, of ensuring that the right individuals receive what you want them to.
Some states allow personal property to be passed by means of a personal property memorandum. This is a document, separate from your will or trust, in which you specifically identify the items of personal property and the individuals who are to receive the items. Your trust or will must refer specifically to the personal property memorandum, but you can prepare the memorandum at your leisure, and you don’t have to sign it in front of a notary. Since you can change the memorandum whenever you want, your will or trust should state that if your heirs discover two personal property memorandums which conflict, the provisions of the one dated last will control.
If your state does not allow the use of the personal property memorandum, your attorney will draft the appropriate documentation for transferring your personal items to the individuals who should receive them.

Someone told me that a good way to avoid probate is just to sign a quitclaim deed giving my real estate to my kids and then place the deed in a safe deposit box so that they can record it when I die. Is this a good idea?
This is a bad idea. The problem it attempts to solve (probate) may not be as bad as the ones it creates.
First, it may not be necessary (depending on your own state) to record the deed to have a completed transfer. If this is the case, your children could claim that you have actually given them title now, and they could gain control of your property.
Next, the Internal Revenue Service could claim that your children received the property as a gift from you. If your children receive property from you by gift, their basis in the property will probably be less than what it would be if they inherit the property from you. In this case, they may be forced to pay greater capital gain tax than they would if they inherit the property from you.
You are much better off creating a revocable living trust and transferring title to your real estate to the trust. In this way you retain control of the real estate during your life, your disability trustee can manage your real estate for your benefit if you become disabled, and the property can pass to your children when you die, without its having to go through probate.

My husband and I lease a safe deposit box in which we keep all sorts of things for our children and grandchildren. We have written a letter in which we say that everything in the box belongs equally to our children. Will this technique allow our children to receive its contents tax-free?
The Internal Revenue Service is likely to take one of two positions: (1) You have made an incomplete gift and the property will be taxed in the estate of the surviving spouse. Or (2) you owe back gift tax and interest and penalties for not filing a gift tax return.

I have a number of collectibles, including coin and stamp collections, antiques, and paintings. I have specifically listed some of these items for coverage on my homeowner’s insurance policy. Would I be wise to give these items to my adult children, within the annual gift tax exclusion, under custody agreements by which they would ask me to safe-keep them in my home until my death?
Whether this arrangement would withstand an attack by the Internal Revenue Service (for gift tax or estate tax purposes) or by creditors (for enforcement of claims against you) depends upon the answer to two questions:

  • Will your estate be filing an estate tax return? If a federal estate tax return is filed, it is likely that the IRS will try to tax the value of the tangibles on the theory that you really did not relinquish control and that you did not make a complete gift that would remove the tangibles from your taxable estate.
  • Does your estate have obligations that can be satisfied only from the proceeds of a sale of the assets? If, at your death, you owe money that could be paid only out of the value of the tangibles under this arrangement, your creditors will most likely ask a court to compel your personal representative to retrieve the tangibles, sell them, and apply the proceeds to the satisfaction of your debts.

Both questions might be answered differently if you should actually store the tangibles in a way that prevents you from enjoying them or if they were scheduled on each child’s homeowner’s policy.

If I have a Swiss bank account, will my estate have to pay a U.S. estate tax on the account?
As long as you are an American citizen or resident of the United States, the IRS will require that the assets in the Swiss bank account be included on your federal estate tax return. The attorney and other professionals assisting in the preparation of the return cannot lawfully permit the person responsible for filing the return to omit the account.

Is there a way to eliminate the capital gain tax on the sale of a gift?
If you give property directly to charity or to one of several types of charitable remainder trusts (as discussed in detail in Chapter 8) and the recipient subsequently sells the property, you and the charity or charitable remainder trust can avoid paying the capital gain tax on the in-crease in value.

What is the best way to plan for community property?
If spouses are interested in acquiring the survivorship right and avoiding probate, they should seriously consider creating a revocable living trust. The revocable living trust has all the advantages of joint ownership and then some, with none of the disadvantages of joint ownership.
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What Is a Revocable Living Trust?

Can the federal estate tax be reduced or eliminated?
There are strategies that can be used to reduce or eliminate federal estate taxes. However, many of these strategies will not always work with a will-planning probate estate plan. This is because the people who draft such plans usually do not coordinate all of the estate’s assets but, rather, deal only with the property in the name of the will maker. As a result, major assets such as retirement benefits, life insurance, and joint tenancy property are not included in the plan.
You can easily design a living trust to coordinate all of your assets under one or more subtrusts and thereby take the assets into account in maximizing federal estate tax planning.

How can I make sure that my beneficiaries do not have to use their own money to pay taxes on what they inherit?
A well-drafted trust or will contains a tax apportionment clause that dictates what assets shall be used to pay the estate taxes. Typically, all estate taxes will be paid before there is any distribution to beneficiaries so that all bequests are received free of the obligation to pay additional estate taxes.
An estate tax is a tax on the transfer of assets from an estate; this is true of the federal estate tax. Some states, however, have an inheritance tax. This type of death tax is imposed on the property an heir or beneficiary receives from an estate. Planning for beneficiaries living in these states is tricky and should be addressed in the individual’s estate plan.

Specifically, what can my spouse and I do to reduce the estate tax burden on our children?
In general, you and your advisors can create:

  • Marital and family trusts in your will or living trust that will shelter up to $2 million of your property if you both die after 2006
  • Irrevocable life insurance trusts to shelter your life insurance from tax
  • Family limited partnerships that reduce the value of your assets for estate tax purposes
  • A current program of making gifts to loved ones or charity

How do I most effectively avoid a living and a death probate?
Through a revocable living trust, living and death probate proceedings can be totally avoided. You may incorporate instructions into a revocable living trust which specify how your disability trustee should manage your assets if you become disabled. This simple procedure allows you to have the benefit of your assets, consistent with your directions, during the period of disability while avoiding the expense, delay, and lack of privacy imposed by the living probate process.
Similarly, a revocable living trust enables you to leave instructions for your death trustee, indicating how assets should be distributed. Because the assets are titled in the name of the trust, you avoid the expense, delay, and lack of privacy caused by a death probate.

How can life insurance policies be totally protected from both probate systems?
The best way to totally protect your life insurance policy and proceeds from both probate systems is to designate a revocable or irrevocable living trust as both the owner and the beneficiary of your life insurance policy.

My husband is not well: his memory and his mental acuity have degenerated over the last several years. If I die before my husband, how can I allow him the dignity of his independence and still protect him from the problems related to his failing health?
With a funded living trust as the center of an estate plan, a trust maker can select a co-trustee to serve with the spouse as trustees of the trust. This enables the surviving spouse to retain control and independence while having the advice and counsel of the co-trustee.
In the event that the surviving spouse’s health further degenerates, the trust can provide for a smooth transition in the management of his or her affairs. For example, a son or daughter could be named to serve as co-trustee with the father. The selection of a family member provides personal consideration as well as the security of joint management for the ailing spouse.

What is a revocable living trust?
A trust is a contract between its maker and a trustee. In the contract, the trust maker gives instructions to the trustee concerning the holding and administering of trust assets. These instructions specify how the assets are to be held and distributed during the maker’s good health, upon his or her disability, and ultimately upon his or her death.
With a revocable living trust, a person can be (and usually is) both the maker and the trustee. A husband and wife will often be joint trust makers and joint trustees of a joint trust.
The term “revocable” refers to a set of powers that are typically listed in the trust agreement which specify that the trust maker has the power to amend or revoke the trust. Upon revocation, the trustee is directed to return all trust assets to the trust maker. In addition to having the power to amend or revoke, the maker has the power to place assets into the trust, remove assets from the trust, make all investment decisions concerning trust assets, and control and direct all payments and distributions from the trust.

What is the difference between a revocable trust and an irrevocable trust?
As its name implies, a revocable trust can be revoked, changed, or amended by the maker of the trust at any time. Its maker can update it as his or her desires and the needs of loved ones change. This flexibility makes a revocable living trust an ideal foundation for almost all estate plans. A revocable living trust can be designed to control all of the maker’s property, totally avoid the probate of the maker’s estate, and maximize federal estate tax savings.
Irrevocable trusts, on the other hand, cannot be altered or amended without the approval of a court. Accordingly, irrevocable living trusts should be used only in certain circumstances after careful consideration and planning. Most often, irrevocable living trusts are used in conjunction with revocable living trusts to hold certain, select assets of the trust maker for the benefit of the trust maker’s loved ones. If the trust maker retains no rights in the irrevocable living trust and is not a trustee or a beneficiary of the trust, the assets of the trust can be excluded from the trust maker’s gross estate for estate tax purposes. This allows the trust maker to lower and, at times, eliminate federal estate taxes.
Irrevocable living trusts can be described as an advanced estate planning tool. They are most commonly used by individuals whose gross estates are taxable for federal estate tax purposes. Unlike revocable living trusts, irrevocable living trusts are rarely the foundation of one’s estate plan but, rather, a supplement to it.

What is a testamentary trust?
A testamentary trust is a trust created by a will. This will-created trust designates a person to serve as trustee, names the beneficiaries of the trust, and includes directions on how assets are to be administered in the trust. The key feature of a testamentary trust is that it does not automatically take effect upon the death of a decedent; it can become effective only if the will creating the testamentary trust is admitted to probate.
Unlike a revocable living trust, a testamentary trust, in some jurisdictions, may be subject to court supervision until all assets have been distributed and all trust purposes have been completed. For example, the trust instrument that creates a revocable living trust may require that the trustee provide annual accountings of the trust’s administration to the beneficiaries. In the context of a testamentary trust, the trustee may be required not only to provide the annual accountings to the beneficiaries but also to present the annual accountings for review and approval by the probate court. The presentation of such accountings for court approval necessarily involves the participation and expense of an attorney. These court expenses are normally avoided in accountings prepared for a revocable living trust.

How does a living trust differ from a testamentary trust?
Living trusts, also known as inter vivos (“during your life”) trusts, are created and in force during your lifetime. You sign the trust agreement and place the assets you choose in the trust while you are alive. The trust survives both your incapacity and your death, distributing the assets of the trust during your incapacity or after your death to your loved ones in the manner you have specified in the trust agreement.
In contrast, a testamentary trust is created within a will and thus is not in force during your lifetime. Since a testamentary trust does not exist until the will takes effect at your death, you cannot place any assets in the trust during your life. Hence, your assets must go through the probate process before being placed in the testamentary trust.

What is the difference between a living trust and a living will?
A living will is an important part of your estate plan because it allows you to pre-plan for very sensitive personal issues that affect you and your loved ones. It directs your physician to discontinue life-sustaining procedures if you are in a terminal condition or a permanently unconscious state. Each state has its own statute that provides specific guidelines and language that can or should be included in your living will.
A living trust deals with your financial affairs rather than with health care issues. With a living trust, you can give instructions about what is to happen to your assets when you are no longer able to manage them yourself, whether due to incapacity or to death. A revocable living trust allows you to keep control over what happens with all of your assets even when you yourself are no longer able to make decisions about them.

Isn’t creating a revocable living trust just a waste of time and money if my estate is not subject to estate tax?
Absolutely not. Your estate will pass estate tax—free on your death, but there is more to planning than taxes. In fact, many personal benefits in a revocable living trust may be significantly more important than estate tax savings. Let’s go back to the beginning and look at our definition of proper estate planning: “I want to control my property while I am alive and well, care for myself and my loved ones if I become disabled, and be able to give what I have to whom I want, the way I want, and when I want, and, if I can, I want to save every last tax dollar, attorney fee, and court cost possible.”
You will notice that a lot of goals precede the concluding phrase, “and, if I can, I want to save every last tax dollar.” It is those preceding goals which have priority in proper estate planning.
For many people who do not have taxable estates, a revocable living trust is an excellent planning vehicle because, among other things, it can address so many different needs. In creating a revocable living trust, you can, for example, do the following:

  • You can provide for your disability by appointing someone to administer your assets while you are disabled in accordance with your detailed instructions on how to care for you and your loved ones.
  • You can create a special-needs trust to take care of anyone in your family who may have a temporary or permanent disability or who may require special care.
  • You can create a common trust to care for your minor children from a common pool of the estate assets, just as you would if your family were still intact.
  • If some of your heirs are poor at handling money, you can arm a successor trustee with spendthrift provisions to restrain your heirs from their unwise spending or to provide protection from the claims of their creditors.
  • You can delay distributions to heirs until they are mature enough to spend their inheritance wisely.
  • You can avoid the public, slow, and expensive probate process.
  • You can direct the disbursement of your estate in a manner tailor-made to the individual needs and capabilities of each of your heirs.
  • If you have contentious family members, you can reduce the likelihood of legal conflicts among them, since a revocable living trust is generally more difficult to contest than a will.

These are just a few examples of the things you can accomplish with a revocable living trust. When you remain mindful of the real priorities in estate planning, you will never choose a planning vehicle solely on the basis of the size of your estate.

Is living trust planning a good idea for a single parent?
Definitely. In fact, it is the best overall solution to the planning problems of the single parent. How does a living trust benefit the single parent? In most respects, it offers the same advantages to a single parent as it does to a married parent. However, because there is no spouse to assist the parent if he or she becomes disabled or to provide for the emotional and financial needs of the child if the parent should die, living trust planning is particularly beneficial for a single parent. Carefully selected guardians and trustees and detailed instructions for your own care and that of your child will ensure that, no matter what life brings, your wishes will be carried out and your child provided for.

What is the income tax effect of a revocable living trust?
A revocable living trust is tax-neutral in that the trust maker is considered the owner of all trust assets during his or her lifetime for tax purposes.

What happens to the trust at the death of its maker?
At the trust maker’s death, the trust may continue according to its terms or may be terminated with the trust assets’ being distributed to the beneficiaries.

Can I have more than one revocable trust?
Yes, you can. For instance, if you plan to be away from the office for an extended period of time, a separate revocable trust can be set up so that you can appoint someone as your trustee to handle the regular business routines of paying bills, depositing checks, and the like, while you are away. This type of trust is like a power of attorney but is safer and more restrictive.
You can also divide property among several revocable trusts and appoint a different member of the family as trustee of each trust to see how each one manages the trust property. This will give you an idea of what would happen in the event of your death. In addition, you can have the sole power to amend or revoke each trust, so that you can terminate a trust if you feel that the principal in it is being mishandled.
In some cases, spouses may each have an individual trust for separate property and a joint trust for marriage property.

I’m afraid I’ll lose control of my assets if I don’t own them any-more. Why do you say I won’t lose control?
First, you create a trust agreement with the help of a qualified estate planning attorney, who makes sure the document fulfills your wishes while staying within the bounds of trust law, debtor-creditor law, marital law, bankruptcy law, and tax law. Among the provisions of your trust are your instructions for the trustee in regard to managing and distributing the assets for and to your beneficiaries—you dictate the terms which the new owner of your property (your trustee) must obey. There is no higher duty under the law than that owed by a trustee to a beneficiary.
As if that were not enough control, you can be the sole beneficiary of the trust during your lifetime. Your trust will contain instructions on how to take care of you during a legal incapacity, and your instructions must be followed and your property used for your benefit. If you become disabled, you actually have more control over your property than you would have if you owned it outright, since without the trust your assets would be subject to a living probate.
And finally, for the ultimate in control, you can be your own trustee while you are alive and competent. You make all the decisions to buy, sell, give away, acquire, and use the property, just as you always did.

How does a revocable living trust avoid probate?
Regardless of the specific types of property that a decedent may have, all property will be either probate or non-probate property. Probate property is all the property that must pass through the probate process to change ownership. Non-probate property is all the property that does not need to go through the probate process to change ownership.
Typically, probate property is property that the decedent owned in his or her own name. Non-probate property is property that passes to a named beneficiary, such as a life insurance policy, annuity contract, certificate of deposit, or individual retirement account. It also includes property that was owned by the decedent in joint tenancy with rights of survivorship.
Property held in a revocable living trust is non-probate property because it is not directly owned by the trust maker. Since the property is no longer owned by the maker in his or her individual name, it does not need to pass through the probate process to have the ownership changed. This transfer of ownership from the individual to the trustee of the trust is referred to as “funding” the trust.
Any time a revocable living trust is used, it is extremely important that it be funded. All assets left outside the trust may have to pass through the probate process to change ownership. Trust makers should periodically review their estate plans and their assets to make sure that they are owned correctly and that the appropriate assets are placed in the trust.

I understand that the probate process is public. If I had a revocable living trust, would everyone still know my affairs?
No. Unlike the probate process, a living trust is not public and does not warrant public attention. In some states, such as California, the trust may be open to inspection by your “heirs at law” or other “interested persons,” but it does not need to be filed in the public records.

Does a living trust avoid an ancillary probate?
When a revocable living trust is properly funded, neither probate in the state of domicile nor ancillary probate proceedings are necessary because the assets are held and owned by the trust.

If my state has simplified or informal probate laws, should I still consider creating a living trust?
All states differ as to the formality of their probate laws. Many states have adopted a probate law that reduces some of the requirements of traditional probate (e.g., court hearings). Even though your state may have informal probate, certain procedures must still be dealt with, resulting in significant cost, delay, and frustration. Additionally, a probate that begins as an informal process can instantly become a very formal probate once the slightest problem occurs.
Even if your state has an informal probate process, you may own real estate in a state that has formal probate, and the probate laws of that state would apply to the real estate. A revocable living trust can avoid all probates.

Is my living trust something that the government will shut down?
The living trust has been authorized by common law for hundreds of years and is growing more and more popular. The trend for the federal government has been to liberalize the use of living trusts, giving them equal footing with probate estates. For example, in 1997, Congress enacted legislation allowing equal treatment of living trusts and probate estates for most income tax purposes.
State governments have followed the federal trend of enacting legislation favorable to the use of living trusts. However, there is no telling whether the states will decide to exert more control over living trusts. Living trusts expedite the transfer of wealth without the usual red tape. In the absence of any special-interest group trying to pull living trusts into the probate system, it is unlikely that state governments would want to create more probates or conservatorships; the courts are overcrowded as it is.

Does a revocable living trust always have assets in it?
A revocable living trust may be unfunded, partially funded with only specific assets, or fully funded. If a revocable living trust is unfunded or not fully funded, the trust maker’s assets that are not held in the trust will pass to the trust in accordance with a “pour-over” provision in his or her will. These assets will be subject to probate.

Can I keep some of my property outside of my trust?
Yes, you can. But any such assets will have to go through the probate process which the trust is set up to avoid.

Are assets held in a living trust protected from creditors’ claims?
Generally speaking, when assets are held in a revocable trust, they are not protected from the legitimate claims of the trust maker’s creditors. This is because the maker can revoke the trust and take back the trust property at any time. The law finds that it is inequitable to allow the trust maker to have this control and full use and benefit from the trust property while denying creditors the power to compel revocation in order to satisfy their just claims.
An irrevocable trust may provide some creditor protection because the maker is not able to revoke the trust and get the property back. The maker may have a beneficial interest in the trust, such as a right to income or to principal, and that interest may be reached by the maker’s creditors. However, if the beneficial interest is subject to the discretion of the trustee and the maker is not the sole trustee, creditors can be thwarted. In fact, two states, Alaska and Delaware, allow trust makers of certain irrevocable trusts to retain rights in the trust and still have the trust assets be free from creditor claims.

Are there ways to draft my living trust so that the trust assets are less vulnerable to my beneficiaries’ creditors?
While a revocable living trust cannot protect the maker from his or her creditors, it can protect the beneficiaries from the claims of their creditors. ‘When a special clause is inserted into the trust document to protect trust assets from claims of the beneficiaries’ creditors, the trust is said to be a spendthrift trust.
Spendthrift trusts are not valid in all states. In addition, the mere presence of a spendthrift clause does not always ensure creditor protection. There are, however, several measures that can be taken to make a spendthrift trust less vulnerable if it is attacked by a beneficiary’s creditors. For example, trust agreements may specify that the trustee must make distributions for the support of the beneficiary or that the trustee may make distributions based solely on the trustee’s discretion. Courts have generally held that spendthrift trusts which require that distributions be made for the support of the beneficiary may be reached by creditors for support-related debts; creditors generally cannot seize assets of a spendthrift trust that allows the trustee to distribute trust assets based solely on the trustee’s discretion.
If your objective is to protect your beneficiaries from their creditors, it is generally best to give the trustee of the spendthrift trust sole discretion as to whether or not to pay the trust’s income or principal to the beneficiary, as opposed to requiring mandatory payments of income or principal to the beneficiary. Additionally, it is not advisable to name the beneficiary of the spendthrift trust as the sole trustee of his or her own trust. Doing so could invoke the doctrine of merger of equitable and legal title, thus allowing the beneficiary’s creditors to reach the trust’s assets.
Creditors could also reach the assets of a spendthrift trust if the conditions necessary for the trust to terminate have already occurred but the trust has not been terminated. For instance, if the terms of the spendthrift trust require that the trust terminate when the trust beneficiary reaches 30 years of age, a creditor of the beneficiary may require that all assets be distributed to the beneficiary when he or she turns 30. The beneficiary cannot elect to wait out the creditor. To solve this problem, you can make the term of the trust be the duration of the beneficiary’s life.

Is the cost of a will or a trust income tax-deductible?
Though the legal fee for drafting a will is generally not tax-deductible, a portion of the fee for the planning and drafting of a revocable living trust generally is. The maintenance, conservation, and protection of income-producing assets is deductible, subject to the 2 percent floor for itemized deductions.

If I set up a revocable living trust, will it help me avoid taxes while I am alive?
No, a revocable living trust will not help you avoid taxes while you are alive. Because you still control all the assets, you still pay the taxes on the income from them.

My bank is currently managing my assets under a trust arrangement. Isn’t the bank’s document a revocable living trust?
The agreement you signed with your bank may be a revocable living trust. A legal document sets forth the conditions which determine the nature of the legal relationship. If the document describes itself as a “trust agreement” and identifies the bank as your “trustee,” a legal trust relationship probably exists. Whether it is a revocable trust depends on the specific terms of the document. The phrase “revocable living trust,” as used by members of the National Network of Estate Planning Attorneys, signifies a very complete statement of your intentions that includes your best thoughts on providing for yourself and your loved ones. The bank’s document probably contains inadequate instructions in the event of your disability and no provisions for distribution other than to return the assets to your probate estate.
Trust documents prepared by banks for general usage are commonly known as letter trusts. Under these arrangements, you, as the maker, designate the bank’s trust department as your trustee but retain the right to revoke the trust arrangement. You are designated as the recipient of all the income. Your estate is designated as the beneficiary upon your death. No provision is made for your disability other than the continuation of income payments to you during your lifetime.
The purpose of the letter trust is to create a specific relationship between you and the bank. The bank is not authorized to be a broker or seller of investment securities. However, the relationship created by the letter trust agreement permits the bank, acting as your trustee, to invest on your behalf and to earn a fee for doing so. These trusts are not designed for estate planning; they are designed to expedite and make easier the bank’s investment of your assets.
You should consult your attorney about creating a fully developed revocable living trust as an amendment to the letter trust. In this way, your bank, continuing as your trustee, will have full instructions, in the event of your disability or death, for managing and distributing your assets.

Why do you recommend a revocable living trust as a basic strategy for proper estate planning rather than other traditional methods?
A revocable living trust—centered estate plan meets all the criteria in the definition of estate planning:

  • It allows you to control all your affairs and assets during your life and after your death.
  • It minimizes taxes, fees, and costs, thereby preserving your wealth.

If you procrastinate and do nothing, the courts will take control of your assets. When you die, your assets will be distributed according to state law; if you become incapacitated, they will be managed by a conservator. The outcome in either case may not be what you want.
With the traditional methods of planning, you can lose control. A will probably will not control all of your assets, and it does not avoid probate when you die. Furthermore, it provides no protection at incapacity. Joint ownership doesn’t avoid probate; it just postpones it. If a joint owner becomes incapacitated, the other joint tenant could end up in the probate court. Joint ownership can also cause the unintentional disinheritance of a tenant’s own family.
Beneficiary designations are not always effective either. They create problems if the beneficiaries are minors or are disabled or if they have creditor or marriage problems.
Finally, none of the traditional methods is particularly useful as a basic strategy for wealth preservation.

If revocable living trusts are such an outstanding planning tool, why do attorneys either downplay their use or fail to recommend them to clients?
Most attorneys are required to take basic courses in wills and probate administration in law school. Trusts are, in many instances, an elective course. Even though the popularity of revocable living trusts as a basic planning vehicle has blossomed in the last 10 years, many schools and continuing legal education programs have failed to catch up with the public demand.
Many attorneys are also reluctant to recommend this planning tool since they believe it will mean less income for them. They mistakenly believe a relatively small fee for sophisticated planning now is not enough to forgo the eventual probate estate revenue. They fail to realize that clients will complete this planning elsewhere to avoid probate and obtain all the advantages of revocable living trust planning.


Joint Revocable Living Trust

What is a joint revocable living trust?
A joint revocable living trust is a single trust created by a married couple that addresses each spouse’s wishes as to his or her property. Both spouses are the trust makers, and both are almost always the trustees.

Can spouses create a joint living trust if they own their property in joint tenancy?
Of course. Joint trusts are good estate planning tools for married couples with joint tenancy property. However, allowing property to pass outright to the surviving spouse pursuant to the survivorship feature of joint tenancy may defeat the trust makers’ planning, particularly if federal estate tax planning is implemented. With a joint trust, it is important that, during funding, the spouses “sever” the jointly held property into equal ownership between them to prevent the property from passing outright to the surviving spouse upon the first spouse’s death.

If my spouse and I choose to have a joint trust, are we able to direct the trustee to hold our separate property within the same trust?
The creation of a joint trust to hold your assets during your lifetime does not preclude either you or your spouse from directing the trustee to hold one or more specific assets for the benefit of either spouse individually.
If individual assets are part of your joint revocable living trust, the trustee must take care to account for the assets and any income derived from them as separate income. This is particularly critical when the trustee is holding separate property for any of the beneficiaries.
Gift tax and asset tax basis issues must be considered when owner-ship transfers occur. Therefore, the trustee must carefully document any change of ownership from one spouse individually to the spouses jointly.
When establishing the assets in the separate name of either spouse, you must consult local law with regard to the requirements for a full transfer of the ownership rights. This transfer is more complicated in a community property state than it is in a common law state. Your attorney can advise you about the requirements for documenting transactions involving specific individual assets.

If a joint revocable living trust is established with the spouses as co-trustees, may either spouse act independently or is joint action always required?
Generally, either trustee is able to exercise the full powers on behalf of the trust for the benefit of both trust makers. Limitations requiring joint action by the trustees could be written into the revocable living trust, but such limitations make management of the trust cumbersome.
If there is a lack of trust between the spouses, they should consider having a professionally managed trust during their lifetimes or establishing separate trusts. In this way, concerns that a spouse might use the trustee relationship to take advantage of the other spouse are eliminated. A third-party trustee can also play an important role as a financial manager, record keeper, and investment advisor for your trust.

Advantages of Revocable Living Trusts What are the benefits of a revocable living trust?
Control, cost, convenience, and confidentiality are the four primary reasons that many people turn to trust-centered estate planning.

A fully funded revocable living trust allows the trust maker to retain control of his or her estate planning affairs while avoiding probate and its related pitfalls.
Perhaps the most important attribute of a revocable living trust is that it allows the trust maker to retain control of his or her financial affairs even in the event of disability. Studies have shown that people are much more likely to experience a lengthy period of disability during their lifetime than they are to die suddenly without any period of disability. While a will has absolutely no effect until the will maker has died, a revocable living trust is effective as soon as it is executed by the trust maker. This means that the provisions of the trust can go into effect while the trust maker is alive, so he or she can plan for disability and other issues that may arise during life. Matters including who the successor trustees will be, how the trust maker’s medical expenses will be paid, and where the maker will live and what standard of living he or she will retain during the disability can be planned and will take effect immediately upon the trust maker’s disability without any need for a living probate. The people designated by the trust maker to handle such matters simply follow the directions that are included within the trust and supplemental documents, including the living will and durable powers of attorney for health care.
In the absence of proper planning, the trust maker’s wishes may remain unknown and decisions affecting the trust maker may be left to chance.

Because property that is held by a revocable living trust avoids probate, the cost of administering the trust estate after the maker’s death is much lower than the professional fees for administering that same property in the probate process.
With a revocable trust, there is no need to retain an attorney to steer the estate through probate. The directions to the successor trustees for the administration and distribution of the trust property are in the trust document. Of course, the successor trustees may seek the advice of an estate planning attorney and a knowledgeable accountant as needed, but in most cases the assistance required from professional advisors is minimal.
Further, trust estates avoid such costs as filing fees, newspaper publication costs, and other expenses associated with the required notices, hearings, and other procedures dictated by probate laws.
The fees and costs associated with administering an estate using a revocable living trust are nominal. A trustee’s fee is based upon the “going rate” of bank trust departments, and national surveys show that the average total cost of administering a revocable living trust estate is less than 1 percent of the gross value of the estate!
Let’s compare the costs of probate administration with those of trust administration for an estate of $200,000. On average, the costs associated with administering the probate estate equal $14,000, of which $6000 (3 percent of the gross estate) is the probate attorney’s fee, another $6000 is the executor’s fee, and the remaining $2000 (1 percent) covers the filing fee, publication costs, probate bond, appraisals, and other costs—a total of 7 percent of the gross estate. Now let’s suppose that the estate plan consists of a revocable living trust. The costs of administering the estate are now about $2000, or 1 percent. Use of the living trust eliminated the probate attorney’s fee, probate filing fee, publication costs, and probate bond and significantly reduced the executor’s fee.
Similarly, living probate proceedings are avoided with proper trust-centered estate planning in which health care agents are appointed and successor trustees are designated in the trust agreement. Living probate—related costs, including attorney fees, filing fees, costs of publication, and the like, are avoided, resulting in preservation of trust assets for the benefit of the trust maker.

While the results of administration of a probate estate or a trust estate are the same—taxes are paid and distributions are made to the beneficiaries—the probate process is cumbersome and time-consuming in comparison to the process of administering a trust estate. The trust maker’s specific directions within the trust document address the contingencies of disability and death and appoint successor trustees to carry out those directions.
Upon the disability or death of the trust maker, the successor trustees have legal control of the trust assets immediately, without involvement of any court, so the trust maker’s lifetime endeavors may be continued without interruption. If the trust maker was engaged in a business enterprise, the ability to continue its operations is generally critical to the health of the business. In addition, the successor trustees carry out the administration of the trust in a timely manner, whether by creating subtrusts for the benefit of the beneficiaries or by making immediate distributions.

Trusts are private. While wills and the entire probate process are open to the public, trusts remain confidential. For many, this in itself is a compelling factor in favor of revocable living trusts.
Most of us have been reared to keep our financial matters private. It is unlikely that we would discuss our income or net worth with neighbors at a social gathering. However, if you die with a will controlling your affairs, all of your sensitive financial matters are at once open to public scrutiny. Your will and the accompanying inventory of your estate, the value of your assets, and your outstanding debts are all filed with the probate court in the county where you resided at death. Any-one, such as an intrusive neighbor or potential suitor for your business, can simply contact the court, forward a small check to cover the expense of photocopying your estate file, and receive copies of all papers filed in your estate.
Since fully funded trusts are not subject to the rules of the probate court, the inventories, notices to beneficiaries, and accountings of all assets and debts of your estate are not filed with the court and hence not open for public scrutiny.


Disadvantages of Revocable Living Trusts

All that you’ve told me about living trust—centered estate planning sounds really attractive. Are there any disadvantages of a revocable living trust?
There can be, but they are few in number, and most of these problems depend upon the state(s) in which you own real property. Even when there are disadvantages, the benefits of a revocable living trust usually far outweigh the drawbacks.

One objection to a revocable living trust is that it is more expensive than a will. True enough in some cases. However, a living trust—centered plan is usually only initially more expensive than a will. Wills have been priced below cost for years by attorneys who build up huge files of wills and then reap the probate fees in years to come. Although executors do not have to use the attorneys who drafted the wills as their attorneys, most do.
The cost of a will and after-death administration through the probate process almost always exceeds, by a large amount, the cost of a funded living trust and its private after-death administration.
Reducing the cost of death administration is only one benefit of avoiding probate, and avoiding probate is only one (small) benefit of a revocable living trust.

Some people find it annoying to have to determine what they own and how they own it and then have to change the ownership of their property to a living trust. Yes, this can be annoying, but it has to be done only once. And if people think it is a problem for them while they are alive and well, think of what a problem it will be for their spouses or children if they become disabled or die.
The choice is this: People can either “probate” their own estates themselves or pay the courts and lawyers to do it for them after they are no longer around to answer questions such as, “Where is the deed to the house?”
Most people who have gone through the funding process, one piece of property at a time, report that they feel a great sense of relief and peace of mind, knowing that they finally have their records in order—which is actually one more advantage of living trusts.

If a husband and wife own property as tenants by the entirety and transfer the property into their revocable living trusts, the property is no longer tenancy-by-the-entirety property. However, for most people, the benefits of tenancy by the entirety are not that substantial.
Tenancy by the entirety is available only in some states and only between spouses. Generally, the creditor of one spouse cannot get at the house to satisfy the debt; the creditor can get only a lien on the house. But this relief is not permanent. When the property is sold, the proceeds of the property may no longer be protected. Also, if a couple’s home has a large mortgage, the mortgage is probably the one debt they are really concerned about, but tenancy by the entirety will not protect their home from its own mortgage when both spouses are liable on the mortgage. If the home is close to being paid for, it is likely the couple do not have pressing bankruptcy concerns. Nonetheless, for some couples, under certain circumstances, tenancy-by-the-entirety protection might have enough psychological benefits to warrant keeping the property outside their living trusts until the first spouse passes away or until circumstances change.
There are at least two court cases, one in Hawaii and one in Missouri, which held that tenancy-by-the-entirety property, when transferred into a revocable living trust, retains its status as tenancy by the entirety for purposes of creditor protection. Make sure that you discuss with your estate planning attorney the status of the law in your state regarding this issue.

In some states, homeowners may not be entitled to protections afforded by a declaration of homestead if they place their homes in revocable living trusts. Even in these states, however, there are often ways to title a home so that the benefits of placing the home in a living trust and the declaration of homestead can both be obtained. To what extent a declaration of homestead can protect a home, under what circumstances, and for how long are a matter of state law. Generally, like tenancy by the entirety, it is not permanent protection. And, like tenancy by the entirety, it does not protect the home from claims by the mortgage holder.

Retirement plans and certain professional practices or franchises may require some special handling for living trusts. In some states, real estate transfer taxes may be triggered upon transfer of real property to a trust (this is very rare); the title insurance company may have some particular requirements; or real estate tax breaks available for owner-occupied residences or the elderly or disabled may not be available when real estate is placed in a trust.

If debt-encumbered property is to be held in a living trust, written assurance should be obtained from the lender that the transfer will not trigger a “due-on-sale clause” (by federal statute this cannot happen in regard to a personal-residence mortgage).
This may seem like a long list, but these issues, when they do occur, are minor and rarely outweigh the substantial benefits of a funded revocable living trust. And more and more state legislatures are sweeping away the few remaining and outmoded quirks of state law regarding living trusts.
Your estate planning attorney should guide you through any issues regarding funding your revocable living trust in your state with your particular assets.
What are the comparative costs of a will and a living trust?
The actual costs of wills and trusts vary from community to community. A living trust typically costs more than a will of comparable complexity, but this general rule may be different in any given community. Any cost comparison between the two must factor in the quality of the service given by the attorney, the scope of the services provided, including advice on how title to assets should be held, and the thoroughness of the planning. In addition, you should take into account the probate and administration expenses saved by using a living trust. On a national level, the cost of passing property to a spouse or from one generation to the next through the probate process can range from 3 to 10 percent of the gross estate. This figure includes court filing fees; executor commissions; and legal, accounting, and appraisal fees. On the other hand, the same estate plan implemented at death through a living trust typically costs from less than 1 percent up to 11/2 percent of the gross estate.
As you can see, a fair cost comparison must include not just the cost of the initial documents but the total cost of passing your property to the next generation.


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What happens if I do no estate planning?
All of us have planned our estates, whether we know it or not. If you do not have a will or a living trust, the state where you live has an estate plan for you, and you are not likely to hold it in high regard.
Should you become disabled, the court, not you or your family, will choose and appoint a conservator to inventory, appraise, and manage your assets and report the information to the court. That information usually becomes part of the public record. There will be attorney and conservator fees imposed against your estate to pay for this privilege.
When you die, your estate will be subject to probate. Again, your assets will be valued and listed in the public record. Creditors will be individually notified of their right to make claims. And the administrator of the estate and the administrator’s attorney will each be entitled to a fee.
Once all the creditors, your administrator, and your attorney have been paid, your assets will be distributed to your beneficiaries according to the preferences set forth in your state’s statutes (the laws of intestate succession). If a share passes to your children, it will be given to them immediately and without restriction if they are 18 years of age or older. If a child is not of majority (18 to 21 years of age), a guardian and conservator will be appointed to control his or her person and inheritance until the child reaches the age of majority, at which time the child will receive his or her inheritance, or what’s left of it, outright.
If a share is established for your spouse, the size of the share will depend on your state’s laws and on the way your property is titled. Your spouse may get all of your estate or very little.
Some assets do not go through probate, but this might not be much better. Life insurance proceeds will pass to whomever you named as the beneficiary. If you forgot one of your children, or if your ex-spouse is still listed as your beneficiary, there may be no recourse because a beneficiary designation supersedes the state’s law as to who will receive your property.
Compare this “plan” with the way in which you would like your property to be held and administered in the event of your death or disability. You will probably decide that a plan you design and control is called for.

Can’t I simply name as beneficiary the person I want to receive my assets or put his or her name on the title with mine and be done with all of this estate planning business?
Maybe, but not likely. It is important to analyze the nature of the assets you expect to leave behind as well as the individuals you wish to see benefit from them. For some assets, such as an account with a broker, you may not be permitted to name a beneficiary. While in some states you may do so, you need to make sure that your state allows such a beneficiary designation.
Additionally, when you re-title assets in your name and that of another person who is not your spouse, you may be making a taxable gift to that person or setting the stage for some very unfavorable income and estate tax consequences.
Further, by adding another person’s name to the title of an asset, you may also be relinquishing your ability to control the asset. Once that person’s name is on the title, that person has rights to the property. And so do that person’s creditors. You could be subjecting your property to the other person’s financial mistakes.
Other problems with this approach include the following:

  • Minors cannot receive or control property that is held in their names. If you title an asset in the name of a minor or name a minor as a beneficiary, a guardian must be appointed to handle any property left to that minor.
  • Minors generally will not receive any benefit from property left to them before they reach their age of majority, which is usually 18 years. There are some circumstances under which they will be permitted to use their property prior to age 18, but only with the court’s permission.
  • Disabled or incompetent beneficiaries cannot receive property directly. An incompetent beneficiary must have a guardian and conservator appointed. A disabled individual may be receiving substantial governmental assistance, eligibility for which could be needlessly jeopardized by naming him or her a beneficiary or titling assets in his or her name.
  • If your spouse is not the parent of your children, even if he or she agrees on what to do with the property on your death, there is always the possibility that unintended beneficiaries will ultimately receive your property.
  • Perhaps most important, you must consider yourself and your well-being. You may invest substantial time and energy in planning for your loved ones, trying to save them needless expense and red tape, but you have to take these same principles and intentions and turn them inward, toward yourself. You, too, deserve to have the best possible plan to care for yourself. Don’t sell yourself short in this process.

Simply adding another’s name to the title of your assets or naming beneficiaries does not ensure that any planning or real benefits will result for you. In fact, doing so may create more problems for you and your loved ones. Before taking these steps, see an expert estate planning attorney so that you can determine what your alternatives and consequences really are.

I don’t really own much. I am married, with two little kids. All that my spouse and I own is titled in joint tenancy with right of survivorship. Do we need any additional planning?
Yes, you do. Even if joint tenancy with right of survivorship allows the surviving spouse to own assets without probate when one of you dies, it does not provide any protection for your children in the event both of you die in close proximity to one another. If you and your spouse were killed in a tragic accident and neither had a will, who would care for your children and how would they inherit your assets? Without at least a will, the probate court will choose the guardians who will care for your children, and it will choose a financial guardian for your assets. The benefits of providing for yourself in the event of disability to prevent a guardianship over your assets, and the benefits of minimizing taxes and expenses, pale in comparison to the importance and benefit of providing for the care of your minor children.

I am single and have no children. Why do I need estate planning?
A proper estate plan will provide for the distribution of your estate in the way you want after your death. Just as important, it will also provide for your care in the event that you become disabled.
One planning concept is to use your assets to do some charitable good after your death. Such charitable gifts either can be made outright upon the person’s death or, in larger estates, can be held in trust in perpetuity for charitable purposes. Private charitable foundations and community foundations can retain assets after a person’s death and pay the income to various charities according to that person’s wishes over a period of time.
One way a single person can accomplish this is by purchasing life insurance on his or her life which would be payable to his or her trust, the ultimate beneficiary of which would be a private charitable foundation or community foundation.

Why should I worry about estate planning if I am young and don’t have a lot of assets?
Two common excuses for avoiding estate planning are “I don’t have enough assets” and “I’m too young to die.” These are misconceptions that can be attributed to a lack of understanding of the consequences of failing to plan and a disinclination to recognize that someday we all die. There are many reasons why estate planning is particularly important when assets are limited.
Estate planning for even modest estates is important because of inflation. This is easily demonstrated through the use of the Rule of 72, which holds that 72 divided by the inflation rate equals the number of years it will take to double the size of an estate. For example, if the inflation rate is 5 percent, the rule says that the value of an estate will double every 14.4 years just because of inflation! If this seems unlikely to you, just consider how much you paid for your home as compared to the original cost of your parents’ homes. Inflation is a certainty of life that simply cannot be ignored. The Rule of 72 does not take into account that the value of assets may grow in excess of the inflation rate. The point is that the value of your life insurance and your house, along with any other assets you may have or acquire, can be significant, especially over time.
The second reason why estate planning is important is because, according to morbidity tables (tables for disability statistics published by insurance companies), the chance of your becoming incapacitated or disabled in the next year is significantly greater than your chance of dying. The absence of an estate plan necessitates a formal, legal guardianship and conservatorship proceeding that involves court costs and the expense of an attorney and would unnecessarily tie up your assets. If you are married and your assets are titled in both your name and your spouse’s, those assets will be tied up as well.
In a guardianship and conservatorship proceeding, the court seeks to protect the assets of an incapacitated person, so it requires annual accounting reports justifying the use of assets. Depending upon state law, court permission might be required for the sale of major assets. A performance bond might also be required. The cost of guardianship and conservatorship proceedings far exceeds the cost of an estate plan even for young people with small estates.
In the absence of a proper estate plan, state law determines how assets will be distributed at your death. In states where property is generally owned by married couples in the form of tenancy by the entirety or joint tenancy with right of survivorship, the jointly held property will pass automatically to the surviving joint tenant by operation of law this may create federal estate tax problems when your spouse dies which could deprive your children of an inheritance.
In states where real property is held by spouses as tenants in common, the absence of a written estate plan results in the assets of the deceased spouse passing to the children, with the surviving spouse receiving only a partial share.
If the children are minors, they cannot hold property in their own names and a formal guardianship proceeding is necessary for the court to appoint the surviving spouse as the guardian. An expensive performance bond may also be required. Since a parent has the obligation to support the children, courts generally do not permit the parent to use the children’s assets for their support unless the parent is destitute. A further complication is that the surviving spouse may be unable to handle the present house payments and desire to sell the home. With the children owning part of the equity of the home and portions of the deceased spouse’s other assets, the surviving spouse may not have access to those funds to purchase a new home.
Thus, even though a person is young and has few assets now, the adverse consequences of failing to plan can be enormous.

At what amount of net worth should I begin to consider estate planning?
If you have assets and loved ones, you are a strong candidate for considering a revocable living trust—centered estate plan. Although a living trust can be utilized to achieve substantial estate tax savings for estates in excess of the applicable exclusion amount, tax planning is generally not the primary motivation of most clients.
Arguably, a young couple with a relatively small estate and minor children has a greater need for a revocable living trust—centered estate plan than a more affluent couple with no children. The need to provide loving and detailed instructions for the care and well-being of a minor child may greatly exceed the need to do estate tax planning.
The estate planning process should address a host of issues including planning for the trust maker’s disability, providing detailed instructions for the care and well-being of the trust maker’s family, preserving and expanding wealth, and, finally, avoiding probate and reducing professional fees, court costs, and tax dollars.
Attorneys often ask clients, “What is most important in your life?” Without hesitation, most clients consistently answer, “my family.” Clearly, for most clients, tax planning is secondary to planning for their loved ones. The decision to embark on a living trust—centered estate plan is therefore generally not related to the size of a person’s estate.

Why is it that so many people, even many attorneys, have not availed themselves of estate planning strategies that could save money, protect their loved ones from financial disaster, keep control of their assets and distribute them in the way they want, and avoid the high costs and public scrutiny of probate?
Statistics indicate that many attorneys do not even have wills. However, just because a person is an attorney doesn’t necessarily mean that he or she has expertise in estate planning. For example, the late Chief Justice of the Supreme Court, Warren Burger, attempted to create his own will, only to have it cost his family $400,000 more than would have been paid if he had properly planned his estate.
It is important to find an attorney who is qualified in estate planning, and who will spend the necessary amount of time working with you and your family to learn your needs, values, fears and objectives.

The questions so far have involved fictional examples of why people need to do estate planning. Are there any examples of real people who could have benefited or did benefit from proper estate planning?
Let us look at Elvis Aron Presley’s estate as an illustration. When the “King of Rock ‘n Roll” died at the age of 42 in August 1977, his gross estate was valued at more than $10 million. His death probate took 12 long years to complete, and his probate file was finally closed in December 1989. A study made in 1991 by Longman Group USA, Inc., shows that Elvis’s gross estate shrank by 73 percent after probate, the most dramatic shrinkage among the famous people listed in the study. By the time his settlement costs were paid, about $2.8 million from the original $10 million was left as the net estate. The settlement costs reported in the study include (1) debts, (2) administrative expenses, (3) attorney’s fees, (4) executor’s fees, (5) state estate tax, and (6) federal estate tax.
On the other hand, Andy Warhol, by planning with some of the techniques described in this text, minimized the shrinkage of his gross estate of $297,909,396 to 2.3 percent.
Groucho Marx’s case gives us a graphic illustration of a living pro-bate saga that a person may have to face because of his or her failure to plan for incapacity. Groucho had a will, but it did not do him any good on his incapacity. The last 3 years of his life became a living probate battle, in full view of TV cameras, as three parties vied for control over his wealth and care: his live-in friend Erin Fleming, the Bank of America, and Groucho’s family. Day in and day out, he was wheeled in and out of court. There was no respect for his dignity and feelings during the lengthy and spectacular trial.
Erin Fleming went to the probate court in Santa Monica, California, to have Groucho declared mentally incompetent. Groucho Marx was indeed judicially declared incompetent in 1974. In addition, Erin Fleming was named his guardian and also his joint custodian along with the Bank of America. All the court proceedings were open to the public and were covered by the nation’s media. The personal life of this famous star was fully exposed. Groucho completely lost control over what was essential to his dignity as a person, namely, his privacy, his personal decisions, and his wealth.
Finally, let us look at Karen Ann Quinlan’s case. Karen Ann Quinlan was 21 years old when she slipped into a coma at a party on April 15, 1975. She became a prisoner in a helpless body supported only by medical technology. Her parents, Joseph and Julian Quinlan, decided to take her off the respirator, end her pain, and put her back in a natural state so that she could die in “God’s time.” However, the doctors at St. Clare’s Hospital in Denville, New Jersey, refused to comply with their request because Karen was legally an adult and did not have a living will and a durable power of attorney for health care.
Joseph, her father, had to be appointed her guardian through a living probate, which lasted more than a year. The New Jersey State Supreme Court ruled unanimously in the Quinlans’ favor on March 31, 1976. Karen was removed from her respirator in May 1976. When she did not die as expected, she was moved to a nursing home. Her parents never sought to have her feeding tube removed during the 9 years she lived after she was taken off the respirator. She died on June 11, 1985. During those frustrating 10 years the Quinlans had to face mounting health care costs as Karen continued to be cared for. The loss of control over their own affairs disrupted and strained the lives of the Quinlan family.


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Chapter 3: Creating a Revocable Living Trust


Should we discuss our estate plan with our children?
This is a very delicate decision that will depend on your family situation, the relationship between you and your children, the relationships among your children, and whether or not your children (and perhaps their children) are treated equally.
Often the ultimate goal is to avoid hard feelings among siblings once the parents are no longer alive. If one child is given more than the others to compensate him or her for having been the parents’ caregiver, the siblings should know this so that they do not accuse that child of having undue influence over your decision to give him or her more. If a well-off child is given less than his or her less fortunate brothers and sisters, the reason for this decision should be explained to clarify that it does not indicate a lack of love and affection. If one sibling gets a distribution outright while another’s share is held in trust for a number of years, there will be natural resentment unless you explain why, as a parent, you feel it is best for one child to wait and the other not to wait.
A similar discussion should take place among spouses of a second marriage and the children of both marriages. If the children of the first marriage are your ultimate beneficiaries, they should know this so that they do not resent the new stepparent for “taking their inheritance.”

Should I coordinate my estate plan with the estate plans of other family members?
If you anticipate receiving assets from the estate of a family member or if you contemplate making a family member with estate planning concerns a beneficiary of your plan, the other family member’s estate plan must be considered in the development of your estate plan. For example, a family member with significant estate tax concerns may not want to receive additional assets from your plan. In such a case, you may wish to choose a different beneficiary or designate an additional beneficiary since that family member might disclaim the assets he or she is to receive from your plan. If you are to receive assets from the estate of a family member, you may wish to have your estate planning attorney consult with that person’s estate planning attorney to coordinate efforts so that your plan is not significantly altered because of your being a beneficiary of the other family member’s estate plan.

Do I have to let my beneficiaries and successor trustees know what the terms of my trust instrument are?
One of the many benefits of a revocable living trust is that the wishes of the maker can be kept private and need not be shared with third persons, including family members and named beneficiaries, during the lifetime of the trust maker. Similarly, because the trust is revocable, the trust maker during life can repeatedly amend the trust instrument to change the designated beneficiaries or the distributions to particular beneficiaries without the beneficiaries’ knowledge or consent. After the trust maker’s death, there is no requirement, as there is with a will, that the trust instrument be filed with the court or any particular authority.
As a practical matter, although the specific terms of a revocable living trust need not be disclosed to family members, relatives, or named trustees prior to a maker’s death, the persons selected to serve as trustees should certainly be made aware of the existence of the revocable living trust and their designation as successor trustees after the maker’s death. They can then act promptly following a trust maker’s death to carry out their duties as trustees. After the trust maker’s death, the beneficiaries of the trust will have a right to review the trust instrument so that they can ensure that the successor trustees properly perform their duties and make distributions to the beneficiaries as designated by the trust maker. State law may also allow “heirs at law” to review all or part of the trust to determine whether they are included in the trust.

Is there a way I can tell my children some personal things which are not included in my estate plan?
Certainly. You can write a statement of your memories, thoughts, and feelings toward them. You can keep this statement in a sealed envelope with your other estate planning documents, or your attorney may be willing to keep this envelope and give it to your children after your death. Alternatively, you can make an audiotape or videotape of yourself in which you express your thoughts and feelings to your children. Some clients do both of these things.

I’ve heard that everyone should have a will. Does my living trust replace a will?
Yes. A properly drafted and fully funded trust-based estate plan replaces a will. However, as a practical matter, a special will called a pour-over will should be a part of your revocable living trust plan. While it may not be needed if your trust is fully funded and you do not have minor children, it is an important fail-safe device should you fail to put all your assets into your living trust. A pour-over will “pours” any assets that are not in your trust at death into the living trust so that they can be controlled by the provisions of the trust.
Property subject to this pour-over will might well have to be probated. Whether it will or not depends on the type of property and its value. The vastly superior alternative to using the pour-over will and probate is to make sure that all of your assets are placed into your living trust. If that is done, the pour-over will simply “sleeps” inside the trust plan and is never awakened for use.

How long does it take to set up a revocable living trust?
Typically, it takes about 2 to 3 weeks after the initial consultation to prepare the trust documents. After the trust documents are signed, it is necessary to complete the funding documents that are used to transfer ownership of the assets to the trustee of the trust. This process can take from a few days to several months, depending on the number and types of assets. These time frames can be shortened greatly if an emergency situation exists.

When does my living trust become effective?
A revocable living trust document and all the ancillary documents created as part of a living trust—centered plan become effective when they are properly signed. In order to receive the greatest benefits from a revocable living trust, however, you must re-title your assets in the name of the trustee. (Technically, title is changed to the name of your trustee, rather than the trust itself; but this is a technicality your attorney can help you with.) If you do not accomplish this, any assets not placed in the trust prior to your death may have to go through the probate process before coming under the control of the trust.

Will I have to record my trust at the courthouse?
A few states require that you record a memorandum of trust or an affidavit of trust when you convey real property to your trust. Such an affidavit or memorandum sets forth certain facts about your trust. For example, you would state the name of the trust, who the current and future trustees are, and some of the powers of the trustees with respect to assets owned by the trust. Ordinarily, you would not disclose the beneficiaries of the trust, the portion of the trust property which has been designated for each of the various beneficiaries, or the provisions for distributing the trust property.

I don’t want anyone to know I have a trust. How do I keep my trust confidential?
In certain jurisdictions where the recording authorities require that the trust document be recorded, or in the case where you do not want anyone to know that you have a living trust, you can use an additional document called a nominee partnership to keep your trust confidential. It acts as an agent for your trust, thereby keeping your trust confidential as an undisclosed principal.

If the trust papers are not filed in the courthouse or other places of public record, how are they recognized as legal documents?
Your trust is much like a contract and is governed by contract law. Since it is not a will, it is not governed by laws pertaining to wills.
When you sign your name to any contract, whether it is for the purchase of a car, an item of personal property, or similar goods, the document is generally not filed in a public forum. Without question, such contracts, once signed, are legal documents and are generally binding upon the parties who have signed them. Likewise, when you sign your trust, it becomes a binding legal document without the necessity of its being filed or made a matter of record.

What is life like after I put all my assets into a revocable living trust?
Life goes on just as it did before. It’s kind of like putting all your assets into a big box with no lid on it. You can put property in and take it out anytime you want. You have complete control. Unlike you or I, the box doesn’t die or become disabled, so court involvement is not needed to carry on your affairs after disability or death. At death, the lid goes on the box and the trust becomes irrevocable.

If I am trustee of my revocable trust, do I have to have a separate taxpayer identification number and file a separate tax return for the trust?
No. The Internal Revenue Code classifies a revocable living trust as a “grantor trust.” Thus the IRS allows you to use your own Social Security number as the trust’s identification number as long as you or your spouse is a trustee of your trust. If you are married and have a joint living trust, you can use either spouse’s Social Security number or you can use one person’s Social Security number for some assets and the other person’s for other assets.
The name of your trust will be on a 1099 form showing interest or other income items, and you will report all your income on your federal income tax return (Form 1040) exactly as you did before you set up your trust. This is because the IRS still considers your revocable trust assets to be your assets.
After your death—or if you have a joint trust, after the death of one spouse—if the trust continues, it must get a separate taxpayer identification number and file a trust income tax return (Form 1041).

How long is the life of my trust?
A revocable trust can be terminated by the trust maker at any time, and you can specify the termination provision in your trust document.
If you do not specify a time, all but six states (Alaska, Delaware, Idaho, Illinois, South Dakota, and Wisconsin) limit a trust’s length of life. The limitation on how long a trust may last comes from English law and is called the rule against perpetuities. English courts wanted to put limits on legal instruments that affected real estate interests so they developed a common law limiting the effect of certain legal documents to a “life or life in being plus 21 years.” This English common law doctrine was originally adopted by all the states. Some states, such as
Nevada and Florida, have modified the rule against perpetuities to make it less complex and more certain as to how long a trust can last.
Therefore, in a state with the common law rule against perpetuities, if you create a trust that includes a 3-month old grandchild as a beneficiary and that grandchild lives to be 90 years old, your trust could go on for 21 years beyond that—for 111 years!

Can I change my trust provisions later on?
Because your trust is revocable, it is a very flexible estate planning device. You may revoke, change, or amend your trust document at any time you wish during your lifetime without penalty.

If there are subsequent changes in the law or changes in my personal circumstances, how do I know my estate plan is still valid?
It is important for you to recognize that an estate plan is constantly changing. As circumstances in your life change, it may be necessary to amend your plan to reflect those changes. You should review your estate plan at least annually to determine whether you need to amend it. If an amendment is necessary, you should contact your attorney for an appropriate modification of the plan.
Your estate planning attorney should notify you of any change in the law that affects your estate plan and should explain how your plan is affected. The combination of review by you and review by your estate planning attorney will ensure that the plan is effective regardless of how long it may be in force.


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Strategies for Everyone

What are some basic estate planning strategies that should always be addressed?
No two individuals will have the very same estate plan. But there are strategies that we might refer to as basic estate planning strategies, be-cause they are employed in most estate plans:

  1. Avoid intestacy (dying without a will or living trust).
  2. Avoid the probate process to the greatest extent possible, through use of a revocable living trust instead of a will and other techniques.
  3. Take advantage of basic tax code provisions that significantly defer and reduce federal estate taxes.
  4. Apply the annual gift tax exclusion.
  5. Name proper beneficiaries for bank accounts and pension and other retirement accounts.
  6. Include directions for handling your financial affairs in the event of your incapacity.
  7. Where there is a family business or a family farm, include provisions to enable the business or farm to be continued, sold, transferred, or discontinued as smoothly and efficiently as possible.

It is important to remember that an effective estate plan can be achieved only after a careful and detailed review of all your specific circumstances and objectives.

Why should I consider life insurance as part of my estate plan?
Life insurance plays three basic roles in your estate plan:

  1. It provides the funds to replace your income for your loved ones upon your death.
  2. It can provide the funds to pay for estate taxes, if necessary.
  3. It can replace any wealth that you might leave to a public or private charity (This is commonly referred to as redirecting your “social capital”—or redirecting the amount of your estate that is subject to estate tax.)

How do I make my plan flexible for changes in my circumstances?
Change is the nature of our world. Over time, laws will change, our family situations will change, our finances will change. Flexibility in planning means two things. First, it means establishing a plan that does not have to be revised every time there is a change in the laws or in a family situation. Second, it means establishing a plan that can be revised to reflect a change in the laws or in a family situation.
A good professional estate planning attorney will be able to help you identify your goals in such a way that future changes in your family’s situation can be addressed now in the plan. A good planner will know how to build flexibility into the plan.

What documents should I expect to have in my estate plan?
At a minimum, a proper estate planning portfolio using living trust—centered documentation will often contain:

  • A section for personal and family information
  • A list indicating the location of original documents
  • A list of the names, addresses, and telephone numbers of professional advisors and representatives
  • A list of all insurance and annuity contracts which you own, so that your intended beneficiaries will not overlook these assets
  • A thorough and easy-to-understand revocable living trust agreement for you; or, if you are married, one trust for you and one for your spouse or a joint trust for both of you, if appropriate.
  • An affidavit of trust which contains pertinent facts about your trust that can be used to prove the trust’s existence while preserving the privacy of its detailed provisions.
  • Pour-over will(s)
  • A memorandum of distribution to dispose of your personal effects (what form this takes will depend upon the state in which you reside)
  • Special powers of attorney which designate agents to fund your revocable living trust with any assets that you may acquire after you are disabled and are unable to fund the trust yourself
  • A durable special power of attorney for health care which grants your designated agent the power to make medical decisions on your behalf
  • A living will which directs your physician as to when to discontinue life-support systems and invasive medical procedures
  • Memorial instructions which contain your burial or cremation wishes and information on the type of memorial service that you would like to have
  • An anatomical gift form which allows you to make a gift of all or part of your body for medical or dental education and research, therapy, or transplant procedures
  • A property agreement which severs and terminates your joint tenancy interests to allow such interests to be properly transferred into your revocable living trust (and your spouse’s interests into his or her trust, if applicable)
  • A section in which you can insert documentation of the assets which have been transferred into your revocable living trust
  • A detailed letter from your attorney setting forth complete instructions for transferring assets into your trust (The Living Trust Workbook, by Esperti and Peterson, Viking-Penguin, 1994, is a complete guide on the subject.)\


Strategies with Prenuptial Agreements

My spouse and I have a prenuptial agreement. How does it affect our estate planning?
Any prenuptial agreement can dramatically alter or nullify an estate plan. For example, the agreement may contain provisions for the dis-position of assets at death, and, if not, it probably defines property ownership—which property is considered separate and which is considered joint. In any event, a marital agreement will likely have a very significant impact on both tax and nontax estate planning, so it is essential that you provide your estate planning attorney with a copy of the agreement.
Because the terms of a marital agreement may conflict with the estate planning goals of one or both spouses, ethical considerations may require that each spouse be represented by a separate estate planning attorney.

I have substantial assets and am thinking about getting married. Could a living trust be used to keep the assets I own before my marriage segregated from property acquired by me and my new spouse during marriage?
Yes, a living trust is an excellent way to keep separate property assets, or assets acquired before a marriage, from being commingled with assets acquired during the marriage. Since the premarital assets are in a living trust, it would be impossible to commingle them with the assets acquired during the marriage unless the commingling was intentional.
To give even more protection, consider coupling a living trust with a premarital property agreement specifying that all the assets in the living trust, along with their increase in value, interest earned, dividends earned, and future appreciation, are immune from the claims of the other spouse and his or her creditors.
To properly accomplish your desire, you must discuss your state’s marital property laws with an attorney who practices in this area of the law.

I am thinking about getting married. Should I consider a pre-nuptial agreement as part of my estate planning?
Many clients find it hard to consider the need for a prenuptial agreement when they are about to be married. To them, asking their future spouse to sign such an agreement implies a lack of trust. Consequently, they miss an important opportunity for estate planning. Obviously, a young couple without substantial assets usually does not need a prenuptial agreement. But when either of the parties brings significant financial worth to the marriage or when other factors, such as the existence of children from a previous marriage, come into play, a prenuptial agreement is particularly warranted.
A prenuptial agreement can cover a wide range of topics, from sharing future earnings to waiving rights of inheritance to dividing housework. The most effective prenuptial agreements result when each party is represented in the process by independent counsel. Independent representation reduces the chance that a party will be able to set aside an agreement on the grounds of undue influence, mistake, or fraud.
Full disclosure of assets is also an important factor in creating a durable prenuptial agreement. With full disclosure, the effectiveness of a successful attack on the agreement is remote.


Strategies for Single Parents

I am a single parent with minor children. Is there special planning I should consider to take care of my children and myself?
As a single parent, it is critical that you design a plan that will designate a guardian for your minor children and a trust for the management of any assets they inherit. Generally, if you are divorced, the legal guardian will automatically be the surviving parent by law. However, there are times when the surviving parent is unwilling or unable to accept his or her parental responsibility. Therefore, it is important to designate in your pour-over will who you would nominate to be your children’s guardian in the event you have the right to do so. In addition, you should choose the person or institution you believe to be the best to serve as a trustee to manage your children’s assets. For the children’s best interests to be served, select a guardian and trustees who will coordinate their efforts to care and provide for the children.
It is equally important that you structure a plan to care for yourself and your children in the event you become disabled. One way of doing this is to use a power of attorney. Unfortunately, even good powers of attorney fail because third parties, such as attorneys, banks, and lenders, can choose whether or not they will rely on the document and act on it to release assets. Thus, at the time when you need it, a power of attorney may not be effective, and then a guardianship will be required. Another negative aspect of a power of attorney is that is does not provide any direction to the agents on what action they should take; therefore, agents can make decisions according to what they deem appropriate rather than on the basis of your directions or instructions.
The most effective disability planning tool for providing for yourself and your children is a fully funded living trust. You can include instructions for the care of your children and yourself in the event you become disabled, thereby eliminating the need for a guardianship or conservatorship to manage your assets.
By establishing a carefully drafted living trust plan and transferring your assets into it, you can avoid probate and will be well on the way to implementing a comprehensive estate plan to care and provide for your children and prevent unnecessary hardships, delays, and expenses in the event you become disabled or incapacitated.


Strategies for Single Individuals

Is a living trust a good idea for someone who is single and has no children?
Yes, if you are widowed or divorced or have never married, a living trust offers protection for your estate. It can completely eliminate living probate and death probate. Further, if properly funded, your trust will ensure that your hard-earned wealth will be distributed to those you designate in the trust in the manner that you decide.

What goals should I have if I have no family?
Because more people today are choosing to remain single, and because people in general are living longer, it is becoming more common to encounter individuals who have no families. For such people, the para-mount concerns are disability planning—finding the appropriate persons or financial institutions to carry out their decisions regarding disability and health care—and determining their beneficiaries.
Usually, these individuals have lifelong friends who can carry out the decisions and/or be named as beneficiaries, or they participate in worthy causes or organizations that lend themselves to charitable planning.


Strategies for Second Marriages

In a second marriage, and I want assurance that my children will inherit my assets. How can I accomplish this goal?
First, it is important that you have a fully funded living trust—centered estate plan. In some states, a spouse’s right to make a claim for a spousal share applies only to assets passing through the probate court. Therefore, in those states, if your assets are held by a living trust, you can provide for your spouse as you deem appropriate without having your plan rewritten by a statutory spousal claim.
Additionally, if you want to provide for your spouse but also want to guarantee that any assets remaining at your spouse’s death will go to your children, you could include a specially designed qualified terminable interest property (QTIP) trust for your spouse as part of your living trust plan. Such a trust provides to the spouse during his or her lifetime all income generated from the assets held in the trust and the right to make nonproductive property productive.
If guaranteeing your children’s inheritance is a central concern, an irrevocable life insurance trust can provide you with the means to pass a definitive amount of funds to your children. If such a trust is properly drafted and maintained, not only will your children receive this benefit but you also receive the benefits of not having the life insurance included in your gross estate and not having to sacrifice any applicable exclusion amount to establish it.

I want to take care of my husband but also guarantee that my children, from my former marriage, are properly taken care of. What strategies can I follow to achieve both goals?
Here are some alternatives you should consider:

  1. To avoid having your children wait until both you and your husband die, consider giving them lifetime advances on their inheritance; or leave them a portion of your estate at the time of your death and the remainder after the death of your husband.
  2. You can leave all or a portion of your estate in a QTIP trust. In this way, your husband gets all the income from the assets and the trust qualifies for the marital deduction; yet it preserves as much of the principal as you elect to pass to your children after your husband’s death.
  3. You and your husband can enter into a post-marriage agreement that clearly sets forth the rights each of you has in the other’s estate.
  4. Then you can each create an estate plan that will carry out your planning objectives and will be legally binding.
  5. You can trust your husband to carry out your estate plan at his death. This alternative is fraught with danger, however, and should be avoided if you want to guarantee that your children ultimately receive a certain portion of your estate.

My children are adults, established in their careers and financially secure. What’s wrong with leaving everything I own to my new spouse and stepchildren, who need it much more than my children do?
There is nothing inherently wrong with disinheriting your adult children. However, in making this choice, consider carefully the emotional and psychological consequences to your children. Even if your children do not need your money, they may feel hurt that you did not leave them an inheritance. If you do disinherit certain children, consider meeting with them and explaining why you have made this particular choice. An alternative way to address this would be to write a letter to them, delivered before or after your death.

My spouse and I each have children from a previous marriage. Are there any special planning strategies we should consider?
When both spouses have children from previous marriages, special care must be taken in the estate planning process. There is no one solution that is right for every situation. Your estate planning team needs to understand your goals and desires for all the children. If the second marriage occurs when the children are adults, the considerations are usually financial. If the children are younger, other issues are involved.
A living trust is a particularly good vehicle for making sure that each spouse’s respective property is passed on to his or her own children. It allows you to tailor instructions to your trustee concerning the needs of family members, rather than turning control over to the court.
It is extremely disturbing to hear about situations in which one spouse received property from the other spouse and then left it to his or her own family to the exclusion of the predeceased spouse’s children.
You can easily resolve this problem by establishing a trust for the benefit of your surviving spouse and including directions specifying that the balance of your trust estate be passed to your children. You can make whatever provisions you desire for your surviving spouse. He or she can be the trustee and have access to income and principal as you direct. However, the ultimate disposition of the trust estate remains subject to your control and direction.

My new bride and I each have two children from previous marriages. Do we have any special estate planning needs?
Planning for the “blended family” is among the most challenging aspects of basic estate planning. Dying with no will or a simple will almost always produces unintended consequences, frequently with disastrous results. While goal and priority setting is an important part of the estate planning process for everyone, it becomes especially important in meeting the objectives of a blended family if a proper balance between competing interests is to be achieved. Many unsuccessful second marriages might have survived, and certainly much heartache could have been avoided, if these issues had been addressed before the marriage.

What are some of the competing interests in a blended family?
Here are some examples of competing interests which can be present in the blended-family environment:

  • Between your children and your new spouse, who is to get what, and when will they get it?
  • After the death of your new spouse, will you divide your assets among your children and your spouse’s children, or will you give them exclusively to your children?
  • Are you leaving your property outright or in trust for the benefit of the children?
  • Are you treating assets that were owned by you and your spouse at the time of your marriage the same as assets that are the product of the marriage?
  • Do you wish to make gifts to your children or expenditures for their education and health during your life even if doing so means that your new spouse will have less after your death?

How do couples in second marriages deal with these issues?
There is no such thing as a typical answer, not even a majority answer. Experience shows that couples vary dramatically in how they strike a comfortable balance between these competing interests. Among the influencing factors are:

  • The relative ages of the two sets of children
  • The respective ages of the spouses
  • The relative financial, educational, health, and other needs of the spouses and their respective children
  • The quality of the relationship between the spouses and their respective relationships with each of the two sets of children


Strategies for Unmarried Couples

What special challenges do unmarried couples have in planning their estates?
The unlimited marital deduction applies only to couples deemed married under state law, making it harder to eliminate estate tax on the death of the first partner of an unmarried couple. One method of paying federal estate tax is to purchase life insurance on each person, using the proceeds to pay the estate tax.

My partner and I are not married, but we regard each other as the equivalent of a spouse. Do we have any special planning needs?
Because the law treats married couples differently from unmarried couples, and because society makes certain assumptions when dealing with a spouse, you and your partner do, indeed, have special planning needs. First, consider carefully what powers and authority you want to give each other during a period of mental incapacity and after death. Then ensure, through a competent attorney, that you each have legally enforceable documents granting those powers and authority. Some states have presumptive statutes that make this difficult because family members are favored over others.
Second, consider writing a letter to those family members who might legally or practically presume that they will be in charge of you and your affairs in the event of mental incapacity and after your death. The letter should explain what you have done and why, and it should request that they not interfere with your wishes.

My life partner and I are concerned about what will happen should one of us become incapacitated or die. Neither of our families is truly accepting of our relationship. What can we do to protect what we have?
The marriage contract imposes certain rights and obligations on a husband and wife. Such obligations include the duty to support each other and provide necessaries; in some states, there is protection from disinheritance, and so on. In the absence of such a marriage contract, the partners must fashion their own agreement.
These agreements are sometimes called living-together agreements or prenuptial agreements. They are enforceable as contracts provided that they are supported by “fair and adequate consideration,” which, in this context, generally means that there is full disclosure between the partners. Such agreements can cover almost anything the couple considers important, such as ownership of particular items of property used in the household; how jointly acquired assets are to be divided in the event of a breakup; and each partner’s obligation, if any, with respect to supporting a disabled or even unemployed partner, and for how long. Each partner should expect to carry disability income insurance and health insurance.
To protect one another in the event of incompetence or death, each of you should consider living trust—based planning, with cross designation of one another in representative capacities. This will enable each of you to retain control over your joint estate and be involved in the decision-making process. Your living trusts can also handle property distribution on death to avoid probate.


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Planning for a Spouse

Am I required by the laws of my state to leave a portion of my assets to my spouse?
The inheritance and succession statutes of most states contain a provision designed to prevent a spouse from being disinherited. Such statutory provisions, often called elective-share statutes, entitle a surviving spouse to a minimum distribution from the estate of a deceased spouse and can be used to override the terms of a trust or will. If you do not take this into consideration when designing an estate plan, the enforcement by your spouse of his or her elective share can significantly disrupt the settlement of your estate.

How do I determine whether I have given my spouse at least as much as the elective-share amount if I have provided for my spouse with lifetime interests in one or more trusts?
The answer to this question is a matter of state law about which you should contact an estate planning attorney in your state. However, assuming your state has an elective-share statute, your state code will generally have “commutation rules” which provide a means of valuing a spouse’s lifetime interests in the marital trust and any other lifetime trust created for the benefit of a spouse.
Once you have calculated that amount, you can compare it to the elective-share amount to determine whether your spouse would be entitled to an elective-share of your estate.

If I wish to leave assets to my spouse, is there a preferred way to do so?
One of the best ways to leave assets to a spouse is through a revocable living trust. Following are some of the advantages of using revocable living trust planning:

  • Probate can be avoided on the deaths of both spouses.
  • A living probate can be avoided if the surviving spouse is unable to manage his or her financial affairs after the first spouse dies.
  • Federal estate tax may be eliminated on the first spouse’s death and either eliminated or substantially reduced on the death of the surviving spouse, depending on the size of the estate.
  • A trustee can be named to serve with the surviving spouse and provide him or her with asset and financial management assistance.
  • By leaving assets in trust, you may provide your spouse with creditor protection if the spouse is sued.
  • The assets left in trust can be protected from a later, unsuccessful second marriage of your spouse. Additionally, your surviving spouse may be able to more comfortably refuse to give away assets or to loan money to other family members or friends by stating that the assets were left in trust and cannot be used for those purposes.

How much property can I leave to my spouse without incurring federal estate taxes?
You can leave an unlimited amount to your spouse without paying any federal estate taxes. Every dollar you leave to your spouse qualifies for the marital deduction, which offsets, dollar for dollar, the assets included in your gross estate. Since your gross estate minus your allowable deductions is your taxable estate—the amount on which taxes are paid—the marital deduction can effectively reduce your taxable estate to zero.
Generally the tax law allows use of the marital deduction to cancel the estate taxes on the first spouse’s death, but there is a catch: Those assets which qualify for the marital deduction in the first spouse’s estate will be taxable in the estate of the surviving spouse, without the benefit of a marital deduction (unless the surviving spouse has remarried).
If you leave all of your property to your spouse, your estate will not pay any estate taxes if your spouse survives you; but upon your spouse’s death, the entire value of your property plus your spouse’s property will be subject to estate taxes.

What about a family trust? What rights must be given to a spouse?
There is no requirement that a spouse be given any rights in a family trust. In fact, a family trust is designed so that it will be subject to estate tax at the maker’s death and will not be included in the surviving spouse’s estate upon his or her death. Remember, this trust’s assets are sheltered from tax by the applicable exclusion amount, so even though the family trust is estate-taxable at the first spouse’s death, there is no estate tax liability.
Typically, a spouse is given rights to the income and principal in a family trust. It is not uncommon for a spouse to have the absolute right to income in the family trust and the right to use the principal under certain circumstances. The family trust can be drafted liberally to allow a great deal of spousal rights, although the surviving spouse cannot have unrestricted access to the principal or the trust will be included in his or her estate. The terms of a family trust are drafted by your attorney after he or she fully understands your financial situation and your planning goals.

As the value of the family trust grows, will any increase over the initial applicable exclusion amount be subject to estate tax at my spouse’s death?
The family trust is designed to be tax-free when the first spouse dies. The value of the family trust is equal to the applicable exclusion amount, meaning that no tax is due. If the family trust is properly drafted and administered, it is not included in the estate of the second spouse to die, regardless of how much it has grown.

How important is the fact that the family trust, no matter how large it grows, will not be subject to estate tax when the surviving spouse dies?
The family trust’s tax-free benefit can be significant. A simple approximation of the value of the family trust in the future can be calculated using the Rule of 72. This rule states that if you divide 72 by the interest rate or rate of growth of an asset, the result is the number of years it takes to double that asset. For example, 72 divided by 7.2 equals 10; that is, it takes 10 years to double the asset at 7.2 percent growth. The recent equities market has produced returns in excess of 14.4 percent, which, when divided into 72, results in 5; it takes 5 years to double an asset at 14.4 percent growth. Minimal inflation of 3.6 percent divided into 72 equals 20, so it takes 20 years to double an asset at the inflation rate. If we apply the growth rate of 7.2 percent to the family trust and assume that your spouse will survive you by 20 years, the value of the family trust will double twice. The entire family trust will pass to your children free of federal estate tax, no matter how large it has grown.

What is the best possible way to protect my estate for my children, provide for my spouse, and defer federal estate tax?
The best approach is to create a qualified terminable interest property (QTIP) trust in your living trust document. A QTIP is a type of marital trust that qualifies for the unlimited marital deduction. After you are deceased, all or part of your assets passes to the QTIP trust. Your spouse is the only beneficiary of the QTIP trust, and the trust continues for his or her lifetime. Upon your spouse’s death, the remaining trust assets pass to your children according to the terms of your trust.

What are the maximum rights my spouse can have in my family trust?
The maximum rights a spouse can be given in a family trust without having the value of the trust included (and thus taxed) in his or her estate are the rights to:

  • Receive all the income
  • Receive the greater of 5 percent or $5000 of the trust’s principal each year
  • Receive any or all of the principal in the trustee’s discretion
  • Appoint the property, through a limited testamentary power, to any recipient other than the spouse’s estate or the creditors of his or her estate

If you were to grant your spouse greater rights than these in the family trust, your spouse would be deemed to control the assets and, at his or her death, the full value of the trust property would be included in his or her estate for tax purposes—the very outcome you sought to avoid by using the family trust.

What are the minimum rights I can give my spouse in my family trust?
If your spouse either consents to give up his or her rights or receives property of yours at your death that suffices to comply with your state’s rules, your family trust does not have to provide for your spouse.

Will there be an income tax on the family trust’s income?
Yes, the income earned on the assets in the family trust will generate an income tax, which must be paid by the trust if the income is retained in the trust. If the income is distributed to the surviving spouse or to the children, they must report and pay income tax on the trust income at their respective tax brackets. The trust receives a deduction for the amounts distributed so that the trust income is taxed only once.

Do the assets in the family trust receive a stepped-up basis upon the death of either spouse?
On the death of the first spouse, the assets in a family trust receive a step-up in basis because they are included in the deceased spouse’s estate. However, upon the death of the surviving spouse, the assets distributed from the family trust do not receive a stepped-up basis. Since assets held in the family trust are not included in the surviving spouse’s estate (they pass to the beneficiaries of the family trust free of estate tax), they do not receive a step-up in basis at the death of the surviving spouse.

Since the assets in the family trust do not receive a stepped-up basis upon the death of the surviving spouse, would we be better off to forgo the use of the family trust altogether?
You would not be better off if, on the death of the second of you to die, there is a federal estate tax due. The federal estate tax rates range from 37 to 55 percent (60 percent on estates between $10,000,000 and $21,040,000). The federal income tax rates on capital gains are considerably less at 20 percent for most assets, and they apply only to the excess of the money received for the asset over its tax basis. Even considering state income tax on capital gains, which can increase capital gain taxes by as much as 8 percent in some states, in a taxable estate you will always be better off passing property by using your applicable exclusion amount than you would be if you retained the property in the survivor’s estate in order to obtain a step-up in basis at the time of the second death.

My spouse and I are having revocable living trusts drafted, and we are discussing the division of our assets between the two trusts. I am concerned about taking assets that were titled to me and transferring them to my spouse’s trust. In the event of a divorce, do I retain the assets that were in my name prior to the transfer to my spouse’s trust?
In most states, during a divorce proceeding, property is divided into either “marital property,” which is subject to “equitable distribution” by the court, or “non-marital property,” which is not subject to equitable distribution. Generally, the manner in which assets are titled does not affect their classification as either marital or non-marital property: the court will categorize the assets under the state’s guidelines and will distribute property without regard to whose name appears on the title. Thus, whose living trust holds title to which assets is of little consequence in a divorce proceeding.

My spouse and I have an estate over $650,000. Rather than doing a trust now, can we wait until one of us dies and set up a trust at that time?
Your question assumes that when you or your spouse dies, the survivor will have the capacity to create a trust; this may not be the case. It also assumes that you and your spouse will not die simultaneously; this, too, may not be the case. Both of these possibilities should be considered in your planning.
In addition, one of the purposes of a living trust is to preserve both spouse’s applicable exclusion amounts (so that both can pass the maximum amount estate tax—free to their heirs). Since your applicable exclusion amount belongs to you, and not to your spouse, you are the only person who can make the arrangements under your estate plan to use it. In other words, your applicable exclusion amount is not an election that your spouse can make after your death. While your spouse can set up a living trust after your death, your spouse will be limited to his or her own applicable exclusion amount. Therefore, you and your spouse should establish and fund your separate revocable living trusts or joint trust while both of you are living.

I want to make sure that the money I made during my life goes to my children and not to someone my husband marries after I’m gone. What can I do to prevent that?
You can have your attorney add a clause to your trust which, in the event of remarriage, shuts off access to the income or principal, or both, of the family trust and to the principal of the marital trust. (Remember, your husband must be able to receive all the income from the marital trust for his life in order to qualify that trust for the marital deduction.) You can also provide that if your husband’s marriage ends for any reason, he can once again benefit from the provisions that were terminated at the time of the remarriage.
When you use this provision, it is important that the trustee of the living trust be someone other than your husband or that there be a trustee serving with your husband. If your husband were the sole trustee, he could deplete the marital and family trusts before the children knew about the remarriage provision. The children would then be at the point of having to sue your husband or possibly lose the funds.

My husband and I do not have a good marriage; we are staying married for the benefit of the children. Although we live in a community property state, I have quite a bit of separate rental real estate property. If something happens to me, I want to make sure the children are provided for. Can I do that?
Yes. You can leave all your separate property in trust, with the income to benefit your children. In order to ensure that your wishes are followed, and because you may not feel comfortable with your husband as the trustee, you may want to name a corporate trustee, such as a bank trust department or an established trust company.


Planning for Non-citizen Spouses

Do I or my spouse qualify for the unlimited marital deduction if my spouse is not a U.S. citizen?
Federal estate tax law requires that a surviving spouse be a U.S. citizen in order to qualify for the unlimited marital deduction. There is a valid reason for this: Congress does not want a surviving non-citizen spouse to leave the United States with property that has never been taxed. The citizen spouse’s estate still benefits from the applicable exclusion amount. The estate of the U.S. citizen decedent will have to pay federal estate taxes on everything over the applicable exclusion amount unless the surviving non-citizen spouse is the beneficiary of a special marital trust called a qualified domestic trust (QDOT).


Planning for Children

Is there a way to plan now for the maximum amount to pass to our children when the second of us dies?
Yes. The surviving spouse’s strategy for investment and distribution of marital and family trust property can be structured to pass the largest amount possible to the next generation. The decision to maximize amounts passing to children is usually made after reviewing the terms of the family trust and after the surviving spouse determines that he or she can live primarily from the income and principal from the marital trust. For example, the surviving spouse may decline to take all or part of the income from the family trust and may decide never to take distributions of principal. The surviving spouse may, instead, spend only out of the marital trust, with the goal of keeping that trust’s property total under the applicable exclusion amount.
This strategy means that the family trust will continue to grow and, upon the surviving spouse’s death, will pass to the children free of estate tax. The only property taxed on the second death will be the value of the surviving spouse’s estate—the marital trust plus any property owned by the surviving spouse outside of the marital trust. The total of that property can frequently be kept below the applicable exclusion amount through the surviving spouse’s spending and making lifetime gifts.


Minor children

Why is planning for minors important?
Virtually all parents want to pass their estates to their children. Unfortunately, whether assets are passed to minor children through beneficiary designations, as a result of joint tenancy, or under the terms of a simple will or bare-bones trust, the assets are often passed without adequate instructions concerning the use of the funds.
Minors cannot own and use assets. Before a minor will be able to use inherited assets, the court must appoint a guardian or conservator to manage the assets for and on behalf of the child under the direction of the court. This process can be expensive and time-consuming.
It is much more sensible to pass the assets under the terms of a revocable living trust. Parents may include instructions in the trust regarding the use of assets for the benefit of their minor children, and they may empower a trustee to handle the assets in accordance with those instructions. Parents can specify the amounts and times of distributions and may provide that the children receive their funds at different times or at different ages, depending upon the personality and character of each child.
Revocable living trust planning affords parents the opportunity to provide for individual children according to each child’s unique needs and in ways that will best fulfill their desires for each child.

My spouse and I want to ensure that if we both die unexpectedly, our minor child will be cared for according to our wishes. How do you suggest we approach an overall plan to accomplish this?
Adequately providing for your children may be the most important estate planning issue you face. You must first decide who will be the nurturing parent or guardian for your minor child. Who would provide the best home, give the most love, and care for your child’s needs? This person may or may not be the best equipped to handle financial and investment decisions. Therefore, your second decision is to select the proper person or entity that can best implement a financial plan and manage the assets you want to provide for your child.
The next step is to establish a plan which incorporates these decisions. Either a will or a revocable living trust allows you to establish a trust for the purpose of holding assets for the benefit of your minor child. The terms of the trust should provide guidance for the trustee and specify when distributions are appropriate and how they are to be made. Individualized instructions can be designed for each child. You can provide broad, general directions or very specific incentive plans which provide guidelines for college education, the purchase of a home or automobile, a wedding, or other significant events. The essential point is that you must take action and establish a plan. It can always be modified and tailored to meet specific needs over time.

My husband and I are expecting our first child. Do we need to wait until after the baby is born to do estate planning?
No, you can establish a plan immediately, as long as you include a provision in your plan stating that it is made in contemplation of the birth or adoption of a child or children. In fact, before the baby’s birth is an ideal time to meet with your advisors to begin considering the changes that the new addition to your family will make for you personally and financially. There are decisions you will want to make about naming guardians for your child. There are decisions about the amount and type of insurance coverage you will need to provide for your child and his or her education expenses.
If you wait until after the birth of the baby, you will probably be too busy dealing with the immediate needs of your lives to find any time for addressing these important issues. Before the sleepless nights and endless diapers bombard you, take time to talk together about your goals and dreams and the way you plan to meet the needs of your little one so that you can prepare an appropriate plan. This type of planning is very positive and can provide a tremendous sense of peace and well-being.

Our children are infants. How can we make sure that we adequately provide for them?
In planning for young children, it is important to assess what their personal nurturing and parenting needs will be, as well as their financial needs, if one or both of you die. Your personal team of professional advisors can offer assistance and counseling through this process.
Most parents have thought about these issues and realize their great importance. Unfortunately, most of them exercise more caution in selecting a baby-sitter for one evening than they do in planning who will care for their children and their money if they die. This is not a deliberate failure or neglect of their children’s needs. Rather, they don’t plan because they believe “it’s not urgent,” or “it’s expensive,” or “it’s a negative thing to think about,” or because they “just can’t decide who to choose.” As difficult as such decisions are to address, they are crucial to the welfare of children. If planning questions go unanswered, a child’s life can be completely devastated.
When children are involved, it is better to have some kind of plan than no plan at all.

What happens if I do not leave a plan for my minor children?
If you do not plan for the needs of your minor children, a court will take charge of your assets in a guardianship. Even if you nominate the guardian, it is the court, rather than the guardian, that has the final say. Not only is the guardianship process expensive, but there is no way to ensure that the court will carry out your values and desires for your children. Also, court jurisdiction and the guardianship ends when your minor children reach majority, which in most states is age 18. At this time, the children are given unconditional control of their property.
In addition, in a guardianship, the funds for each child are maintained in separate accounts. The court does not allocate more money to one child even if that child has greater needs. Thus, if one of your children has health problems or special needs and all of his or her share is used, the court cannot divert part of the funds of another child whose share is more than adequate for his or her needs. All children are treated equally, even if they have unequal needs.

In planning my estate, how do I take into account the 20-year age difference between my children?
Start by asking yourself how you would treat your children if you were still alive when they are to receive their inheritances. If your oldest children have already been provided with a college education, a wedding, or a down payment on a house, would you want to make sure your youngest children have those same benefits? If your estate is measured in millions, there is enough money available for everyone. However, if you have a more modest estate, you should consider the use of a common trust.
A common trust, which can be incorporated into a will or a living trust, states that, on the deaths of both you and your spouse, all your assets will continue to be held in trust for the benefit of all your children until your youngest child reaches a certain age, which you designate, or until your youngest graduates from college. At that point, the common trust can be divided into separate shares for each of your children. Their separate shares can either be distributed then or continue to be held in trust and be distributed later at specified ages.
This technique allows you to make sure that your youngest children receive the same benefits that your older children received, just as you would have done if you were still alive.

When should the common trust terminate?
There are many alternatives as to when the common trust terminates. One of the most common approaches is to have the trust end when the youngest child reaches a certain age, such as 23, or when the youngest child reaches a certain age or completes college, whichever occurs first. At that time, any remaining trust property is divided equally (or otherwise, as you designate) into separate shares for each child. You can instruct the trustee to distribute the property in a lump sum or in some other way, depending on the provisions in your trust.

When will my children be old enough to properly manage their inheritances?
The legal age of adulthood and—unless otherwise planned and provided for by the parents—the time at which a child is entitled to receive his or her inheritance is generally the age of 18, although this age may vary on the basis of circumstance and state law. Since it is often difficult to know how well an 18-year-old will manage money, parents are sometimes concerned about a lump-sum distribution to children. In some cases, this is true even though the children are already adults at the time the estate plan is established.
In a revocable living trust, you can provide a trustee with specific directions regarding how and when distributions should be made to your children. It isn’t uncommon in the situations just mentioned for parents to stretch out an inheritance over a period of years and stagger the distributions at ages 30, 35, and 40, for example. In this way, if the child mishandles the first distribution, he or she has two more chances to learn to manage the money or property responsibly. Some parents simply plan to distribute the income from the trust quarterly or annually during the child’s life to ensure that the child always has access to money, but in small-enough portions that poor decision making won’t wipe out the full inheritance.
Parents who have such concerns need to know that they can achieve their goal of providing support to their children without worrying that the children will accidentally or purposefully undermine that goal.


Special Children

How should the needs of a special child be met?
A family with a special-needs child faces many challenges, but perhaps none is more wrenching than trying to deal with an uncertain future and make an estate plan for that child. Parents want to ensure the financial well-being of their disabled child, and the needs of such a child may continue long after the parents are gone.
For many persons with disabilities, losing eligibility for benefits is not an option. Persons with physical or mental disabilities often rely on public benefits to pay or supplement the cost of attendant care, medical care, wheelchairs, and rehabilitation. Public benefits may also provide for other basics such as food, clothing, and shelter. Historically, families resorted to the very unsatisfactory arrangement of either disinheriting the disabled person or leaving the disabled child’s share to siblings to avoid losing benefits. A much better solution is the special-needs trust.
The future of many essential government benefits for persons with disabilities is uncertain. There is a growing trend for the federal and state governments to provide fewer resources for persons with disabilities. Many people feel that providing for care will increasingly fall upon families, churches, and nonprofit organizations in the future.
A special-needs trust can enable a disabled person to inherit property without jeopardizing eligibility for government benefits, can coordinate the parents’ estate plan so that the child will be provided for if the parents become disabled or die, and can protect the assets from the child’s creditors.
To ensure that their special child will be cared for most effectively, the parents must have a carefully thought-out plan, and the plan must be flexible enough to work despite an uncertain future. A proper estate plan will focus on achieving as much independence as possible for the disabled beneficiary.

How does a special-needs trust protect my disabled son’s eligibility for public benefits and still take care of his day-to-day needs?
A special-needs trust protects eligibility for public benefits by supplementing, rather than replacing, essential government benefits that your son may be receiving or might later be eligible for from various government assistance programs.
The purpose of the special-needs trust is to cover items that government benefits do not pay for: trips to visit family members, reading material, educational tools, and over-the-counter medicines are just a few of the many purchases that can be made on behalf of the beneficiary. Assets in a special-needs trust can also be used to pay for programs of training, education, treatment, and rehabilitation not covered by public benefits. The trust may also provide for certain recreation, entertainment, and consumer-goods expenses that enhance the beneficiary’s self-esteem. A well-planned and well-managed special-needs trust can serve as a safety net to provide for your son throughout his life.

What specifically are “special needs”?
Special needs are any items that are essential for maintaining the comfort and happiness of a disabled person and that are not being provided by any public or private agency. Special needs include medical and dental expenses not covered by Medicaid, annual independent checkups, equipment, training, education, treatment, rehabilitation, eyeglasses, transportation (including vehicle purchase and maintenance), insurance (including payment of premiums on life insurance for the beneficiary), and essential dietary needs. Special needs may also include electronic equipment such as radios, CD players, television sets, and computer equipment; camping, vacations, athletic contests, movies, and travel; money to purchase appropriate gifts for relatives and friends; payments for a companion or attendant; and other items to enhance self-esteem.

Does the Social Security Administration allow special-needs trusts?
Yes. In 1975, the Social Security Administration established rules allowing assets to be held in trust for a recipient of Supplemental Security Income (SSI) as long as the disabled beneficiary (1) cannot control the amount or the frequency of trust distributions and (2) cannot revoke the trust and use the trust assets for his or her personal benefit.

Can the disabled person act as a trustee of a special-needs trust?
No. The whole premise of a special-needs trust is that the disabled beneficiary cannot be considered to have control over the principal or income of the trust. The assets of the trust are for the benefit of the disabled person, but he or she has no power or authority to direct the payment of funds.

Who acts as a trustee of a special-needs trust?
Families fortunate enough to have responsible, nondisabled members can name one (or more) of these family members to serve as trustee for the disabled child. Since the sibling or other relative will likely be very familiar with the needs, wants, and desires of the disabled beneficiary, proper discretionary decisions can be made for the benefit of the beneficiary.
For families that do not have such trustees readily available, the selection of the trustee becomes much more difficult. Special organizations have been formed in some states to serve as trustees for the disabled; they are designed to protect a disabled beneficiary’s funds from creditors while preserving the right to receive governmental assistance such as SSI and Medicaid. Such organizations typically have a master trust and use an individual adoption agreement for purposes of implementing the special-needs trust. Depending upon the desires of the trust maker, the organization can serve as trustee of the special-needs trust, using its sole discretion for the benefit of the disabled family member, or it can invest and preserve the assets while working in conjunction with the recommendations of a contact person designated in the adoption agreement. The contact person can be a relative or friend selected by the trust maker for making discretionary decisions. Since the organization is able to pool several individual special-needs trusts, management fees are much less than would normally be charged for a private, individual trust, making smaller trusts financially viable.
Once the individual adoption agreement has been properly established, the trust maker may fund the trust currently with gifts or after the trust maker’s death with life insurance, individual retirement ac-counts, retirement plans, or other devices utilizing the beneficiary designation.

Who can establish a special-needs trust?
Parents or other family members of a disabled child can establish a special-needs trust as part of their general estate plan. A special-needs trust can be part of a parent’s living trust, or it can be a separate, stand-alone trust. A stand-alone special-needs trust solely for the disabled child has the advantage of being available to be the recipient of gifts from other concerned family members such as grandparents and friends.

Aren’t all special-needs trusts the same?
No. A “boilerplate” special-needs trust, focusing solely on preservation of public benefits, achieves limited goals and objectives and can condemn a disabled person to a lifetime of dependence. A proper special-needs trust should focus first on the specific needs of the disabled beneficiary, needs of the family, and preservation of wealth and lastly on preservation of public benefits. Many of the public programs allow the beneficiary to own no more than $2000 in cash including SSI and Medicaid.
In some cases, a well-planned special-needs trust can enable the beneficiary to eventually become independent and no longer require public benefits. In many other cases, it allows the beneficiary to maintain a dignified quality of life while he or she remains on benefits indefinitely. If public benefits help achieve independence, the eligibility for benefits should be maintained. Benefit programs such as SSI and Medicaid allow very limited income and resources to be controlled by the disabled beneficiary.

What provisions should be considered when creating a special-needs trust?
The primary goal in creating a special-needs trust is to benefit the special beneficiary in a way that does not disrupt any government benefits that he or she may be receiving. In order to effectively accomplish this goal, the special-needs trust should address the following issues:

If a beneficiary receives support from any source, including a trust, the amount of governmental assistance can be reduced on a dollar-for-dollar basis. Support includes such things as food, clothing, and shelter for the beneficiary. The trustee of the special-needs trust should be directed to provide nonsupport distributions.
In addition, the negative effect of providing for support items can be minimized by taking advantage of the presumed maximum value rule. Under this rule, if non-cash distributions for support items are made, they are presumed to have a monthly maximum fair market value of $177, so the SSI benefits will not be reduced more than $177 per month. Therefore, with proper drafting, making less frequent in-kind distributions having a value well in excess of $177 each will yield a much greater benefit to the beneficiary than making smaller distributions every month. Typically, an annual distribution large enough to supplement the beneficiary’s needs over the entire course of the year would provide the best benefit. For the trustee to be permitted to make distributions for support purposes, the trust should specify that the trustee has the sole discretion to determine that the government benefits available to the beneficiary are inadequate for meeting his or her basic subsistence needs.

Typically, cash distributions are to be discouraged or prohibited unless special situations arise that would prevent the beneficiary from receiving the necessary benefits of the trust. For example, if the beneficiary has a terminal condition in which the life expectancy is not ascertainable (e.g., an HIV-positive diagnosis) or if there is a concern that future reductions in government support would reduce the beneficiary below subsistence-level existence, cash distributions may be desirable. If cash is to be distributed, the specific situations under which the distributions can be made should be clearly defined to minimize the amount of lost public benefits.

The trust should specify that it is the trust maker’s intent to have the government benefit program provide for the supportive care and that the purpose of the trust is to provide for the nonsupport requirements of the beneficiary. The trust should further specify that it is the intent of the maker not to make the beneficiary ineligible for any existing or future benefits.

The trustee should have sole discretion over distributions from the trust, and the beneficiary should not be authorized in any respect to infringe upon the trustee’s discretion.

If the trust maker has specific purposes in creating the special-needs trust, they can be identified. For example, the trust can direct that payments for school tuition and education may be made, and such payments will not affect benefits as long as the expenditures are not for room and board, which are considered support. Similarly, the trust can state that assets may be utilized to create burial trusts or long-term service contracts or to provide for other types of nonsupport expenses specified by the trust maker, such as the costs of attending family gatherings.

Although a home is considered to be a “non-countable” asset for purposes of obtaining SSI or medical assistance, the payment of real estate taxes or a mortgage could be deemed to be a contribution toward housing and result in a loss of benefits. However, by making use of the rule that in-kind distributions have a presumed maximum value of $177 per month, mortgage obligations or real estate taxes for an entire year could be paid in a single month to minimize the impact of the loss of benefits. Non-interest-bearing loans are not counted as either income or assets as long as the funds are expended in the month received, and distributions could be made to correspond with the due date of real estate taxes or home repairs.
Through a properly prepared special-needs trust, a trust maker can significantly increase the quality of the disabled loved one’s life and minimize or eliminate any loss of government benefits to which the beneficiary is entitled.

What assets can be held in a special-needs trust?
Any kind of asset may be held by the trust, including cash, personal property, or real property. Often, no assets are put into the special-needs trust until the death of the trust maker, in which case the trust is an “empty shell” waiting for a future event. It is prudent, but not required, to place some assets into the trust and begin using the trust immediately.

Can a special-needs trust be the recipient of insurance proceeds?
Yes, funding a trust with life insurance is often ideal if the primary objective of the trust is to provide for a child upon the death of his or her parents. It is often desirable for concerned family members to make the special-needs trust the recipient of life insurance policies.
The special-needs trust could be an irrevocable life insurance trust to hold the insurance policy and ensure that the insurance proceeds are not taxed to the trust maker’s estate.

Can additions be made to a special-needs trust?
Yes. Additional property may be added to the trust at any time by the trust maker or any other person except the disabled beneficiary. Additions may be made as gifts during life or as bequests through wills or living trusts, life insurance policies, employee benefit plans, or retirement plans.

Does every person with a disability need a special-needs trust?
Absolutely not. This sort of planning is appropriate if (1) the beneficiary lacks the capacity to manage his or her financial affairs or (2) maintaining eligibility for public benefits is essential or will enhance the person’s standard of living. There are many persons with disabilities who do not receive benefits and have no impediment preventing them from managing their financial affairs.

One of our children is not disabled but does have a number of psychological and social problems. How can we make sure that this child will be properly cared for after my spouse and I are gone?
One of the greatest strengths living trusts have is their flexibility: the trust maker can include customized language that describes in detail his or her wishes. Certain legal language can be inserted that enables the trustee to personally care for a child.
In your case, including information particularly unique to your child would be most helpful to the successor trustee, such as the child’s likes, dislikes, habits, and routines, his or her personal strengths and weaknesses, legal entities or agencies that interact in supportive roles to benefit the child, previous problems and how they were resolved, ways in which you wish the trustee to spend “discretionary” money on behalf of your child, and other related information. You can also make arrangements with a particular provider of benefits and record them for the trustee so that he or she can provide the same level of care, concern, and love for your child as you would if you were still living.


Adult Children

Do I have to distribute my assets equally to my children?
Parents often struggle with the decision of whether or not to distribute their assets equally to their children. Despite what some people may believe, children are not all equal and usually they should not be treated as equals. Facts and circumstances surrounding a particular child will determine how you will distribute assets, if any, to that child or to his or her beneficiaries. This can be particularly troublesome if there is a family business and not all family members are active in the business.
You should distribute your assets to whom you want, when you want, and in the amounts that are appropriate considering all surrounding issues. You might consider what may be equitable for your beneficiaries rather than constraining yourself by arbitrary notions of equality: equitable may end up being equal, but equal is not always equitable.
Your decision on how to distribute your children’s shares to them upon your death should take into consideration such factors as each child’s age, health, ability to make financial decisions, family circumstances, and situation with creditors. Basically, you should look at what each child truly needs or may need and plan in the most loving and realistic way you can for that child.

Should I give my adult children their inheritance all at once or over a period of time?
Although your natural inclination may be to give your adult children their inheritances outright, that may not be the best or wisest course of action for them. A well-thought-out series of subtrusts in your living trust can provide for the specific needs of your children. Leaving property to your children in trust can often protect them from their own inexperience with money, from their inability to make wise decisions, from their creditors, or from a divorcing spouse. Adult children who do not have experience with large sums of money are often overwhelmed when they receive an inheritance. They may make some poor choices and come to realize, too late, that their inheritance has gone to poor investments and frivolous spending.
Perhaps an adult child is easily influenced by friends and family and can’t say “no” when asked for a handout. Perhaps he or she has a drug or alcohol problem and a large “windfall” will only increase his or her ability to satisfy the dependency. Or perhaps, at the time of your death, one of your children may have the misfortune of being in the middle of a nasty divorce or a lawsuit.
By using trusts, you can plan for all these situations very specifically if they currently exist, or you can plan in anticipation of the possibility of those problems and provide some protection for your children if it is later needed.

How do most people leave instructions for their adult children?
They create a sub-trust for each child’s share within their living trust document.

Can we leave our property equally to our children but structure the terms and conditions of each of their trusts differently?
This is a common and effective planning strategy. You can provide detailed instructions in each child’s trust which specifically meet your hopes, concerns, dreams, values, and aspirations for that child and which specifically address your assessment of that child’s strengths and weaknesses.

How can I prevent squabbles among my children?
By doing good planning! Family squabbles are more likely to occur when people do not leave instructions which make their intentions clear. If your instructions are complete and give a clear indication of your intentions, there will be less likelihood that your children will argue over different interpretations of the instructions.
There is nothing wrong with adding language to your estate plan which describes your intentions. The problem with many “cookie-cutter” documents is that no specialized language is added. A good estate planning professional will be able to help you identify your hopes, concerns, and desires and properly incorporate them into your planning documents.

Won’t we be unreasonably dominating our children from the grave if we leave our property in trust for them?
You have hopes, dreams, and aspirations for your children while you are living; why should they change when you are dead?
Distributions from the trust should be based upon each child’s individual ability to manage and conserve money and the dynamics of each child’s marriage situation. However, many parents do not like to restrict one child’s access to assets while giving the other children full access. Frequently, the practical solution they arrive at is to determine the strategy for the least responsible child and then apply it uniformly to all their children.

What options do I have regarding the distribution of assets?
Once you’ve decided on the terms for dividing the inheritance into each child’s own share or trust, you have the following additional options to consider:

  • Whether or not the trust income will be periodically distributed, and if so, when
  • When the trust principal (trust assets) will be distributed
  • The degree of permitted discretionary distributions by the trustee

What income taxes do trusts pay?
When a trust distributes net income, the trust receives an income tax deduction. This means that the trust or estate does not pay tax on net income it distributes; the tax is paid by the beneficiary recipient.

Should a trustee accumulate income or distribute it?
If the income accumulated by the trust is insignificant, it may be beneficial to let the net income accrue and be distributed along with the principal of the trust. If there is significant net income generated by the trust, it is generally beneficial to pay the net income to the child since the child is most likely in a lower tax bracket and thus will be taxed on the income at a lower rate than the trust would be.
Distribution of net income helps the child learn how to manage money and makes the child less dependent on receiving principal distributions. Once you make the decision to pay income to the children, the next decision is how often it should be paid.

How frequently should income distributions be made?
While once-a-year payments might encourage the child to learn to budget, such an approach may be somewhat extreme. Ideally, monthly income is preferable; however, most stock dividends are paid quarterly. It is administratively difficult to receive income, determine the prorated expenses, and process the checks every month. Arguably there might be a breach of fiduciary duty if the trustee was slow in making monthly distributions. It might be more feasible to provide for distributions at least quarterly; this would still give the child an opportunity to learn budgeting.

Should we give our trustee the authority to make discretionary distributions of trust principal?
The pressure to make periodic distributions of principal is somewhat alleviated if you give the trustee the authority to make interim distributions for legitimate reasons.
Frequently, the trustee is given the authority to make distributions for the “health, education, maintenance, and support” of the child. These are known as the ascertainable standards in the Internal Revenue Code. Collectively they provide for a beneficiary’s all-encompassing needs. Thus, the trustee, in his or her discretion, could pay for a child’s major medical needs. Similarly, the trust could provide the trustee with a standard for discretionary distributions. For example, some parents prefer a conservative standard which requires the existence of a genuine need, while others prefer a more liberal standard which allows financial assistance for such matters as the purchase of a residence, a business, or any other extraordinary opportunity.

Do discretionary distribution plans provide built-in creditor protection?
Yes. Because the distributions are in the trustee’s sole discretion, payments do not have to be made when a beneficiary’s creditors are making demands or lurking nearby. The trustee, who should be an independent trustee rather than a beneficiary or family member, can retain the funds in the safety and protection of the trust.

Are there many strategies for multiple distributions?
There are as many strategies as there are inventive parents and grandparents. In general, however, if a child has not reached middle-age maturity or does not have a track record to demonstrate financial responsibility, it might be appropriate to use a minimum two-stage distribution, 5 years apart, with quarterly payments of net income throughout the period of the trust. In this way, the child can learn from mistakes he or she makes from the first distribution and hopefully be more responsible with subsequent distributions of principal.
For the same reason, staggered distributions are also appropriate if the trust assets are significant. Distributions typically begin when the child reaches a certain age (usually at age 30 or 35) or on the death of the surviving parent, and they continue at specified intervals over a predetermined period of years. For example:
Distribute 25 percent of our daughter’s share to her on the death of the survivor of us, and distribute the balance in three additional distributions at 5-year intervals from that date.

If I set up a revocable living trust and I want my children to be beneficiaries of the trust, can I provide that distributions to my children be made directly to revocable living trusts set up by them?
Yes, you can. Doing so makes a great deal of sense because it allows their inheritance to be governed by their own set of instructions. The inheritance will then be protected from a living probate and a death probate.

Is there a general approach that most people use in planning for responsible adult children?
Usually the children are named as their own trustees in a co-trusteeship with others whom they can name and replace – subject to standards (this “creditor-proofs” the trust estate). In this way, adult children can receive what they want from their trusts whenever they want it.

Can we provide for our children retirement years through trust planning?
Parents can sometimes reasonably predict that their children will frivolously waste the distributions. A strategy you can use in this situation is to provide the net income to the children and give authority to the trustee to make discretionary distributions of principal with the final distribution at age 55 or later. In other words, the assets are used to ensure the children’s retirement.

I’m afraid my children will not save properly for retirement. I’d like them to receive part of my estate immediately upon my death, but is there any way I can make sure that most of what I leave them is retained for their retirement?
Yes. You can design the distribution pattern from your trust to help your children in their retirement years. You could give your trustee instructions to hold some or all of the principal of the trust until your children reach retirement age. This does not need to be an all-or-nothing provision. If you wish the children to have access to a portion of your estate immediately upon your death, you may provide that instruction, with the remainder to be held in trust until the children’s retirement age.

How can I protect my son from himself? He is terrible with money, and be afraid he will squander his inheritance.
Because such an adult child is likely to squander or lose money immediately, an outright distribution is out of the question. However, most parents love their children regardless of the shortcomings they may have, and most parents want to help their children with their resources rather than simply disinherit them.
A lifetime trust can provide that your son will be taken care of from his share of your estate for his lifetime under definite instructions that take into account the difficulties he is having during life. – An incentive trust can provide that your son must alter his behavior in order to receive distributions from the trust.

My son has a drug addiction. Can I put a provision in my trust that prevents him from accessing any of the trust assets unless he passes a drug test?
Absolutely. Your attorney can draft your trust to your specific requests. A typical provision of this nature will allow money to be spent on your son’s behalf for rehabilitation but will not allow the trustee to disburse funds unless your son passes a drug test. You may also want to include periodic distributions based on the results from follow-up drug testing. If you want to provide for your son upon your death but are concerned about the possibility of drug or alcohol abuse, you need only to leave appropriate instructions in your trust document. For example:
Under normal circumstances I would like my son to have all of the income and whatever principal is necessary to provide him with his every need, as long as it is reasonable.
However, if my trustee knows or has reason to suspect that my son is dependent upon or has a problem with drugs and/or alcohol, then my trustee, in my trustee’s sole and absolute discretion, may withhold both income and principal distributions until my son is evaluated for drug and alcohol abuse.
If it is determined that my son has a drug or alcohol abuse problem, my trustee shall offer my child the opportunity to enter a treatment program to be paid for from the assets of my son’s trust.
If my son refuses to seek treatment which in the reasonable discretion of my trustee is warranted and proper, my trustee may withhold payments of both income and principal from my son’s trust until he proves to the satisfaction of my trustee that he no longer has a substance abuse problem.

Can I provide for the costs of food, shelter, and medical care without giving the funds directly to my addicted daughter?
In order to ensure that the payments are used for the benefit of your daughter, as opposed to her using the trust disbursements to further her habit, the trustee could make all mortgage or rental payments directly to the mortgage company or landlord. Similar arrangements could be made for medical expenses, food, clothing, and expenditures for other basic necessities.

How can I leave my assets to my children without squelching their incentive to be responsible and to grow and develop?
To promote gratitude and philanthropy, you could leave a portion of your estate to a charitable foundation and name your children as trustees. To give them an incentive to provide for themselves and their families, you could match their earnings, dollar for dollar, or double their annual incomes when they hit some income milestone such as $100,000.

I want my children to lead productive, hardworking lives which contribute to our society. How can I build incentives into their inheritance without being overly controlling or just giving them too much money?
There are a number of approaches you might consider:

  • Opportunity finding: You may instruct your trustee to create or buy an “opportunity” for a child. The benefits to the child will occur primarily if the child successfully develops the opportunity.
  • Testamentary charitable foundation: You may want to create a trust or foundation in your living trust that springs to life after your death and directs that, under certain guidelines, your children assist in the philanthropic endeavor of giving away the income of the trust. This strategy not only encourages children to look beyond themselves but also enhances their personal and social status in their communities.
  • Staggered distributions: You may simply want to stagger distributions to the children at certain more mature ages or after certain periods of time. A second- or third-chance formula allows your children to have resources left if they fail to handle their first distributions wisely.
  • Trustee discretion with criteria: Your trustee can hold a child’s share for life with the discretion to make certain distributions. You can set any number of specific criteria for the exercise of that discretion, such as liberal or conservative standards for distributions, and you can suggest or direct under what circumstances that child’s trust principal should be distributed.
  • Milestone incentives: You may condition distributions from your trust on your children’s reaching certain milestones which can either be clearly defined or be left to the discretion of your trustee.

The opportunities for creating incentives for your children are almost endless; however, you must also be sensitive to the risks of over-controlling. With the assistance of an experienced, knowledgeable estate planning team, you can create the structures which encourage the desired outcome without the negative responses.

How can I make sure that only my children receive their inheritance?
In your living trust, you can create at your death a trust share for each child so that a child’s spouse, or ex-spouse, or even a child’s creditors cannot get to the trust-share property.
The trust will contain instructions that all trust shares are created only for the children and their beneficiaries. There will also be spend-thrift provisions stating that distributions are to be used only for the child’s health, support, maintenance, and education expenditures and that on the beneficiary’s death, the proceeds of his or her trust share will pass directly to grandchildren and others. Spendthrift provisions protect the beneficiaries from the claims of their creditors and from their own attempts at improper actions with regard to the trust’s income or principal.

We have been very fortunate in that all our children’s marriages look sound today but so much can happen, and divorce is so common. Can we protect our legacy from going to a child’s spouse in a divorce?
If you choose to leave your property in trust for your children rather than making an outright distribution, you will provide some divorce protection in most states. Unlike an outright distribution, property held in trust for a beneficiary is not owned by the beneficiary; it is owned by the trust. Because it is not owned by the beneficiary, the trust property is generally not subject to the claims of creditors or claims resulting from a divorce proceeding. However, there are exceptions to this general rule. Most states have given judges of family courts broad power to attach property if justice requires. For example, it may be extremely unjust to deny a non-beneficiary spouse a portion of trust property if doing so would impoverish that spouse. In some states, the family court might exercise its equity powers to invade the trust.
Having an independent trustee distribute the trust property in accordance with an ascertainable standard or specific guidelines will provide more protection against a beneficiary’s divorce than would be the case if the beneficiary is the sole trustee with broad powers to demand principal.

I have eight children, four of whom help me operate my dairy farm. The assets of the dairy farm account for 90 percent of my $2 million estate. I want the four who operate the farm to receive it, but I also want the other four to receive an equal share of my estate. Is there a way to accomplish this?
This is a very common agribusiness situation. Life insurance made payable directly to the non-involved children or payable to a trust for their benefit can go a long way toward equalizing the children’s shares.
A trust agreement can be structured so that it pays the proceeds to these children free of federal estate tax.

How can our family’s vacation retreat be made available to all our children without unfairly burdening any one of them with the cost of upkeep and taxes?
Family retreats (cottages, camps, cabins, etc.) are often the most cherished of estate assets; their use by family members can have a positive effect on family dynamics after parents are gone. However, leaving a share of the cottage, along with its proportion of the upkeep and taxes, to each child may place a burden on some of the sibling owners and may make it difficult for them to equitably divide the use of the retreat.
Creating a family-retreat sub-trust in your living trust can afford a workable alternative to dividing the interest among your children. In the sub-trust, you can name all the children as trustees and create a fund for maintaining the property regardless of its use.

If someone named in my trust agreement dies before me, how does this affect my revocable living trust?
The death of a named beneficiary generally has no legal effect upon the validity of the revocable living trust. If a beneficiary dies before the trust maker, any trust provisions pertaining to that person will generally lapse and the distribution that would have been made to that person will be distributed as otherwise designated in the trust instrument. If appropriate care has been taken in drafting the trust, it will designate who is to receive a specific bequest of property if a particular named beneficiary dies before the trust maker. In addition, as long as the maker is still alive, he or she is free to amend the trust instrument to account for the death of a beneficiary.

If my trust gives a distribution to a beneficiary and gives that person the power to appoint the distribution by a trust, does the property in the distribution go through probate?
No, the property goes directly from one trust to another if the power of appointment is exercised.

If my trust gives a distribution to a beneficiary and gives that person the power to appoint the distribution by a will, does the property in that distribution go through probate?
Yes, the property will go through probate on the death of your beneficiary if the power of appointment is, in fact, exercised in his or her will.


Planning for Grandchildren

We would like to leave our assets to our children to provide for the education of their children (our grandchildren) at least through graduate school. But we are a little afraid that our children will not use the inheritance for that purpose. Is there a way to ensure that our wishes are carried out?
Yes. You can leave your assets in trust, with the income and principal to be used as needed for the education of your grandchildren. You can also provide that after the last grandchild has been educated, the remaining principal is to be given to your grandchildren. If you were to pass the excess to your children, there could be generation-skipping transfer tax consequences.

One of my sons is not married, and he’ll probably never get married. Can I prepare my estate so that anything I leave him will go to my grandchildren after he dies?
Absolutely. The ability to accomplish this is one of the great benefits of leaving property to your children in trust. By leaving property to your son in trust, rather than through an outright distribution, you can specify that he has use of the property during his lifetime and that, when he dies, it passes according to your instructions to your descendants.


Planning for Other Family Members

How can I provide for my surviving widowed mother?
You can establish a separate trust with your mother as the primary income beneficiary. The trust’s terms could allow the trustee to use the principal, if necessary, for the health, maintenance, and welfare of your mother during her lifetime. Any assets remaining after the death of your mother could be distributed to your other surviving family members.
It is not wise to combine trust assets for your parent with trust assets for your surviving spouse and children. The trustee may be unreasonably criticized for exercising discretion in providing too much income or principal for any particular family beneficiary. Your trust should have explicit instructions as to how the income and principal of the separate trust are to be used.


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