Most people know about wills and their basic purpose – to ensure that one’s hard-earned assets go to the right beneficiaries when an individual passes away. However, wills can be used for a lot more than simply dictating who gets a person’s assets. Here is a list of some of the very valuable things a will can do:
While wills can serve as powerful estate planning tools, they are only effective if they are properly drafted to suit the needs of each individual. An estate planning attorney can review all your options with you and establish a will in a manner that ensures your wishes will be honored.
Many people have preconceived notions about trusts and believe that they are only for multi-millionaires who wish to leave large trust funds to their children. However, this is far from the truth; trusts can be invaluable tools in the estate plans of millions of individuals.
Trusts are simply an arrangement where one party holds property on behalf of another party. In an estate planning context, trusts are created by the person doing the estate planning (the settlor), who authorizes another person (the trustee) to manage the assets for the benefit of a third party (the beneficiaries). There are many reasons for establishing trusts including tax minimization or providing for the needs of underage beneficiaries.
Some types of trusts that may be useful in estate planning are:
As you can see, there are many different types of trusts, each of which can be customized to serve a valuable purpose in accomplishing the wishes of those making gifts or planning an estate. An experienced estate planning attorney can help you assess your finances and goals to determine the best vehicles to preserve your wealth and your legacy.
Without careful planning, much of your life’s legacy could be lost to estate taxes. While a simple will can provide for the transfer your estate to your loved ones, it does not have special provisions for advanced estate tax planning.
Federal estate tax laws were updated in 2017 as part of the Tax Cut and Jobs Act of 2017. As a result, the current exemption amount is about $12 million per person and $24 million for married couples. This means a single individual can give away and leave at death a total of $12 million (or $24 million for a married couple) without paying any federal estate or gift tax. The federal estate tax exemption, also referred to as applicable exclusion amount is adjusted annually for inflation. The Tax Cut Jobs Act will sunset at the end of 2025, and the exemption amount will be reduced to $6 million per person (or 412 million for a married couple).
The taxable value of the estate is calculated by adding up all the assets owned by the individual and subtracting from that total any of his or her liabilities. Additional deductions can be taken for qualified charitable deductions as well as administrative and legal costs involved in settling the deceased’s estate.
The tax rate for estates exceeding the exemption amount is 40%. The rate is applied to the taxable estate value that is in excess of the exemption amount.
In addition to the individual exemption, married couples enjoy an unlimited deduction for transfers to one another. While this is great news for many couples who choose to leave their estate to each other, without proper planning, it can result in a forfeiture of some of the individual estate tax exemptions after the passing of the second spouse.
For example, this can occur when a husband leaves $3 million of his individually-owned assets to his surviving wife who already has $5 million herself, bringing her total net worth to $8M. The bequest to his wife is not subject to estate taxes because it qualifies for the unlimited marital deduction. After some time, the wife also passes away, leaving everything to the children. Assuming she passes after 2025, her estate can take advantage of her individual exemption of $6 million, but the rest her estate could be subject to estate taxes because her husband’s individual exemption was unutilized.
To address this issue, the current estate tax law allows for “portability” of individual exemptions between spouses. Stated another way, estate tax portability enables the surviving spouse to utilize the unused portion of the first-to-die spouse’s estate tax exemption. Portability is not automatic and in order to take advantage of it, an estate tax return must be filed with the IRS within 9 months of the passing of the first spouse, even if there are no taxes due at the time.
An alternative to relying on portability is to utilize a special planning tool referred to as a credit shelter trust (also referred to as a bypass or A-B trust). If properly established, such trusts work much in the same way as portability, but do not require filing of an estate tax return after the passing of the first spouse.
A number of states impose a separate estate or inheritance taxes. While the rates are typically much lower than the federal rate of 40%, the exemption amounts are smaller as well.
Individuals and families with significant net worth might still have taxable estates even if they take full advantage of their respective exemptions. For these individuals, there are a variety of advanced planning techniques that can be crafted to help reduce the estate tax burden, such as strategic gifting plans, life insurance trusts, personal residence trusts, freeze partnerships, grantor retained annuity trusts and generation skipping transfer trusts.
Tax planning strategies are inherently complex but an experienced estate planning attorney with knowledge of estate and gift tax laws can help you establish a comprehensive plan that will allow you pass on as much of your hard-earned assets as possible to your loved ones and beneficiaries.
A properly drafted will should clearly identify all beneficiaries and leave no ambiguity surrounding the intentions of the Testator. Unfortunately, estate planning documents, whether wills or trusts, do not always clearly reflect the intentions of the testator. Even if the language of the documents is clear, parties may have other reasons to initiate a lawsuit or object to a will.
When someone with standing objects to a will or a trust, the estate might have to be litigated. This is sometimes referred to as a “will contest.” These disputes can be complex and should be navigated by attorneys with expertise in such matters, including an intimate knowledge of probate court rules and procedures.
Typically, if a will is involved, a probate court will determine whether or not it is valid and should be executed. If the will is found to be valid, the court will oversee the allocation of assets and will ensure that the named executor carries out the wishes of the decedent in a lawful and timely manner. The court also oversees the distribution of assets if the testator, or deceased person, died intestate, without a valid will.
A protesting party may only contest a will if he or she falls within one of two categories. First, those mentioned in the will, known as the will’s beneficiaries, may formally challenge it. Alternatively, if the challenger stands to inherit according to laws of intestacy (such as a family member), but is not named in the will, or is expressly disinherited, he or she may seek to contest. If one is not named as a beneficiary in the will and is not a family member eligible for inheritance, known as a distributee, he or she may not pursue a formal challenge.
In order to successfully contest a will, the protesting party must prove that the will is invalid. There are several scenarios under which a will may not be admitted, including but not limited to:
In instances where no valid will exists then intestacy laws which indicate what assets each family member is to receive go into effect. Typically, inheritance is granted to family members according to a specific order. Once the decedent’s debts have been paid from the estate, the remaining assets are distributed among the testator’s spouse, children, parents, siblings, grandparents, grandchildren, or great-grandchildren. Family members who are half-blood relatives are generally considered as if they were full-blood.
Without the guidance of an estate litigation attorney, the web of rules involved in the process can be overwhelming and lead to serious errors or even forfeiture of one’s rights. Whether you are an executor, trustee, beneficiary or someone improperly left out of a will, contact our estate litigation attorneys to discuss your options.
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When someone passes away, his or her property must somehow pass to another person. In the United States, any competent adult has the right to choose the manner in which his or her assets are distributed after his or her passing. (The main exception to this general rule involves what is called a spousal right of election which disallows the complete disinheritance of a spouse in most states.)
A proper estate plan also involves strategies to minimize potential estate taxes and settlement costs as well as to coordinate what would happen with your home, your investments, your business, your life insurance, your employee benefits (such as a 401K plan), and other property in the event of death or disability. On the personal side, a good estate plan should include directions to carry out your wishes regarding health care matters, so that if you ever are unable to give the directions yourself, someone you know and trust can do that for you.
Sadly, many individuals don’t engage in formal estate planning because they don’t think that they have “a lot of assets” or mistakenly believe that their assets will be automatically shared among their children upon their passing. If you don’t make proper legal arrangements for the management of your assets and affairs after your passing, the state’s intestacy laws will take over upon your death or incapacity. This often results in the wrong people getting your assets as well as higher estate taxes.
If you pass away without establishing an estate plan, your estate would undergo probate, a public, court-supervised proceeding. Probate can be expensive and tie up the assets of the deceased for a prolonged period before beneficiaries can receive them. Even worse, your failure to outline your intentions through proper estate planning can tear apart your family as each person maneuvers to be appointed with the authority to manage your affairs. Further, it is not unusual for bitter family feuds to ensue over modest sums of money or a family heirloom.
Your estate is simply everything that you own, anywhere in the world, including:
Your home or any other real estate that you own
Your business
Your share of any joint accounts
The full value of your retirement accounts
Any life insurance policies that you own
Any property owned by a trust, over which you have a significant control
If you have children under the age of eighteen, you should designate a person or persons to be appointed guardian(s) over their person and property. Of course, if a surviving parent lives with the minor children (and has custody over them) he or she automatically continues to remain their sole guardian. This is true despite the fact that others may be named as the guardian in your estate planning documents. You should name at least one alternate guardian in case the primary guardian cannot serve or is not appointed by the court.
A comprehensive estate plan should include the following documents, prepared by an attorney based on in-depth counseling which takes into account your particular family and financial situation:
A Living Trust can be used to hold legal title to and provide a mechanism to manage your property. You (and your spouse) are the Trustee(s) and beneficiaries of your trust during your lifetime. You also designate successor Trustees to carry out your instructions in case of death or incapacity. Unlike a will, a trust usually becomes effective immediately after incapacity or death. Your Living Trust is "revocable" which allows you to make changes and even to terminate it. One of the great benefits of a properly funded Living Trust is the fact that it will avoid or minimize the expense, delays and publicity associated with probate.
If you have a Living Trust-based estate plan, you also need a pour-over will. For those with minor children, the nomination of a guardian must be set forth in a will. The other major function of a pour-over will is that it allows the executor to transfer any assets owned by the decedent into the decedent's trust so that they are distributed according to its terms.
A Will, also referred to as a Last Will and Testament, is primarily designed to transfer your assets according to your wishes. A Will also typically names someone to be your Executor, who is the person you designate to carry out your instructions. If you have minor children, you should also name a Guardian as well as alternate Guardians in case your first choice is unable or unwilling to serve. A Will only becomes effective upon your death, and after it is admitted by a probate court.
A Durable Power of Attorney for Property allows you to carry on your financial affairs in the event that you become disabled. Unless you have a properly drafted power of attorney, it may be necessary to apply to a court to have a guardian or conservator appointed to make decisions for you during a period of incapacitation. This guardianship process is time-consuming, expensive, emotionally draining and often costs thousands of dollars.
The law allows you to appoint someone you trust to decide about medical treatment options if you lose the ability to decide for yourself. You can do this by using a Durable Power of Attorney for Health Care or Health Care Proxy where you designate the person or persons to make such decisions on your behalf. You can allow your health care agent to decide about all health care or only about certain treatments. You may also give your agent instructions that he or she has to follow. Your agent can then ensure that health care professionals follow your wishes. Hospitals, doctors and other health care providers must follow your agent's decisions as if they were your own.
A Living Will informs others of your preferred medical treatment should you become permanently unconscious, terminally ill, or otherwise unable to make or communicate decisions regarding treatment. In conjunction with other estate planning tools, it can bring peace of mind and security while avoiding unnecessary expense and delay in the event of future incapacity.
Some medical providers have refused to release information, even to spouses and adult children authorized by durable medical powers of attorney, on the grounds that the 1996 Health Insurance Portability and Accountability Act, or HIPAA, prohibits such releases. In addition to the above documents, you should also sign a HIPAA authorization form that allows the release of medical information to your agents, your successor trustees, your family and other people whom you designate.
There are two types of death taxes that you should be concerned about: the federal estate tax and state estate tax. The federal estate tax is computed as a percentage of your net estate. Your net taxable estate is comprised of all assets you own or control minus certain deductions. Such deductions can be for administrative expenses such as funeral and burial costs as well as charitable donations. The federal estate tax currently taxes estates with net assets of $5,250,000 or greater.
Even if you believe that that you may not be affected by the federal estate tax, you still need to determine whether you may be subject to state estate and inheritance taxes. Further, you may have a taxable estate in the future as your assets appreciate in value. You should regularly review your estate plan with an estate planning attorney to ensure your estate plan takes into account changes in the tax laws as well as shifts in your individual circumstances.
Your taxable estate comprises of the total value of your assets including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies minus liabilities and deductions such as funeral expenses paid out of the estate, debts owed by you at the time of death, bequests to charities and value of the assets passed on to your U.S. citizen spouse. The taxes imposed on the taxable portion of the estate are then paid out of the estate itself before distribution to your beneficiaries.
The federal government allows every married individual to give an unlimited amount of assets either by gift or bequest, to his or her spouse without the imposition of any federal gift or estate taxes. In effect, the unlimited marital deduction allows married couples to delay the payment of estate taxes at the passing of the first spouse because at the death of the surviving spouse, all assets in the estate over the applicable exclusion amount ($5,120,000 ) will be included in the survivor's taxable estate. It is important to keep in mind that the unlimited marital deduction is only available to surviving spouses who are United States citizens.
A Credit Shelter Trust, also known as a Bypass or A/B Trust is used to eliminate or reduce federal estate taxes and is typically used by a married couple whose estate exceeds the amount exempt from federal estate tax.
Because of the Unlimited Marital Deduction, a married person may leave an unlimited amount of assets to his or her spouse, free of federal estate taxes and without using up any of his or her estate tax exemption. However, for individuals with substantial assets, the Unlimited Marital Deduction does not eliminate estate taxes, but simply works to delay them. This is because when the second spouse dies with an estate worth more than the exemption amount, his or her estate may be subject to estate tax on the amount exceeding the exemption. Meanwhile, the first spouse's estate tax credit was unused and, in effect, wasted. This could be avoided by ensuring that after the passing of the first spouse, an estate tax return is filed even if no taxes are due. The purpose of a Credit Shelter Trust is to ensure preservation of both spouses' exemptions. Upon the death of the first spouse, the Credit Shelter Trust establishes a separate, irrevocable trust with the deceased spouse's share of the trust's assets. The surviving spouse is the beneficiary of this trust, with the children as beneficiaries of the remaining interest. This irrevocable trust is funded to the extent of the first spouse's exemption. Thus, the amount in the irrevocable trust is not subject to estate taxes on the death of the first spouse, and the trust takes full advantage of the first spouse's estate tax credit. Special language in the trust provides limited control of the trust assets to the surviving spouse which prevents the assets in that trust from becoming subject to federal estate taxation, even if the value of the trust goes on to exceed the exemption amount by the time the surviving spouse dies.
Our homes are often our most valuable assets and hence one of the largest components of our taxable estate. A Qualified Personal Residence Trust, or a QPRT (pronounced “cue-pert”) allows you to give away your house or vacation home at a great discount, freeze its value for estate tax purposes, and still continue to live in it. Here is how it works: You transfer the title to your house to the QPRT (usually for the benefit of your family members), reserving the right to live in the house for a specified number of years. If you live to the end of the specified period, the house (as well as any appreciation in its value since the transfer) passes to your children or other beneficiaries free of any additional estate or gift taxes. After the end of the specified period, you may continue to live in the home, but you must pay rent to your family or designated beneficiary in order to avoid inclusion of the residence in your estate. This may be an added benefit as it serves to further reduce the value of your taxable estate, though the rent income does have income tax consequences for your family. If you die before the end of the period, the full value of the house will be included in your estate for estate tax purposes, though in most cases you are no worse off than you would have been had you not established a QPRT. An added benefit of the QPRT is that it also serves as an excellent asset/creditor protection vehicle since you no longer technically own the property once the trust is established.
There is a common misconception that life insurance proceeds are not subject to estate tax. While the proceeds are received by your loved ones free of any income taxes, they are countable as part of your taxable estate and therefore your loved ones can lose over forty percent of its value to federal estate taxes. An Irrevocable Life Insurance Trust keeps the death benefits of your life insurance policy outside your estate so that they are not subject to estate taxes. There are many options available when setting up an ILIT. For example, ILITs can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage. You can also provide for distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child.
A Family Limited Partnership (FLP) is simply a form of limited partnership among members of a family. A limited partnership is one which has both general partners (who control management) and limited partners (who are passive investors). General partners bear unlimited personal liability for partnership obligations, while limited partners have no liability beyond their capital contributions. Typically, the partnership is formed by the older generation family members who contribute assets to the partnership in return for a small general partnership interest and a large limited partnership interest. Then the limited partnership interests are transferred to their children and/or grandchildren, while retaining the general partnership interests that control the partnership.
The FLP has a number of benefits: transferring limited partnership interests to family members reduces the taxable estate of the older family members while they retain control over the decisions and distributions of the investment. Since the limited partners cannot control investments or distributions, they can be eligible for valuation discounts at the time of transfer which reduces the value of their holdings for gift and estate tax purposes. Lastly, a properly structured FLP can have creditor protection characteristics since the general partners are not obligated to distribute earnings of the partnership.
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