Estate Planning

What is Estate Planning and Who Needs It?

The big question to answer before going any further is “what is estate planning?”  Estate planning is the overall term for the process of planning out what you want to happen to your estate (all of your assets), including all of the rights, titles, and interests to your assets.  There are a few important considerations that we need to keep in mind: the possibility that you will acquire new property (that you do not already own); the accumulation of value in your assets, and how to keep that hard earned value; and, finally how you want your assets distributed after your death.

Throughout the estate planning process, we need to plan the best ways to effectively and efficiently distribute your estate, while focusing on both tax and non-tax considerations (a/k/a how to avoid giving a lot of your hard earned value to the government).  Estate planning also includes financial planning, especially with a focus on preservation of your assets using income-tax planning, investment planning, insurance planning, and retirement planning.

Now that we know (at least at a high level) what estate planning is, we should discuss some of our objectives.  There are three main objectives of estate planning: preserving your wealth so that it can be passed down through several generations; strategically use your current wealth, during your lifetime, to ensure that you and your family can keep your current lifestyle; and, pass the greatest possible amount of your wealth and assets, to your heirs or chosen beneficiaries, after your death.

What about all of that “legalese?”

While our focus should always be on drafting documents that are understandable and written in a way that can be used by anyone (especially your Executor or Trustee), there are several “terms of art” (key words used in legal writing that exist because of long held tradition and use) that need to be used in estate planning.  Here there are with some clarification:

  • Probate: This is the judicial process where a decedent’s estate is officially valued.  Additionally, several other steps occur: beneficiaries are determined and contacted (this can sometimes be a messy process, if no Will exists); a valuation is conducted of the decedent’s entire estate.; an estate administrator or Executor (in charge of estate distribution) is declared and certified by the Probate court; creditors are also notified, giving them one last opportunity to seek unpaid bills; and, the assets are legally transferred to the determined beneficiaries.  The Probate process can be long and strenuous, typically taking anywhere from 10 months to 18 months (you read that correctly, even in 2020) for an uncontested Probate proceeding.  Last, but not least, the Executor or Administrator is discharged from their duties.  An estate can be brought to the Probate Court in 4 ways:
    • The decedent passed intestate (without a Will).
    • The decedent has a Will distributing property to beneficiaries without the use of a valid and properly funded trust.
    • A Trust is being challenged as to validity, capacity, fraud, or undue influence.
    • A Trust is unfunded and property remains outside of the Trust’s intended protection from the probate process.
    • One last thing on probate: How much will it cost?
      • Probate costs can include: court fees; appraisal and valuation fees; account fees; fees paid by the executor; and, your probate attorney’s fees to represent you throughout the process.
  • Intestacy: Speaking of not having a Will, intestacy refers to an estate that does not have a Will.  If someone passes away, without having left behind a Will (or a Revocable Trust – more on this in a later blog post) they are said to have “died intestate.”  (note: partial intestacy may happen if a Will is not properly drafted, or does not dispose of all of the Decedent’s assets).
  • Testator (male) and testatrix (female): The individual who is the main subject of a Will (also the individual who leaves a Will to distribute their property after their death).
  • Executor: an individual or entity appointed by a Testator to carry out the terms of their Will.
  • Trustee: an individual or entity granted control or powers of administration of property in Trust, with a legal obligation to administer the property pursuant to the Trust document (usually for the benefit of the Trust’s Beneficiaries), solely for the specified purposes.
  • Custodian or Guardian: an individual entrusted with guarding and keeping property or having custody (or guardianship) of a person.  Generally, in a Will, a Custodian or Guardian is the individual (or individuals) you name to watch over your minor children or special needs family members, after your death.
  • Descendant: Descendants are those individuals who are the “issue” (another legal term you might see used interchangeably with descendant) of an individual, such as their children, grandchildren, and their grandchildren’s children, to the remotest degree.
  • Incapacitated or incapacity: When used in a Will, these terms interchangeably refer to an inability to an individual who cannot handle their property and affairs by reason of age or illness (mental or physical).
  • Education: “Why is this a term we are defining?” you ask?  Simple. Educational expenses are a huge estate planning tool when it comes to tax avoidance (a/k/a your money can go towards educational expenses, rather than to the government).  Educational expenses generally include tuition for private elementary and secondary schools, college, professional, graduate or vocational school, and living expenses, supplies and travel related to education.
  • Charity or charities: Generally, an organization described in Sections 501(c)(3) and 2055(a) of the Internal Revenue Code.  
  • Death taxes: Generally, federal estate tax and any inheritance or estate tax imposed at death by any state of the United States. 
  • Generation skipping transfer tax (GST): A tax imposed under Section 2601 of the Internal Revenue Code.  This is a tax imposed on both outright gifts and transfers in Trust for the benefit of unrelated persons who are more than 37.5 years younger than the donor/testator, or to related persons more than one generation younger than the donor, such as grandchildren.  Confused yet?
    • The GST occurs frequently when grandparents directly transfer money or assets to their grandchildren without first leaving it to their parents.
    • The GST doesn’t just apply to grandchildren though. It also addresses gifts or transfers made to other family members and to unrelated individuals who are at least 37 1/2 years younger than the donor. All such beneficiaries are referred to as “skip persons.”
    • The GST applies regardless if the transfer of property happens as a result of a gift made during the lifetime of the individual making the gift or if the transfer occurs via a Will or Trust.  In fact, a Trust (itself) can be considered a “skip-person.”  
    • Do not worry though, we still have a few tricks up our sleeve (read more about the Unified Credit and GST-exemption amounts below).
  • Unified Tax Credit: Is a lifetime exemption on federal estate and gift taxes, up to an amount that each person is allowed to gift to other parties without having to pay gift, estate, or generation-skipping transfer taxes.  The Tax Cuts and Jobs Act (TCJA) of 2018, more or less doubled the exemptions to $11.18 million per individual, but keep in mind that laws (including tax laws) frequently change along with political shifts.  Through portability (more on this term below) married couples may share their individual amounts as a couple. Effectively, enabling the couple to transfer a large amount of assets tax free to whomever they choose.  This amount is CPI (Consumer Price Index) adjusted every year, and is $11,580,000 for 2020 per individual (or $23,160,000 for a married couple).
  • Generation-Skipping Tax Exemption: GST shares the same lifetime exemption as the federal estate and gift taxes (the Unified Credit), and that exemption is pretty significant as of 2018.  The Tax Cuts and Jobs Act (TCJA) of 2018, more or less doubled the exemptions to $11.18 million per individual, but keep in mind that laws (including tax laws) frequently change along with political shifts.  The TCJA is set to expire at the end of 2025 unless Congress takes steps to renew it. The GST tax rate is 40 percent, so you need to take care to avoid as much of that tax as possible.  This amount is CPI (Consumer Price Index) adjusted every year, and is $11,580,000 for 2020 per individual (or $23,160,000 for a married couple).
  • Portability: Married couples can double the exemption amounts, which can help a married couple to transfer significant assets and wealth without federal taxation.  This can apply regardless of the amount of total value of your estate. You should always consider speaking with an estate planning attorney to ensure that you are maximizing your tax planning strategy.
  • Unlimited Marital Deduction: Speaking of wedding bells, the unlimited marital deduction allows an individual to transfer an unlimited amount of assets to their spouse at any time, including at the death of the transfer, free from tax.  Just to be clear: no tax whatsoever between spouses.

Who needs estate planning?

I will take a guess at what you are thinking: “estate planning is only for the ‘rich’ or people with a lot of assets.”  Is that true though? Almost everyone should have an estate plan. “Why?” you might be asking. There are many reasons to do at least some degree of planning, even if you do not consider yourself “wealthy” (read more below). 

Let’s take a look at a few examples:

  • Individuals with minor children: If you have children who are still minors, you need to specify who will care for the children if both you and your spouse pass away, and how you will provide for that care financially.  You should make these arrangements in your Will, but you should also consider a few other things:
    • Have a discussion with the individuals you choose to care for your children.  
    • Think about how you will finance this care, but also about how to ensure that your children are financially protected.  By using a Trust, you can provide for your children’s care while ensuring that the funds are protected by the Trust (so that no one takes what should rightfully belong to your children).  There are a variety of provisions we can work into your Trust documents to ensure that your children have access to the assets when they need them, but (at the same time) to prevent those assets from being wasted or (worse) stolen.
  • Individuals who own assets in more than one jurisdiction (different states):

Appropriately prepared estate plans can avoid ancillary probate (having to probate in more than one state because you own property in multiple states).  There are a variety of Trusts that we can use, in addition to strategic planning, to avoid ancillary probate.

  • Entrepreneurs or business owners: Succession planning is the key to determining what should be done with your interest in a business (regardless of whether the business interest will be passed on to your heirs or sold).  There are many issues that effect succession planning (buy-sell provisions, rights of first refusal, economic vs controlling interests, etc. – which we will cover in detail in another blog post), but suffice it to say that time is the biggest concern.  Frequently, entrepreneurs or business owners think they have plenty of time (or that they will last forever), but a solid succession plan takes a long time to implement (and requires a lot of patience). You will need to have some difficult discussions with key stakeholders (family, business partners, vendors, employees, shareholders/members, etc.).
  • Individuals who may have to pay estate taxes: Let’s start by pointing out that there are tax saving strategies (for example, the annual exclusion) that literally anyone can use to reduce their taxable estate.  However, while you may not quite be at the Unified Credit capping numbers, you should still have a conversation with your estate planning lawyer or financial planner regarding what taxes will need to be paid upon your death.  You must plan for that payment, regardless of the size of your estate. Additionally, while the Unified Credit may help you with those pesky federal estate taxes, you still need to look at what taxes may be due at the state level (yes, you will also be taxed at the state level).  You need to ensure that you have enough liquidity (cash) to avoid the forced sale of estate assets. If these is not enough cash, assets may have to be sold (potentially ruining an otherwise effective estate plan). There are many planning strategies and tools to discuss, including life-insurance planning.
  • Individuals who care about who gets what: If you do not plan out and determine how you want to transfer your assets (through a Will, Trust, or other planning tool), the state will do so as part of probate.
  • Individuals in occupations with high-liability: If you are a doctor, lawyer, accountant, actuary, contractor or otherwise in an occupation that could be considered a high risk for a law suit or claims from creditors, estate planning can help protect your assets.  
  • Individuals whose spouses are not U.S. citizens: Generally speaking, the unlimited marital deduction is not available for a spouse who is not a U.S. citizen.  There are tools (for example a QDOT Trust) that we can use to allows a non-citizen surviving spouse of a decedent to take advantage of the marital deduction on estate tax for any assets placed into the QDOT Trust before death.  

Individuals who may become disabled: If you are at-risk to becoming disabled, you need to appoint an agent to make decisions for you as part of your estate planning.  Using a Power of Attorney, and a Healthcare Power of Attorney, you can grant powers to your Agent to make (guided) financial and medical decisions on your behalf.  In drafting those documents, we can control how much leeway your Agent has. Additionally, a thorough estate plan can help you prepare for possible Medicaid eligibility as part of the process.


Finally, an estate plan can help accomplish a variety of other objectives (we will dig deeper in future blog posts). Your estate plan can also protect your assets against creditors, primarily using a variety of different types of Trusts (or provisions added to Trust documents). Also, Trusts can fulfill a multitude of other roles (including facilitating transferring business ownership interests, or other assets).

Questions or comments?

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