Estate Planning Basics
Common Questions About Estate Planning
This page outlines 38 estate planning topics, written by Georgia estate planning attorney Charles Pyke, to help you understand the importance of having a complete estate plan and answer questions you may have about estate planning tactics and strategies.
Estate planning is the process of planning for the efficient transfer of assets at one’s death. In other words, it is planning what will happen to your assets when you die.
Although a Will and a Living Trust are well-known vehicles for disposing of assets upon death, there are other ways in which this can happen. Let’s examine three of the most common.
Probate is a process that starts at your death. This process transfers title of your assets to your beneficiaries. A person’s estate is Probated if they die with a Will or they die intestate (without a Will). During this process, your creditors can make claims against your estate and anyone not satisfied with your Will can contest it.
The estate tax is a tax on your right to transfer your assets when you die. Your estate, also known as your “gross estate,” includes everything you owned or in which you had an interest at the time of your death.
A marital deduction is a deduction reducing the value of what is taxable for gift and estate tax purposes. It allows an individual to transfer some assets to his or her spouse, estate and gift tax free. The IRS allows an individual to leave any amount of assets to his or her U.S. citizen spouse without taxation.
Joint Tenancy is a form of property ownership where, upon the death of one of the owners, all of the deceased owner’s interest in the property is transferred immediately to the surviving owners. Whether you realize it or not, if you are married, you probably own property in Joint Tenancy. Do you have a joint checking account? Then you probably own property in Joint Tenancy. Do you have a car or a home in both your and your spouse’s names? Then you probably own property in Joint Tenancy.
There are two types. One for financial and one for health care. A “Financial Power of Attorney” allows you to name one or more persons to help you handle your financial affairs. If you want your Agent to have the greatest range of authority, then you will want to draw up a General Power of Attorney. This document allows your Agent to conduct business in your name at any time. If you want to limit the power of your agent, you may decide to sign a Limited Power of Attorney.
A Durable Health Care Power of Attorney is a legal document that allows you to name any competent person at least eighteen years old to be your advocate and make health care decisions for you. You can pick a family member, friend or any other person you trust, but be sure the person you choose is willing to serve.
In the year 2021, the annual gift tax exclusion amount is $15,000 per recipient. There is no limit on the number of recipients to which qualifying gifts can be made. The key word here is qualifying. The IRS does not consider a gift to be qualified unless the person receiving the gift possesses a “present interest,” an immediate ownership, in the asset. This means that, in general, transfers in Trust are not considered present interests, but future interests.
A Living Probate can arise if you become mentally or physically disabled. It is generally referred to as either a “guardianship” or “conservatorship.” A guardian is someone appointed by the Court to look after you. A conservator is someone appointed by the Court to look after your assets. Guardianship and conservatorship were designed to protect people that could not protect themselves.
Initially a Revocable Living Trust may cost more with respect to its formation and implementation than a Will, but those costs are usually a small percentage of the amount saved through the avoidance of Probate costs and family turmoil at the time the grantor dies. Additionally, if confidentiality and continuity of ownership are important objectives, then the Revocable Living Trust is the document of choice.
A Revocable Living Trust is one of the most flexible estate planning tools available. It can be the foundation on which an individual’s financial and estate plans are built. It offers many benefits and gives you control over the management and distribution of your assets during your lifetime and after your death.
The Trustee has the responsibility of managing the Trust assets. Ideally, the Trustee should be someone who can keep records and follow the instructions of the Trust document. While the Trustee need not be a financial genius, the Trustee should know his or her own limits and be able to select appropriate advisors.
One of the most important benefits of Living Trusts is that they avoid Probate since they are completely private. Because a Trust is recognized as a separate legal entity, a Trustee can make distributions to named beneficiaries without any involvement from the courts. The courts maintain no control over the Trust’s assets, and do not tie up the assets in potentially lengthy (and costly) Probate process. The Trustee simply distributes assets to named heirs.
By transferring assets into a Revocable Living Trust, the assets are no longer held or reported in your name and thus it is much more difficult for criminals to find or access either the account information or the assets themselves. Additionally, the assets in the Trust and the earnings on those assets may not be considered marital property or community property and may not be subject to division by a court in a divorce proceeding.
Estate liquidity refers to the ability of your estate to pay taxes and other costs that arise after your death using cash and cash equivalents. If your property is mostly illiquid (e.g., real estate, business interests), your estate may be forced to sell assets to meet its obligations as they become due.
The first step is to call your estate planning attorney. The next thing you will need to do is find the original Will or Trust documents. Once you have located the Will or Trust papers, you will need to gather all the financial information about the assets. Finally, you will need to attend the meeting with your estate planning lawyer.
Tax laws come and go. Do all of these changes make your Will or Trust invalid? No! However, amendments to the Will or Trust may be needed to comply with the new laws or may be needed to make sure you get the most benefit from the new laws.
In most cases, when an asset is passed on to a beneficiary, its value is more than what it was when the original owner acquired it. The asset therefore receives a step-up in basis so that the beneficiary’s capital gains tax is minimized – because it is not based on the increase in value from the original purchase price.
Most gifts are not subject to the gift tax and most estates are not subject to the estate tax. In actuality, only about one-half of one percent of all estates are subject to the estate tax. This is due to the unlimited marital deduction and the annual gift deduction. Even if tax applies to your estate, it may be eliminated by the Federal Applicable Exclusion amount. Most relatively simple estates with a total value under $11.7 million and a date of death in 2021 do not require the filing of an estate tax return. However, for those estates that are valued at more than $11.7 million, you will need to figure the estate tax.
On the financial side, a good estate plan coordinates what will 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 you become disabled or die. On the personal side, a good estate plan includes directions to carry out your wishes regarding health care matters. So if you ever are unable to give the directions yourself, someone you select would do that for you, and know when you would want them to authorize heroic measures and when you would prefer they pull the plug.
A Qualified Terminable Interest Property (QTIP) Trust is a type of Trust that allows a surviving spouse to postpone estate taxes. A QTIP Trust allows the surviving spouse to make use of the Trust property tax-free. Taxes are deferred until the surviving spouse dies and the final Trust beneficiaries receive the Trust property.
The Generation Skipping Tax (GST) is a tax levied on assets that are given to individuals who are more than one generation away from the donor. The GST may be in addition to the Estate Tax.
The Uniform Transfers to Minors Act is simply a way for a minor to own property (such as securities). Under the UTMA, similar to the Uniform Gift to Minors Act (UGMA), you may choose someone to manage property you are leaving to a child. This person is called a custodian. If you die when the child is still under the age set by your state’s law, the custodian will step in to manage the property.
When a spouse leaves money or property to the surviving spouse, it usually qualifies for a marital deduction, making the transfer tax-free. Then, at the surviving spouse’s death, the government gets its tax because the property is included in the survivor’s estate. However, with a non-citizen-surviving spouse, the government might not get the tax if the survivor left the country.
A Charitable Remainder Trust permits a donor to defer the income tax consequences on the sale of a capital gain property and make a charitable gift. The donor transfers property to the Trust, retaining the right to receive a stream of annual payments for a term chosen by the donor. At the donor’s death, the remaining assets go to the charity, thus the name Charitable Remainder Trust.
The Family Limited Partnership offers a unique capability to realize a variety of planning goals.
- Assets held in the FLP are substantially shielded from potential claims.
- Income taxes can be shifted to lower bracket family members to take advantage of deferral and savings techniques.
- Estate taxes on accumulated wealth and future appreciation can be minimized or eliminated by gifting discounted interests in the FLP to children or Trusts established for their benefit.
A Crummey power is a special power regarding gifts in Trust. It is possible to qualify gifts into a Trust for the annual exclusion by using a Crummey power. Without a Crummey power, all gifts you make to your Irrevocable Trust will be subject to gift tax.
ILIT stands for Irrevocable Life Insurance Trust. This is an estate planning technique often used to ensure that life insurance proceeds will not be subject to federal estate tax. The ILIT is used to hold a life insurance policy or policies outside of an estate.
A Grantor Retained Annuity Trust (GRAT) is an Irrevocable Trust into which an individual transfers property and retains the right to receive annual payments from the Trust for a term of years. It is funded with a single contribution of assets, which pay a percentage of the initial contribution, either fixed or as an annuity. At the end of the term, the assets are distributed to the beneficiaries of the GRAT.
A Qualified Personal Residence Trust (QPRT) is powerful gifting tool that allows you to leverage your estate and gift tax credit and to freeze an appreciating asset at its current value. It is an Irrevocable Trust that holds a personal residence for a term of years. At the end of the Trust term, the residence is distributed to the beneficiaries named in the Trust. These beneficiaries are typically your children.
Supplemental Needs or Special Needs Trusts (SNT), preserve government benefit eligibility and leave assets that will meet the supplemental needs of the person with a disability. The SNT must be designed specifically to supplement, not supplant, government benefits.
IRAs consist of savings that have grown tax-deferred. That means that when funds are withdrawn, they are subject to ordinary income tax rates. The entire balance of the withdrawal is taxable, not just the earnings.