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Estate Planning Basics Part III What are some tools that can be utilized to eliminate or reduce my federal estate tax obligation? What about a 40lk, IRA, and profit sharing plans? What documents are needed to protect an estate? What are trusts? Why do we hear so much about revocable living trusts? What are the advantages and disadvantages of a revocable living trust? I already have a will, is there any reason that I would set up a trust?

1. Question: What are some tools that can be utilized to eliminate or reduce my federal estate tax obligation?

Unlimited Marital Deduction

Property that passes to a surviving spouse is eligible for unlimited marital deductions. This requires that the surviving spouse is a United State Citizen.

So, if the entire estate is left to the surviving spouse, no federal tax is due. However, upon the passing of the surviving spouse, if he or she does not remarry, the entire estate will be taxable at death.

Under the above scenario the tax is in essence deferred. The best plan would be to keep the federal estate tax as low as possible at the surviving spouse's death so that heirs will have the money to meet all commitments. Your estate planning team can assist you with these concepts.

Applicable Credit Amount

The applicable credit amount (formerly called the uniform credit amount and sometimes referred to as the exclusion amount) is $625,000 for 2000.

This means that an owner can pass $625,000 of property to heirs, other than a spouse, free of federal tax. This property can be passed either while you are alive (through gifts) or a death. In fact, since a surviving spouse also has this credit, at death, a married couple could potentially pass $1,250,000 to heirs with no federal estate tax implications.

Provisions in your will or trust can make sure that this is handled properly. Consult your estate planning team and especially your attorney to execute the proper documents to take full advantage of this credit.

Gifting

You can significantly reduce the size of your taxable estate by implementing a gifting program. If you do not need a particular asset to live on, your estate planning team may recommend that you give the asset away. This may especially make sense since the recipient will probably be the person who would have received the particular asset at your death.

The advantage of the gifting process is that the gifted asset is removed from the estate. The disadvantage though may be that once removed, you lose all benefit and control of the gifted asset.

The annual amount that you may gift is $10,000 per person. So, a husband and wife can gift a total of $20,000 to an unlimited number of people every year with no gift tax consequences.

Your estate planning team will assist you in handling the gifting procedure properly.

Trusts

Trusts will be discussed in more detail in the next section entitled Four Documents of a Well Protected Estate. In a nutshell, a trust is a written legal instrument created during your lifetime for the benefit of another.

A trust can hold almost any kind of property and is an extremely flexible tool.

You might create a trust to:

• manage assets
• protect assets
• provide privacy
• avoid probate
• provide for multiple beneficiaries
• provide for special needs
• reduce or eliminate estate taxes

Your estate planning team can discuss the intricacies of each of these. To learn more about trusts in general terms click here.

2. Question: What about a 40lk, IRA, and profit sharing plans?

In addition to your 40lk, IRA, and profit sharing plans you should also pay special attention to

• any valuable or collectibles you may own
• your business interest
• life insurance policies
• annuities
• installment sales and receivable

These assets definitely require special attention due to the income tax consequences of holding these assets among other things.

Your estate planning team can help you understand what you own and how it will be passed to heirs. This is one of the essential roles your team can play for you.

They will help you coordinate beneficiaries so that your will, insurance policies, and retirement benefits so they are effective as a whole.

3. Question: What documents are needed to protect an estate from many of the negative circumstances you have described so far?

For much more detail on each of the four below click on the title.

4. Question: What are trusts?

A trust is a legal document used in estate planning when one person (the trustor or grantor) transfers to another person or a corporation (the trustee) a property interest to be held for the benefit of himself or others (the beneficiaries). There is a special kind of trust called a:

Revocable Living Trust

A revocable living trust is a legal document that includes instructions for the division of your assets. In this way it is very similar to a will, but a living trust allows you to:

• avoid probate
• maintain control of your assets that you have worked so hard to earn
• prevents the courts from taking control of your assets

5. Question: Why do I hear so much about revocable living trusts?

A revocable living trust transfers your assets from you to the name of your trust. Your trust becomes the owner. You have all of the same rights as before and you can even cancel (revocable) the trust if you wish.

You still control the assets but you legally do not "own" anything, so the courts can not take control when you die or suffer an illness or accident that leaves you incapacitated (such as Alzheimer's disease).

As with most choices there are a few disadvantages. Continue on to gain the full picture.

6. Question: What are the advantages and disadvantages of a revocable living trust?

A. An Assets in the trust are not subject to probate administration. This usually saves executor’s and attorney’s fees.

B. It also grants more privacy as to who gets the trust assets, when they receive them, and how much they get.

C. All of your assets are brought into one plan.

D. Quicker distribution of assets.

E. You control when beneficiaries receive your inheritance. This can prevent the courts from controlling a minor's inheritance.

F. Professional management is available if the trustor becomes incompetent, disabled, or wants to be free of the worries of management.

G. Should the trustor (also usually the original trustee) die, a successor trustee can step in and manage the trusts assets without delay or "red tape."

H. Annual court accountings, with accompanying legal fees, are not required, although some states do not require annual accountings for testamentary trusts (will trusts), either.

I. The trustee can collect life insurance proceeds immediately after the Trustor dies and can (if permitted under the trust document) use the proceeds to care for family members without any need for court approval.

J. A successor trustee can be in another state without problems.

A. Creditors may not be cut off as quickly as they are in probated estates.

B. A little more effort is required to transfer assets into the trust, and records should be kept of transactions by the Trustee.

C. The attorney usually charges a higher fee to establish a Living Trust, as opposed to a Testamentary or Will Trust. There may also be ongoing administrative charges.

D. Annual tax returns may be required if the trustee is someone other than the trustors.

Note: Assets in a revocable living trust are included in one’s gross estate for federal estate tax purposes.

6. Question: How do I go about transferring my assets into a trust?

Your estate planning team will guide you through the process. You will be changing titles on real estate, stocks, CDs, bank accounts, insurance, etc. Your living trust will likely include jewelry, art, furniture and other assets that do not include titles. Click here to review a more specific description of funding your revocable living trust.

7. Question: I already have a will, is there any reason that I would set up a trust?

Yes, there are several very important reasons to consider a trust.

A will is not always the best planning tool for you and your family because a will does not allow you to avoid probate when you die.

A will is always verified by the probate court before your wishes are carried out.

A will is effective after you die. This means that if you suffer a catastrophic accident or illness before you die the courts may take control of your assets.

Click here to see a comparison of having no will, to having a will, to utilizing a living trust.