ESTATE PLANNING:
The Fundamentals
T
he fundamental issues in estate planning do not vary
greatly from one person to another. Our clients are generally most interested in what is going to happen to their
assets when they die, the impact of transfer taxes (often called,
“death taxes”) on their estate plan, and whether steps should be
taken to minimize the involvement of the Probate Court after
their death (often called,“avoiding probate”). Clients with minor
children are concerned about protecting them by naming appropriate guardians and ensuring that their assets are not distributed
to them at too early an age. Our clients are often interested in
executing or updating advance directives, i.e., a Durable Power
of Attorney for Health Care/Living Will and a Durable General
Power of Attorney (for financial matters).
annual exclusion and “split gift”$28,000 per
donee per year (although this will require
the consent of both spouses who are U.S.
citizens or legal residents through the filing
of a Gift Tax Return).
Federal Death Taxes
What can be done to limit probate costs and associated attorney’s and administration fees? If assets are held in joint tenancy,
the surviving joint tenant receives his or her interest in the property
immediately upon the death of the first to die without the involvement of the Probate Court. Assets with beneficiary designations
(e.g., life insurance and retirement accounts) work the same way.
Although the executor may be required to file the Will and a death
certificate, or prove the death of the first of the joint tenants to die,
full probate administration is generally not required.
Another common way to avoid probate is to use a Revocable
Trust, also known as a“living” or “inter vivos” Trust. An individual
may avoid probate by establishing such a Trust and transferring
assets from themselves individually to themselves as Trustees of
the Trust. Some people choose to use a bank, attorney or other
family member as a trustee. In many states, the Probate Court
does not supervise the administration of Revocable Trusts except
when someone petitions the Probate Court for relief of some kind.
Trusts may have many other benefits. Trusts can allow couples
to minimize any state death or estate taxes, and Generation Skipping Transfer taxes. In addition, the use of Trusts may protect the
family assets from spendthrifts and creditors.
Even when you avoid probate, you do not avoid“death taxes”
or the requirement to file a Federal Estate Tax Return. If you have
property that is equal to or more than the applicable exclusion
amount at the time of your death, your executor must still file
a Federal Estate Tax Return, even if you leave all of your assets
to your spouse free of tax. Assets included in the taxable estate
include life insurance, retirement plans, all assets in one’s individual name or Revocable Trust, and one-half of all assets owned
jointly by a husband and wife (or 100 percent of the asset value, if
jointly owned by someone other than a spouse).
If you own real estate in another jurisdiction which has
The federal laws changed substantially in 2013 with respect
to federal transfer taxes (i.e., the Gift Tax, Estate Tax and Generation-Skipping Transfer Tax.) However, the federal government
is closely scrutinizing these laws, and may change them again in
the future. Your attorney should review your assets carefully and
help you develop a plan that should minimize the impact of these
changes on your estate plan. There are three general principles
that are helpful to understand with respect to these taxes. First,
the Unlimited Marital Deduction allows a married couple who
are United States citizens to transfer unlimited sums of money or
assets between themselves. Quite simply, there is no transfer tax
imposed on a gift from one spouse to the other spouse or when
the first spouse, at death, leaves assets to the other spouse.
Second, there is what is often referred to as the Applicable
Exclusion Amount. This is the amount that an individual can
gift or leave at death to someone (other than a spouse) free of
any federal transfer tax. The Federal Estate, Generation-Skipping
Transfer and Gift Tax rates are set forth in the following chart:
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2015 Issue 1 GearedUp
Year
34
Applicable Exclusion
Amount (Estate Tax)
Top Estate, GST
and Gift Tax Rate
2015
5.43 million 40 percent
(indexed for inflation)
Third, there is the Annual Exclusion. This is the amount
that an individual can gift to another annually without paying
a gift tax or consuming any of the individual’s applicable exclusion amount. The 2015 annual exclusion amount is $14,000 per
donor per donee per year, and is indexed for inflation. The $14,000
annual exclusion will slowly increase in the future based on a
cost of living adjustment. Married couples may combine their
State Death Taxes
by Denis Dillon
Many states do not impose estate taxes,
however 30 states do. If you own real estate in a jurisdiction which
has an estate tax, you may have to file an estate tax return and
pay a tax in that state even if you are not required to file a Federal
Estate Tax Return.
Probate Avoidance