Estate planning allows you to:
- control the disposition of our assets on your death, and or continue control of your assets for a substantial time after death
- avoid probate, and
- minimize the unified estate and gift tax
The structure and documents used in an estate plan depend on our age, assets and their value, circumstances (e.g., second marriage with children from a prior marriage, or a special needs child), and what you want to occur, and must be determined after a through review of your finances and needs.
Documents in an estate plan
A typical set of estate planning documents consists of a will, living will, durable power of attorney, and durable health care power of attorney, and in many cases a revocable living trust agreement.
Other mechanisms can be used, such as irrevocable trusts, life insurance trusts, self-canceling installment notes, residence trusts, and special needs trusts (for disabled children, etc.).
Additional documents may be used to transfer property outside of probate, such as a beneficiary deed for real estate, transfer on death title for vehicles, or pay on death provision for a bank account. All of these have the effect of transferring ownership to the named individual(s) on grantor’s death if not altered before then, but provides no current interest. These transfers do not require the named person’s agreement to sell or mortgage the property, such as is the case with a deed transferring real estate to joint ownership with right of survival.
Current and annual gifting programs
There may be steps you can take to facilitate the the tax effective transfer of your assets, such as:
- You can currently transfer assets that you anticipate will appreciate substantially before your death. While such an immediate transfer will use some of all of your unified estate and gift tax credit, it will remove an asset from your estate at the much lower current value, that will be worth substantially more at your death, and if still in your estate substantially increase your tax.
- You can implement an annual gifting program, e.g., a husband and wife together gifting $24,000 ($12,000 each) to each of 2 children, each of their children’s 2 spouses and 6 grandchildren can remove $240,000 each year from their estate and over $1MM over 5 years, without using any of the unified credit.
The downside to gifting is that you have to relinquish control and use of the assets and the income they may generate. Persons may be concerned that they may need of those assets, e.g., due to extended illness or the infirmities of age, and the need for home health care to stay in the home rather than moving to an assisted living facility or a nursing home.
Valuation and partial gifts
It is possible to deal with assets to minimize the value included in your estate or divide the interests to allow gifting and still retain control.
Assets can be subject to a number of valuation discounts, including:
- minority / lack of control – the owner of a minority interest or of non-voting interest is basically “along for the ride” and has no say in the management, disposition or shifting of investment to a different investment
- blockage – if there is a large amount of a particular kind of asset (land in a particular area) it will depress the market price to put it on the market at once and will either take a substantial time to liquidate or have to be marketed over a period of time
Valuation discounts permit more of an asset to be gifted without tax in an annual gifting program or using the lifetime exemption. E.g., a corporation valued at $1MM with 1,000 shares would seem to have a per share value of $1,000, and e.g., 12 shares could be gifted under the annual exclusion amount. If a 25% minority discount is appropriate the annual gift could be 16 shares.
A corporation can have voting and non-voting stock (or limited liability company voting and non-voting member interests), and the owners of the voting stock are in control. Shareholders can “reorganize”, create new non-voting stock, and issue shares of non-voting stock pro-rata to owners of voting stock (e.g., 10 shares of non-voting stock issued for each share of voting stock owned). They would then be able to gift away a large part of the value by gifting the non-voting stock, while keeping the voting stock and control of the corporation. The gifting can be combined with an annual gifting program to divest value in a corporation over time, and allows e.g., parents can move value out of their estate while continuing to control the management of the business. The small non-control stock interests in the corporation are typically entitled to a minority discount.
Another common took is the family limited partnership (“FLP”), while allows you to retain the general partnership interest and control while gifting away a substantial portion of the value. Additionally the FLP can achieve valuation discounts.
The IRS is suspicious of valuation discounts and frequently challenges them. it is very important to form, structure and document them properly to avoid a dispute or be successful if challenged.
Legislative limits on valuation discounts are being considered. 6/7/09
If you die without a will (“intestate”), Missouri and other states’ statutes will determine how your assets will be distributed. Generally, if you have a spouse but no children, all to the spouse, and if you have both a spouse and children, half to the spouse and half to the children (in equal shares between the children). Otherwise, your assets pass “downstream” to your “issue” (children, grandchildren, etc.),or if none, then “upstream” to your parents (or grandparents, if necessary), and if none of your predecessors are still living, back down through your siblings, or aunts and uncles, etc., and then to their issue. if you have no relatives of the required degree of relationship (“consanguinity”) your estate passes (“escheats”) to the state.
Property owned by you at your death (not including jointly held property or property held in trust) must be probated. Many people want to avoid probate due to:
- probate fees
- attorney expenses
- public disclosure (probate court records are generally available for public inspection as are most court files).
Small estate probate
There is a simplified “small estate” proceeding where the probate assets are below a certain limit
Probate can be avoided by your not “owning” assets when you die. this can be accomplished by use of a revocable living trust, joint ownership with right of survivorship or non-probate transfer means.
Although you can generally deal with the property in your revocable living trust as if you owned it directly, it is treated as owned by the trust and not you, so on your death and those assets owned in trust do not need to be probated. Property owned as “joint tenants with right of survivorship” or “tenants by the entirety” (similar to joint ownership but only available to husbands and wives) are passed to the surviving joint owner without necessity of probate. Joint ownership can be broken during life by one tenant without agreement of the other tenant(s), while tenants by the entirety ownership can not be broken except by agreement of both spouses. Property held as tenants in common is owned by our at death and must be probated.
Use of joint ownership, e.g., by mom deeding the family home to herself and her children does serve to avoid probate it can cause complications if mom wants to sell the house and move to a different living situation as the children’s signatures must be obtained for the dee on sale which may be an inconvenience, or the children may refuse to cooperate or demand a portion of the proceeds. Property held by you as tenants in common continues to be owned by you at your death and must be probated.
Beneficiary deed, transfer on death (TOD) or pay on death (POD)
There are non-probate transfer alternatives to avoid probate without using a trust. For real estate a “beneficiary deed” passes title to real property to the beneficiary on the owner’s death if the owner does not take other action before their death, but if the owner decides to designate a new and different beneficiary, sell, or mortgage the property etc., they can do so without permission or signature of the beneficiary.
Similar vehicles are available for car titles and stocks and generally referred to as “transfer on death” or “TOD”, and bank accounts or certificates of deposit as “pay on death” or “POD”.
Will and codicil
The basic estate planning documents is the will. It typically names a personal representative or executor or executrix (title to this office determined by statutory language), and provides for payment of your outstanding debts and “last” expenses and distribution of your remaining property. If a trust is part of your estate plan, the will is often a “pour over” will that directs all assets will be distributed to your revocable living trust, and the ultimate distribution is provided for in the trust. The pour over will is important even if you have a trust to take care of any assets that are omitted from transfer to your trust during your life. Even if you are diligent, it is easy to miss something and the pour over will serves as a fail safe measure to get the property to your trust.
Marital rights and “taking against the will”, and pre-marital or ante-nuptial agreements
Surviving spouses generally have a right to one years support and one-third of the decedent’s estate. A pre-marital or ante-nuptial (post marriage) agreement may affect these rights.
Living Will or Health Care Declaration
The living will or health care declaration is a statement of what efforts you want taken or withheld if you become seriously ill or injured with doubt as to your ability to recover. It is not an authorization for euthanasia, but rather a statement not to extend your dying process.
Power of attorney
A power of attorney designates certain persons to act on your behalf. the power granted ceases to be effective on your death or incapacity. A power of attorney is typically used for completion of a transaction when you will be unavailable to e.g., sign documents.
A power of attorney can designate one or more persons to act, and multiple persons can be designated to serve in the alternative, in sequential order, or together with a designated number or per cent of the acting persons to make the decision.
Durable power of attorney
A durable power of attorney remains in effect even after your incapacity and until your death. This means a durable power will allow designated persons to take action for you such as paying bills or dealing with other financial matters during periods you are incapable of acting on your own behalf.
Durable health care power of attorney
A durable health care power of attorney allows designated persons to make health care decisions if you are not able to do so.
Both durable powers of attorney and durable health care powers of attorney have a provisions, called a “springing” power that provides they only come into effect if you are incapacitated and unable to take action on our own behalf. this allows to to sign a durable power of attorney in advance of the need (at which time yo would not be able to sign the power) and have it “spring” into effect in the time of need (e.g., your incapacity).
Revocable living trust
A revocable living trust exists separately from the grantor who creates it or trustee. It is “revocable” because it can be amended or revoked by the grantor. The grantor can serve as the trustee or another person cane be designated on formation or later to serve as the trustee. While the grantor serves as trustee the grantor can generally deal with the property as if it were owned in their individual name.
Because a trust has an existence separate from the grantor, it continues on after the grantors death (although it becomes irrevocable at that time). This allows you to continue to control your assets after death.
A typical use of the estate plan is to minimize the estate tax. On death each spouse can pass an unlimited amount to the surviving spouse without tax, and a certain amount (depending on the year of death) to others (including children) without the tax being triggered. The credit allowed to the first spouse to die can not be passed on, and the assets passed from the first spouse to the survivor will be taxed on the death of the second spouse. Typically the credit is “captured” by putting the assets in trust and dividing the trust assets on the grantor’s death into an “A” trust and a “B” trust, or a “marital” and “credit shelter” trust. The maximum amount of assets are placed in the credit shelter trust without triggering tax, and the balance are placed in the marital trust. Assets in the marital trust are treated as transferred to the surviving spouse and there is no tax on the death of the first spouse but are taxed on the death of the surviving spouse. Normally the assets in the marital trust are used to support the surviving spouse first before suing any of the credit shelter trust assets because the value of the assets in the marital trust are included in the surviving spouse’s estate on their death, but the assets in the credit shelter trust will not be included. Depleting the marital trust first thus avoids some of all of tax that would otherwise be imposed.
The assets in the credit shelter trust can be available to the surviving spouse or to others (currently or after time), and the assets in the marital trust must be available to the surviving spouse with income distributed at least annually.
Funding the trust
After a trust is formed the assets must be transferred into the trust or trustee’s name:
- a deed for real estate
- a bill of sale for personal property
- an assignment of certificates of deposit
- a stock power for individually held stocks
- a new brokerage account and related transfer paper for stock in a brokerage account, or
- an assignment of partnership or limited liability company interests.
As new assets are acquired they need to be titled in the trust name. Assets not in your trust or otherwise dealt with will have to be probated.