ESTATE PLANNING GUIDE 

In this guide, we will explore the objectives, obstacles, and choices you have when it comes to estate planning.

ESTATE:

Includes: home, other real estate, certificates of deposit, checking and savings accounts, life insurance, retirement accounts, stocks, bonds, etc. In other words, all of your assets.

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PLANNING:

Managing and distributing the estate in a manner consistent with owner’s objectives.

 OBJECTIVES:

In Mr. Stewart’s experience of meeting with clients, he has found that individuals have three primary objectives regarding their estate plan. Those objectives are to:

  1. Distribute Quickly

  2. Maintain Control

  3. Minimize Expense

OBSTACLES:

There are three major obstacles which prevent the estate planning objectives from being accomplished. The obstacles are:

  1. Probate

  2. Guardianship

  3. Estate and Gift Taxes

CHOICES:

There are only three main ways in which an estate can be distributed. The choices are:

  1. Probate

  2. Operation of Law

  3. Living Trust

Obstacle #1

PROBATE: The most important thing to understand about probate is that it is an expensive court proceeding which distributes a deceased person’s estate.

MISCONCEPTIONS:

Although most people want to avoid probate, very few know what causes it. Listed below are just a few of the most common misconceptions about probate.

  • Probate is caused by not having a will - not true.

  • Probate is caused by having a will - not true.

  • Probate is caused by a poorly written will - not true.

  • Probate is caused by a large estate - not true.

  • Probate is caused by a will contest - not true.

  • Probate is caused by an attorney - not true.

  • Probate is caused by a death - not true.

CAUSE:

Probate is necessary when the decedent’s signature is needed to transfer the deed to the home, the checking account, the stock certificates, etc. The problem is not probate, the problem is the need for the signature. The solution is the probate.

Obstacle #2

GUARDIANSHIP: Guardianship is a court proceeding similar to probate. The difference is the guardianship occurs when an individual is still living. Guardianship solves the problem of obtaining a person’s signature when the signature is unavailable or legally unacceptable because the person, although still alive, is physically incapacitated or mentally incompetent.

POWER OF ATTORNEY:

In an effort to avoid guardianship, many sign a Power of Attorney giving another person the right to act on their behalf. There are three kind of Powers of Attorney:

  1. Limited Power of Attorney

  2. General Power of Attorney

  3. Durable (Family) Power of Attorney

The person who signs or gives a Power of Attorney is called “the principal” and the power holder is the “agent.” All Powers of Attorney are cancelled at the death of the principal, and only the Durable Power of Attorney is legal after the incompetency of the principal.

Exercise extreme caution when choosing individuals who will have the right to sign your name as they choose. In an effort to protect and control your estate, you could lose it.

Obstacle #3

TAXES: The two taxes that will be the focus of our attention here are the Federal Estate Tax and the Gift Tax. There are two rules, two exceptions, and two penalties to understand.

RULES:

  1. During Life: As of 2020 no more than $15,000 per donor, per donee, per calendar year can be gifted to an individual tax free. The lifetime exclusion is $11.58 million.

  2. At Death: As of 2020 no more than $11,580,000 per person can pass to beneficiaries tax-free.

EXCEPTIONS:

  1. An unlimited amount can be transferred from spouse to spouse during life and at death tax-free.

  2. An unlimited amount can be transferred to a qualified charity.

PENALTIES:

  1. If over $15,000 is transferred to someone other than a spouse, a gift tax return (form 709) must be filed. The amount of the excess will reduce, dollar for dollar, the amount of the estate which can be left tax-free at death.

  2. If the estate is in excess of the exemption amount at death and is not transferred to the spouse or a charity, your estate will owe tax on the excess amount at the applicable Estate Tax rate.

United States Federal Unified Estate and Gift Tax Rate Schedule

Year Exclusion Amount

2016 $5.45 million 40%

2017 $5.49 million 40%

2018 $11.18 million 40%

2019 $11.4 million 40%

2020 $11.58 million 40%

Choice #1

PROBATE: The most important thing to understand about probate is that it is an expensive court proceeding which distributes a deceased person’s estate.

PUBLICITY:

The contents of your Last Will and Testament and information regarding your finances are private matters during your lifetime. In probate, however, they become part of a permanent, public record.

DELAY:

The average probate takes anywhere from 6 months to 2 years and that is assuming that there are no problems.

EXPENSE:

Most people are aware that probate is expensive; most don’t realize, however, just how expensive it is.

The major expense of probate consists of two parts: the attorney’s fee and the personal representative’s (executor’s) fee. Generally, the fee paid to each is based on a percentage of the Gross Estate.

There are two methods of determining the size of an estate: gross and net. The Gross Estate is calculated by totaling the current market value of all of the assets in the estate. The Net Estate is the gross estate minus any debts and obligations of decedent against the estate such as a mortgage on a home or any other liabilities. Thus, the Gross Estate is always larger than the Net Estate unless there are no liabilities in which case the value is the same.

Attorney’s fees alone are usually estimated to be from 3% to 5% of the Gross Estate.

OBJECTIVES:

Quickly? No.

Control? No.

Inexpensive? No.

CHOICE #2

OPERATION OF LAW: In operation of law, the assets are transferred automatically to someone without regard to the terms of the will or any contrary desires of the decedent.

The most common type of operation of law is join tenancy, in which the assets are transferred to the surviving spouse. The subsequent transfer from the surviving spouse to the beneficiaries will have to go through probate. Consequently, probate is postponed, but not avoided.

Joint tenancy between parent and child is not generally recommended. This can cause a gift tax, as well as expose the parent to the child’s divorce obligations and bankruptcy proceedings, as well as lawsuit liabilities of the child.

There are also capital gains tax avoidance opportunities that are lost with the use of joint tenancy. The capital gains tax occurs when the sales price of the asset exceeds the “basis” (the original price) of the asset. The difference between the basis and the sales price is treated as income and is taxed.

The way to avoid the capital gains tax is to have appreciated assets get a “stepped-up” basis. When an asset is part of a decedent’s estate, the basis is increased or “stepped-up” to the current value of the asset on the date of death. This eliminates any capital gains tax on the appreciation of value which occurred prior to death.

OBJECTIVES:

Quickly? Yes.

Control? No.

Inexpensive? No.

CHOICE # 3

LIVING TRUST: A trust is a legal entity created to own, manage, and distribute assets in accordance with an individual’s desire. The administration of the assets in accordance with an individual’s desire. The administration of the assets are not interrupted by probate nor guardianship since the trust does not die and does not become incompetent.

PREPARED BY AN ATTORNEY:

The trust agreement should be drafted by an experienced attorney who specializes in this area of law.

LIVING TRUST:

Revocable trust, living trust, and Inter-Vivos declaration of trust are all names for the same thing.

TRUSTORS:

The Trustors control what happens with the Trust Assets. Trustors are also referred to as Settlors, Grantors, and Donors. They determine the rules to be followed within the trust. The Trustors are the only ones that can change the document’s terms, withdraw all of the assets prior to its termination, or revoke the trust in its entirety.

TRUSTEES:

The Trustees are the persons who manage the trust in accordance with the written direction of the Trustors. It is not unusual for an individual to be both Trustor and Trustee. Alternate or successor trustees, who can be the adult children of the Trustor, are names to serve as Trustee in the event of the death or incompetency of the original Trustees. It is also possible to name a bank as Trustee or Successor Trustee. It is up to the Trustor to make this decision.

BENEFICIARIES:

The Beneficiaries are the individuals who receive the income and the principal of the Trust. Typically, the Trustors, while alive, have sole access to all of the income and principal in the Trust. Upon the death of the Trustors, the income and principal are distributed to their chosen beneficiaries, such as their children. It is important that only beneficiaries of suitable age and discretion receive sizable distributions. Therefore, where minors are involved, deferred payments in a series of installments is frequently the best approach.

Where do I begin?

Now that you have the facts about estate planning, you may want to know how to proceed toward your own estate planning goals.

FREE CONSULTATION:

An initial one-half hour in office consultation with Mr. Stewart is free. Contact us to set up your appointment.

TRUSTEES AND BENEFICIARIES:

In a will, the persons doing the transferring are called the Personal Representatives (Executors). In a trust, they are called the Trustees. In most cases, the same persons serve in both capacities.

Before the consultation, clients should consider not only who they would like their beneficiaries to be and when they would like for them to receive distributions, but also who they would like to names as their Personal Representatives and Trustees.

DOCUMENT DRAFTS:

If upon the completion of the initial consultation, the client decides to proceed with an estate plan, a draft of the documents will be prepared.

DOCUMENTS SIGNED:

Upon approval of the documents by the client at the appointment with counsel, the final documents are signed. During this appointment, funding the trust is explained and a set of written instructions is given to the client.

COST OF ESTATE PLAN:

Due to our experience and expertise, an estate plan which includes a living trust, pour-over will, durable power of attorney, health care surrogate, and living will, can generally be done for as little as $2,000.00. A joint trust package (both spouses) starts at $2,500. When you consider that the cost to probate a $100,000 estate is generally $5,000 or more, the amount saved is obvious and dramatic.

The fee for the estate plane includes preparation of all legal documents done in conjunction with the trust. However, there are nominal out-of-pocket costs incurred which are charged to the client.