A generation or two ago, estate planning typically consisted of the adoption of a Will under which the decedent’s assets would pass to his beneficiaries, usually family members. Assets consisted of a personal residence usually owned jointly with a spouse, and a few other assets such as stocks, and items of personal property. There was little concern about the proper titling of assets to achieve the client’s goals. If there were a retirement plan, it was usually a pension plan which required that at the death of the participant, the remaining benefits would be paid to the surviving spouse and at her death, there were no further benefits. If there were a family business, it was often an unincorporated sole proprietorship, or perhaps a partnership with another co-owner. There was little succession planning for a closely held business.
A generation or two ago, bequests under Wills to children were often outright at age 21, with little concern for whether the child would be sufficiently mature to handle assets at that age, and without planning to protect such assets from creditors and future claims by a divorcing spouse. There were no asset protection trusts. Certainly Wills provided benefits for grandchildren, but there were no such things as generation skipping transfer trusts or dynasty trusts. If a couple had life insurance, it was usually on the life of the husband as the primary bread winner, sometimes provided by his employer, without thought about the need for insurance on the life of the wife, whether or not she was working. When one spouse became ill, he or she simply relied on the other spouse or the children as a group to make the “right” decisions on health care and end of life decisions. Little thought was given as to a possible disagreement among the children on the appropriate actions to take for a seriously ill parent.
A generation or two ago, there were no 401(k) plans, individual retirement accounts, 529 Plans, ESOPs, universal life insurance, second-to-die life insurance, long term care insurance, pay-on-death accounts, health care powers of attorney, living wills, special needs trusts, or stand-by guardian forms. Few people owned stocks, and mutual funds were greeted with suspicion. Stock options were only for the rich. Bequests to charities, if made at all, were simple cash bequests. There were no charitable remainder trusts, charitable lead trusts, private foundations, or donor advised funds.
A generation or two ago, in contemplating marriage, little thought was given to protecting assets of each spouse brought into the marriage in the event of a divorce. There were no pre-marital agreements or post-marital agreements.
A generation or two ago, in selecting fiduciaries, one was limited to selecting among family members or the local bank. There were no trust companies, trust protectors, or asset managers.
Estate, Gift, and Generation-Skipping Transfer Taxes Under the American Taxpayer Relief Act of 2012
The American Taxpayer Relief Act of 2012 (“2012 Act”) is the first permanent set of estate, gift, and generation-skipping transfer tax laws adopted by Congress in over a decade. Prior laws incorporated sunset provisions that made long-term estate and gift planning difficult.
Under the 2012 Act, the maximum estate, gift, and generation-skipping tax rate is 40%, up from 35% in 2012. The 40% rate is reached at a taxable estate or cumulative gifts of $5 million, adjusted for inflation.
The estate, gift, and generation-skipping transfer tax exemption remains at $5,000,000, adjusted for inflation. For 2013, the exemption is $5,250,000.
The 2012 Act makes “portability” of the estate tax exemption permanent. Portability allows the unused estate tax exemption of the first spouse to die to be used by the surviving spouse. As a result, the combined exemption available to a married couple is $10,500,000 for 2013.
Planning for Couples with Assets Less than the Exemption
As a result of the 2012 Act, married couples with estates less than the exemption should decide whether they want to bequeath all of each person’s assets to the surviving spouse, or have some portion or all pass to a Family Trust for the benefit of the surviving spouse and children. The advantage of the Family Trust is that at the death of the surviving spouse, the assets in the Family Trust will pass to the remaindermen (typically children), rather than passing under the Will of the surviving spouse. Thus, if the surviving spouse remarries, such assets will not pass under the Will of the surviving spouse to other beneficiaries such as another spouse or to step-children. A Family Trust may also be beneficial if there are concerns about the ability of the surviving spouse to manage his or her assets.
What are Typical Estate Plan Formats?
The following are illustrations of various estate plans that can be implemented either through a traditional Will or through a Pourover Will and a Revocable Trust, where the surviving spouse is a U.S. citizen . If the surviving spouse is not a U.S. citizen, the marital share should be distributed to a “qualified domestic marital deduction trust” in order to attain the estate tax marital deduction.
A. Family Trust; Residue to Spouse or to Marital Trust
In this alternative, the Family Trust is funded with an amount that can pass free of estate taxes due to the estate tax exemption, or if estate taxes are not anticipated, a lesser amount. The residue passes to the spouse either outright or to a Marital Trust. The Family Trust will benefit the spouse and children and will continue for the life of the spouse and at his or her death pass to the children or other beneficiaries. The Marital Share will be included in the estate of the spouse for estate tax purposes, but the assets in the Family Trust will not be included. One advantage of the Family Trust is that the assets are not titled in the name of the surviving spouse, but rather are controlled by the Trustees. At the death of the spouse, the assets will pass to the children. Note that the Will or Trust only controls assets in the decedent’s individual name. Assets passing by beneficiary designation such as life insurance or retirement benefits will not be controlled by the Will or Trust unless such amounts are paid to the Estate or Trust.
B. All To Spouse With Disclaimer Trust
In this alternative, all the assets pass to the spouse and he or she will have 9 months to disclaim all or a portion of such assets. The disclaimed amount will then pass to a Disclaimer Family Trust for the benefit of the spouse and children. At the death of the spouse the trust assets will be distributed to the children. The advantage of this alternative is that the spouse has the flexibility to decide whether to take the assets or to disclaim all or a part into the Family Trust. Any assets in the Family Trust will not be included in the estate of the spouse for estate tax purposes. The disadvantage of this alternative is that the spouse may decide not to disclaim even though that would save estate taxes and because the spouse will take the assets outright, the assets in the spouse’s name will be eventually distributed under his or her Will which could be changed. In order to disclaim, the surviving spouse may not have accepted the benefit of any assets that will be disclaimed, meaning for example, that the spouse may not receive dividends from stock that she later wants to disclaim. Such dividends would have to remain held in the estate and pass to the Family Trust. In this alternative, if the spouse is not alive, the assets will pass to the Family Trust for the benefit of the children or issue.
C. Use of Generation-Skipping Trusts
In larger estates, clients often want to make use of their generation-skipping transfer tax exemption by creating a generation-skipping trust. The generation-skipping tax is a tax on gifts, bequests or distributions from trusts to beneficiaries who are two or more generations younger than the decedent or transferor, such as grandchildren. It is imposed at the flat rate of the highest estate tax rate applicable in the year of the bequest or distribution. An exemption is available for the generation-skipping tax and it is equal to the applicable credit amount, which is $5,250,000 for 2013. The purpose of the generation–skipping trust is to hold assets for the transferor’s children’s generation for their lives and at their deaths, the remainder is distributed to the grandchildren, thereby skipping the child’s estate for estate tax purposes. While the assets are not included in the child’s estate, nevertheless, the child can receive income and principal from the trust for his or her life. Such a trust is typically funded with an amount equal to the generation-skipping transfer tax exemption. Where the client’s estate plan includes the use of a Family Trust, often the Family Trust is drafted to be a generation-skipping trust. Thus the Family Trust would benefit the surviving spouse for his or her life, then the children for their lives and the remainder would be distributed to the grandchildren at a specified age.
Do I Need Estate Planning Documents if my Estate Will Not Incur Estate Taxes?
With the increase in the Federal estate tax exemption, many clients will not face estate taxes upon their death. However, even if there are no potential estate taxes, there are many reasons to adopt Wills and other estate planning documents:
- To make sure assets pass to the beneficiaries selected by the client. If the client dies without a Will, the assets held in the deceased client’s name will pass according to North Carolina law which might be contrary to the client’s preferences.
- If the client has minor children, because minor children cannot hold title to property, the client should provide in a Will that the children’s shares of the estate be held in a trust for the minor child until he or she reaches some designated age in adulthood.
- If a beneficiary does not manage funds well or suffers from a disability, it may be wise to place the beneficiary’s assets in a trust established under the Will.
- In the event that the client’s spouse and children all die before the client, adopting a Will would allow the client to direct who should be his or her “final beneficiaries” to receive the estate assets.
- The above steps may be taken by signing a traditional Will. Because Wills are eventually probated and subject to public scrutiny, some clients prefer to also adopt a revocable trust (sometimes referred to as a ‘”living trust”) to direct the disposition of their assets. One advantage of the use of the revocable trust is that it is not subject to probate and thus not subject to public review.
How do I Plan for my IRAs, Retirement Plan Benefits and Life Insurance?
It is very important to properly name beneficiaries of the IRAs, other retirement plans and life insurance. Adverse income tax effects can occur with regard to retirement plan benefits if such beneficiary designation forms are not properly completed. The named beneficiaries typically should be individuals or trusts for individuals, so that the payments from the retirement accounts can be stretched over a long period of time to allow assets in the plans to appreciate tax-free. Review of a client’s retirement and life insurance benefits is a very important step. If minor children will be beneficiaries of such assets, the client should consider adopting beneficiary designation forms that will cause such assets to pass to a trust for such persons.
What are the Essential Estate Planning Documents?
While most people acknowledge the need for a complete estate plan in order to ensure that their loved ones are taken care of in the event of their death or disability, not everyone knows what is required to have a “complete” plan. Here is a list of 10 “essentials” that should be considered as part of the planning for every estate:
1. Last Will and Testament and Revocable Trust. When most people think of having a “complete estate plan,” the Will is the document that likely comes to mind. There is good reason for that. If you die without a Will, some or all of your assets will be distributed under the intestacy laws of the state in which you reside at your death and this may or may not correspond with your desires. A Will can also avoid personal and administrative difficulties since it enables you to appoint a personal representative to handle your estate and a guardian to be responsible for your minor children, rather than relying on the court to appoint these positions. Many people also choose to use a revocable trust as part of their estate plan. A revocable trust is created during your lifetime and provides for yourself and your family both before and after your death. There are a number of advantages to the revocable trust, including flexibility, confidentiality, ease of management and distribution of assets, and the avoidance of probate. The revocable trust is not a Will substitute but may be a potentially valuable tool to be used in conjunction with your Will.
2. Beneficiary Designations and Property Title. Certain assets pass at your death by operation of law and are not controlled by your Will or by the intestacy laws. These assets include real estate held with another with right of survivorship, financial accounts held with another with right of survivorship, “pay-on-death” accounts, and assets that pass by beneficiary designation, such as life insurance and retirement benefits, that name someone other than your estate as beneficiary. All other personal and real property that you own in your sole name at your death will pass either under your Will, or if you do not have a Will, by intestacy. A complete estate plan involves a review, and possible revision, of your beneficiary designations and titled property to ensure that they comport with your overall estate planning goals.
3. Durable Financial Power of Attorney. While not technically an estate planning document since it is effective only while you are living rather than at death, this document is an invaluable tool in preparing for the possibility of your physical or mental disability since it allows you to name an agent who can act on your behalf in the event that you are incapacitated or are otherwise unable to attend to your financial and business matters. The designated agent can be an individual (such as a relative or friend) or a financial institution, such as a bank or trust company. As this appointment involves giving an agent the same financial powers that you possess, choose your agent, and successor agents, wisely.
4. Health Care Power of Attorney. Similar to the financial power of attorney, this document allows you to appoint an agent who is an individual to make your health care decisions in the event that you are unable to make them for yourself. Again, typically this health care agent is a relative or friend. This document also allows you to name an agent to receive medical information which has become increasingly difficult to access as recent laws have been enacted to ensure patient privacy.
5. Advance Directive for a Natural Death. More commonly known as a “living will,” this document expresses your desires with respect to certain treatments to prolong your life in the event you have a terminal disease or illness, in a persistent vegetative state or suffer from the end stages of dementia or Alzheimer’s Disease. A “living will” allows you to authorize the withholding of extraordinary medical means such as artificial nutrition and hydration, if you are in any of these medical states.
6. Standby Guardian Appointment. The guardian provisions in your Will only take effect upon your death. This document allows you to name a guardian for your minor children in the event that you and your spouse are incapacitated or otherwise unable to care for your children during your lifetime.
7. Regular Review of Estate Plan. Things change in life, and part of any good estate plan is ensuring that it accurately reflects your current personal and financial situation, not to mention the current state of the estate tax and estate and trust administration laws. You should therefore review your estate plan at least every three to five years or sooner in the event of a major change in circumstances (birth of a child, financial windfall, or decline in the value of assets, change in the tax laws, etc.).
8. Accessible Information. Having a complete estate plan ensures that your loved ones will be taken care of from a legal perspective. On the practical side, you can help avoid potential delay and difficulty in the handling of your financial affairs by providing them with vital information in the event that something should happen to you. We provide a booklet to our clients and other persons entitled “My Essential Information,” in which you can list assets, account numbers, sources of income, monthly bills, names of advisors, insurance information and other information that your executor or attorney-in-fact would need to manage your assets and take care of you. You should make sure that your closest family members and personal representative either know, or have easy access to, certain important information, including, but not limited to, the location of your Will and other estate planning documents, other important papers, medical information, social security number, safety deposit box location and location of the key, password information, financial account information and contact information for notification purposes. This booklet is available from your Poyner Spruill attorney. Click here to request a copy by email.
9. Additional Considerations. Do you have a large estate that may be subject to estate taxation? Do you have a family business and need a succession plan? Do you have a beneficiary with special needs? Do you have a beneficiary who should not receive his or her inheritance outright? Would you like to make a substantial bequest to charity? All of these questions and more should be considered and planned for in a complete estate plan. In short, give serious thought to your circumstances and identify any areas of particular concern to you and these things should be addressed by your estate planning.
10. Communicate. At first glance, this may seem an odd choice to include as part of your estate plan but communication with your family prior to your death or disability can save much hardship later on. This is especially true in situations in which family members are not being treated similarly under your estate plan. Although there are times when surprises are appreciated, dealing with the death of a loved one is generally not one of them. Taking the time to communicate with your family prior to your death or disability will help to ensure that your plans are carried out as efficiently as possible and can often help to avoid hurt feelings in the process. An easy way to provide essential information to your family in the event of incapacity of death is to complete the booklet, “My Essential Information,” discussed above. The booklet is a central place that key information on assets, liabilities, sources of income, monthly bills, account numbers and other facts can be recorded. Finally, make sure you know where the originals of your estate planning documents are located. Typically, they should be placed in a safe deposit box. Also be sure that your spouse and/or other family members know of the location, and if held in a safe deposit box, where the key to the safe deposit box is held. Keep a copy of your documents at home as well so that your fiduciaries can quickly access your documents.
Is There a Comprehensive List of Documents That a Client May Review?
The following is a list of many estate and financial planning documents that clients may find useful to achieve their goals.
Testamentary Disposition of Property
- Pourover Will and revocable trust
- Written memorandum concerning disposition of items of tangible personal property
- Credit shelter family trust
- QTIP trusts
- QDOT trusts for non-citizen spouse
- Charitable bequests: outright or through charitable remainder trusts and charitable lead trusts
- Special needs trusts for certain beneficiaries
- Foreign Will to dispose of property located outside the U.S.
Health Care Documents
- Health care power of attorney
- Advance instruction for mental health treatment
- Declaration of a desire for a natural death
- Do not resuscitate order
- Anatomical gift forms (driver’s license and donor card)
Lifetime Financial Planning and Asset Management Documents
- Durable power of attorney for financial management
- Beneficiary designation form for retirement plan benefits
- Inter vivos revocable management trust
Inter Vivos Transfer of Property to Family Members
- Section 2503(c) trusts
- Spousal limited access trust
- Life insurance trusts
- Grantor retained annuity trusts
- Family limited partnerships and limited liability companies
- Inter vivos qualified terminable interest property marital trusts (“QTIP Trusts”)
- Section 529 plans
- Gifts under Uniform Transfers to Minors Act
- Sale to family member through private annuity
- Sale to intentionally defective grantor trust
- Interest-free or low interest loans of money
- Generation-skipping transfers
- Outright gifts
- Special needs trusts
- Transfers of stock options
Inter Vivos and Post-Mortem Charitable Gifting
- Outright inter vivos gifts to charity
- Gifts of remainder interest in residence
- Inter vivos and testamentary charitable remainder trusts
- Inter vivos and testamentary charitable lead trusts
- Outright bequests to charity
- Gifts and bequests to private foundations
Other Estate Planning Considerations
- Managing and structuring the closely-held family business
- Planning for succession management
- Life insurance
- Long-term care insurance
- Pre-need funeral arrangements
- Titling of property between spouses to minimize taxes
- Retirement plan benefits
- Buy-sell agreements for closely-held businesses
Planning for Funding and Owning Life Insurance
- in insured’s name
- in family member’s name
- in name of closely-held business
- in life insurance trust
- in a charity’s name
- Direct payment by insured
- Gifts to family members
- Payments by closely-held businesses
- Gifts to life insurance trust
- Split dollar agreement with family members, closely-held business or trust
- Gifts to charity
- Types of life insurance:
- Whole life
- Blend of term and permanent
- Amount of insurance needed:
- To support spouse and children
- To pay estate taxes
- To fund buyout under buy-sell agreement for a closely-held business
- Key-man insurance held by closely-held business
- To replace assets passing to charity
- Insurance on life of spouse
Identifying Fiduciary Roles
- Attorney in fact under durable power of attorney for financial arrangement
- Health care agent under health care power of attorney
- Trustee of inter vivos revocable management trust
- Custodian for transfer under Uniform Transfers to Minors Act
- Guardian for minor children
- Executor under Will
- Trustee under irrevocable trusts
- Other general partners of family limited partnerships and other managers of limited liability companies
- Trust protectors
Miscellaneous Documents And Other Information To Locate
- Deeds, deeds of trust and car titles
- Life insurance policies and beneficiary designations
- Property insurance, including “umbrella” liability policy
- Medical insurance; List of Doctors and Medications
- Other person’s wills or trusts under which you were a granted power of appointment
- Last 3 years’ income tax returns
- All federal and state gift tax returns filed
- Brokerage statements
- Retirement plan election forms
- General financial statements
- Loan documents
- Special funeral instructions
- List of unpaid charitable pledges
- Information on cost basis in assets
- Information on stock options
Craig Dalton, an attorney no longer with Poyner Spruill, was the original author of this article.