What Do You Need in Your Estate Planning Toolkit?
By Robert J. Saalfeld
SAALFELD GRIGGS PC
Many people say they are finally going to get their estate plans in order. They want to avoid a mess at death, save death taxes and have their property go to the right people, but they are not sure what estate planning tools they need to have a good plan. Here are some suggestions.
A Revocable Living Trust avoids having to go through a court probate. The person who sets up the trust, called a “Grantor” or “Trustmaker,” can maintain control as Trustee. The Living Trust is amendable during the Grantor’s lifetime. The Living Trust also acts like a Will and distributes the Grantor’s property at death to the beneficiaries the Grantor names. The Living Trust allows the childrens’ shares to be managed in trust for their benefit until they reach a later age.
The Living Trust names a successor trustee to the Grantor to manage the Grantor’s financial affairs if the Grantor becomes incapacitated or dies. The Living Trust can also refer to a memorandum where you indicate who should receive items of tangible personal property. The Living Trust uses your social security number for income tax purposes and does not require a tax identification number or separate tax return while you are living. A husband and wife can use one joint trust if they are comfortable with owning everything together. Otherwise, a separate Living Trust for each spouse can be used. A Living Trust is also private in that you do not have to list your assets and their values in court filings like you would in a probate.
It is important that assets are titled in the name of the Living Trust, as assets that are left out have to go through the court probate. Certain assets are left in your individual name and not titled in the Living Trust since they avoid probate through a beneficiary designation, such as life insurance, retirement accounts and annuities. These beneficiary designations need to be coordinated with the estate plan.
A Power of Attorney is another helpful document, as you can name an agent to handle items that are not in the Living Trust, such as signing income tax returns.
A “Pourover” Will is used to pour over to the Living Trust items that were inadvertently left out of the Living Trust. These items go through the court probate, but they will be distributed in accordance with the terms of the Living Trust. The Will is also the place you name guardians for minor children.
A health care Advance Directive is used to appoint an agent to make health care decisions. An Advance Directive avoids a court guardianship proceeding. An Authorization for Release of Medical Information to certain individuals is also useful in light of the medical privacy laws restricting access to medical information unless there is a signed authorization.
Death taxes can be saved in a variety of ways. For married couples, the Living Trust can have a “By-Pass” type trust that comes into play at the death of the first spouse. The property of the first spouse to die, up to the death tax exclusion, is transferred to the By-Pass Trust at the first death. The Federal death tax exclusion is currently two million dollars and the State of Oregon death tax exclusion is one million dollars.
The By-Pass Trust can be managed by the surviving spouse and the assets of the Trust are available to the surviving spouse for health, education, maintenance and support. Since the surviving spouse only has a life interest in the By-Pass Trust, the By-Pass Trust is not includible in the surviving spouse’s estate for death tax purposes. The children thus benefit from the death tax exclusions of both spouses. In other words, with a By-Pass Trust, up to four million dollars, instead of only two million dollars, can be transferred to the children free of Federal death tax, and up to two million dollars, instead of only one million dollars, can be transferred free of the State of Oregon death tax. Since the Federal death tax rate is 45%, and the State of Oregon rate is approximately 10%, substantial savings can be achieved by a plan that doubles your death tax exclusion.
Property held jointly with a survivorship feature (such as tenants by the entirety) does not pass through the Will or Living Trust. It thus cannot go to fund a By-Pass type trust to save death taxes. Although joint property can avoid probate at the death of the first spouse, it will be subject to probate at the survivor’s death or if both spouses die at the same time. It is thus often best to place this property in the Living Trust so it can be used to fund a By-Pass Trust to save death taxes and avoid probate.
Making lifetime gifts is another method to save death taxes. Each person can give up to $12,000 per person, per year. This is called the “Annual Exclusion.” Gifts made directly to educational institutions for tuition, or directly to health care providers, do not count against the $12,000 exclusion. In addition to the Annual Exclusion, one can also give up to their one million dollar “Lifetime Exclusion.” The amount of Lifetime Exclusion used is subtracted from the exclusion at death, so the benefit of using the Lifetime Exclusion is the death tax savings on the appreciation after the gift. When a gift is made, the recipient takes the donor’s income tax cost basis, so it is best to give higher basis assets so the recipient does not trigger a big income tax on resale. With a few exceptions, like IRA’s, inherited assets receive a step up in basis to the date of death value, which eliminates or lessens the income tax when the beneficiaries later sell the property.
Life insurance is not subject to income tax, but it does count as part of the estate for death tax purposes if the decedent owned the policy. One method to eliminate death tax on life insurance is to have the insurance policy owned by an Irrevocable Life Insurance Trust. Existing policies transferred to Life Insurance Trusts are kept out of the estate only if the insurance is transferred more than three years prior to the insured’s death. Transfers to a Life Insurance Trust can qualify for the $12,000 annual gift tax exclusion if the Trustee provides notice to the beneficiaries that they have a period of time, such as 30 days, to withdraw the contribution to the trust. This technique (called a “Crummey Notice” after a Mr. Crummey who first used this method) makes the contribution a present interest to qualify it for the Annual Exclusion.
There are many other advanced techniques to reduce death tax that can be used depending on the situation. These include gifting minority interests in entities that can reduce the value for gift purposes, Generation Skipping Trusts, Qualified Personal Residence Trusts, and Grantor Retained Annuity Trusts. Many people utilize a Family Charitable Fund at a public or private foundation as part of their plan, or the family can advise or direct the fund upon distributions to charities.
Once the basic estate planning items are complete, it is very helpful if they are organized for the surviving spouse and/or back up Trustee. This can be done by assembling the documents in a notebook with tabs. A memorandum of instruction to the spouse and/or Trustee is also useful to provide key information such as advisors to call, where to locate information on assets, and suggestions on what to do with each asset, such as business assets, land, investments, retirement accounts, etc.
If you own or co-own a business, it is important to have a business succession plan in place that is understood and communicated to the family. If your business interest is to be purchased by the other owners, the events triggering the purchase (e.g., disability, death, retirement) need to be spelled out in a Buy-Sell Agreement.
Finally, a plan should be updated every few years if assets, beneficiaries or fiduciaries change to keep the plan current.
By using the proper estate planning tools, organizing the documents and information, and updating your plan, you can avoid leaving a costly mess for your family.
If you have questions about the issues discussed in this article, please contact a member of the firm’s Estate Planning Group.