Black’s Law Dictionary, First Edition 1891, defined ‘Estate’ in part as: “The interest which any one has in lands, or in any other subject of property… The word ‘estate’ …comprehends every species of property, real, and personal…”  Decades later the Fifth Edition added, ‘…The total property of whatever kind that is owned by a decedent (deceased; dead person) prior to the distribution of that property in accordance with the terms of a will, or, when there is no will, by the laws of inheritance in the state of domicile (permanent or principal residence) of the decedent.’   Thus, your estate includes your house and any other real estate; financial accounts and non-qualified investments; business interests; retirement benefits and accounts (IRAs, 401Ks, pensions; etc.); insurance policies (death benefit to individual beneficiaries can be received tax-free and excluded from deceased insured’s estate); vehicles; collectibles and other personal belongings.

Basic estate planning can be started by most people; however, due to the complexities of numerous laws and vast choices in financial and estate planning, most people with large estates (even more than $ 1,000,000 in assets) should consider the help of professionals.  One or more of the following may be needed to get the results you desire: an accountant, attorney, bank trust officer, life insurance agent, and other consultants.

 

“There is a common misconception that an estate is only the property that one leaves at death.  In reality, it is much more than that.  The term estate planning in its broadest sense encompasses the accumulation, conservation, and distribution of an estate.  The overall purpose of the estate planning process is to develop a plan that will enhance and maintain the (household’s) financial security… include lifetime financial planning… and facilitate the intended and orderly disposition of property at death.”[i]   The following include topics related to estate planning:

I. LIVING WILL:

A living will (advance medical directive) is a legal document used to communicate your desires concerning future medical treatment in the event you are not able to speak for yourself.  The legal contract requirements vary by state; however, the general purpose is the same.  Living wills specify which life prolonging treatments you do or do not want in the event you become terminally ill or enter into a vegetative state.  The document should be given to at least two individuals who would be most likely to communicate your request.  This directive is not effective until you are incapacitated and unable to communicate.  Certification of your condition by a physician is usually required.

II. FUNERAL ARRANGEMENTS:

Personally, I tell my wife and kids, ‘when I die, my soul will fly, but you can put my body (t-shirt and jeans) in an online discount casket and bury it in the country near the old church; or nuke (cremate) it and cast my ashes in the Mediterranean Sea or Mississippi River if you don’t want me on your cruise.’  The truth of the matter is that dealing with the death and funeral arrangements of a loved one can be very stressful and difficult.

Many individuals do not consider or care to deal with helping their spouse, children, or siblings, by aiding in the planning for their own funeral.  For many family members, your input concerning your final arrangements is often more important than the money needed for funeral expenses.  Your opinion or desire as to burial or cremation, your final resting place, memorial service, costs and how to achieve the arrangements, and even help with your obituary, will help prepare your family, as well as relieve some future stress.

III. ASSETS:

One of the most important steps in estate planning is making an inventory of your assets.  Seeing that you would probably rather give your money to other entities than the IRS, do not get to caught up in auditing your non-collectible books, clothing, CDs and DVDs, and other personal items.   Reasonable garage sale prices on furniture, exercise equipment, and personal items are most practical.

BASIC INVENTORY OF ASSETS and LIABILITIES
ITEM*	Year acquired	Loan Balance	Ownership (who & how)**	Current Balance (Value)
Checking Accounts
Savings Accounts
Money Market Accounts
CDs
Treasury bills
Treasury bonds
Stocks
Bonds (Corporate)
Bonds (Municipal)
Mutual Funds
Annuities
Life Insurance (cash value)
Business interest
Pension Accounts
401K; 403B; SEP; etc.
Other IRAs, etc.
Trusts, royalties, etc.
Other financial accounts
Personal Residence
Other Residence
Investment (residential)
Investment (commercial)
Land
Other real estate property
Automobiles
Boats and other vehicles
Household furnishings
Jewelry
Collections (art, coin, etc.)
Other personal assets
Credit Cards
Personal loans
Bank loans
Securities margin loans
Income taxes owed
Other taxes
Other charge accounts
Child support/alimony due
Medical bills due
Other personal liabilities
* Items – attach list of accounts are individual stocks, funds, etc.** who – husband, wife, child, etc.; how – joint, community property; etc.

Because estate planning involves the accumulation, conservation, and distribution of assets, investing, retirement planning, insurance plans and succession objectives all fall within its scope.  For more information on planning for retirement see the article entitled RETIREMENT PLANNING.

Your amount of assets is directly related to your ‘total gross estate’ and thus your ‘tentative taxable estate (IRS Form 706; U.S. Estate & Generation-Skipping Transfer Tax Return).’   For large estates, using ‘allowable deductions,’ ‘transfers,’ trusts, life insurance, and other methods of reducing estates and estate taxes is very significant.  According to the U.S. Census Bureau there are over 114 million households (average of 2.6 persons).  It is estimated that about 1.1 million households have net worth’s over $ 5 million.   Thus less than 2% of the households are subject to federal estate taxes; yet, most are subject to probate, taxes, and other expenses.

IV. LIFE INSURANCE:

There are numerous uses of life insurance in estate planning.  Life insurance can provide an almost immediate source of funds for final and ongoing household expenses. Life insurance can create a lasting legacy for a family or charity.  Death proceeds can be excluded from both estate assets and probate.  These benefits can also offset or replace other assets, such as real estate, a business, or a farm.

Of course life insurance can be used to provide funds for death and transfer taxes, income taxes, estate settlement or probate costs, as well as the debt obligations of the deceased.  In order to ensure that a life insurance policy is excluded from the estate, chosen heirs should be both the owners and beneficiaries. If ownership is transferred within 3 years of the deceased date of death, then the policy may still be included in the estate.

If the estate, a business, or trust is made beneficiary of the deceased, then they will receive the one-time tax free payment of the death proceeds.  And transfers or payments of funds after that will likely be taxable to the heirs.  You may be required to attach IRS Form 712 – Life Insurance Statement with the Form 706 Estate… Tax Return.  Form 712 will ask for the name of the policy owner and proof by a copy of the application (inside the policy) or a copy of the assignment.  The form will ask if ‘there any transfers of the policy within the three years prior to the death of the decedent?’

Though large estates can benefit through Trusts, by making your children owners, applicants, and beneficiaries of a life insurance policy, and by gifting the premiums up to the allowable amount, you can exclude the policy from the estate while at the same time efficiently reducing and using assets of the estate.  You should determine your objectives and compare individual and survivorship plans. If one or both spouses are unhealthy, then single premium or survivorship life insurance policies may provide better returns.

V. MARITAL DEDUCTION:

The marital deduction is the most used tax reducer.  There is currently no limit to the amount of the marital deduction.  However, excessive use of this deduction can lead to higher taxes on heirs.  The marital deduction defers taxes on the remaining transferred property until the death of the second spouse.

On December 17, 2010 the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law.  This act increased the estate, gift, and transfer tax exemption to $ 5 million per person and $ 10 million per couple.  Moreover, the Act allows for ‘spousal portability,’ which is the ability of the surviving spouse to use any unused exemption amount of a predeceased spouse.  However, unless Congress extends these provisions, on January 1, 2013 the exemption will revert back to $ 1 million.

If Congress extends the portability law then spousal bypass trust will not be necessary.  However, there is no guarantee as to what Congress will do in the future concerning the exemption amount and portability provision.  Couples should seek professional advice to learn if a QTIP (Qualified Terminable Interest Property – marital deduction) Trust is in their best interest.

VI. TRANSFERS:

The Estate Tax is a tax on your right to transfer property at your death.  Obviously, individuals can make transfers by their will and by the law during their lifetime; and they can make transfers by their will and by the law at their death; or they can be forced to make transfers by law at their death.

One of the best ways to reduce the estate and thus possible estate taxes is to make transfers and donations during their lifetime.  In 2012, an individual can gift up to $ 13,000 per person with no taxes due.   Or according to the IRS Tax Tip 2012-62, ‘Eight Tips to Determine if Your Gift is Taxable,’ “…Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2012, the annual exclusion is $13,000.  Gift tax returns do not need to be filed unless you give someone, other than your spouse …more than the annual exclusion for that year.  Generally, the person who receives your gift will not have to pay any …tax …You cannot deduct the value of gifts you make (other than deductible charitable contributions).  …The following gifts are not taxable gifts: Gifts that are do not exceed the annual exclusion…
Tuition or medical expenses you pay directly to a medical or educational institution for someone; gifts to your spouse; political organizations… and …charities.   You and your spouse can make a gift up to $26,000 to a third party without making a taxable gift…”

VII. EXECUTOR / EXECUTRIX:

An executor (executrix – female) is a personal representative appointed by a testator (one who makes or has a testament or will) to carry out the wishes and directions in their will, and to dispose of the property according to the will or testamentary provisions after their death.  One may have co-executors.  If you die without a will, or without naming an executor in your will, or if you named an executor and they are unable or refuse to serve as your executor, then a judge (the court) may appoint an executor – which will report to the probate court.  It is possible for a creditor to be appointed by the court if none is named.

Some states allow a testator (you) to appoint an ‘independent executor’ which has the power to distribute the estate’s assets without being subjected to the probate court.  This can significantly lower probate cost which generally run from about 2% to 4% of the estate.  You should give serious consideration to writing a will and naming an executor (and a co-executor/executrix if desired), as well as naming contingent executors in the event that your primary choices do not serve.  Remember an executor will usually be required to keep up the estate and pay bills until real estate is sold and all the property is distributed as required.

VIII. WILLs and APPOINTMENTS:

Black’s Law Dictionary defines ‘Will’ as: “Wish; desire… choice… A ‘will’ is generally defined as an instrument by which a person makes a disposition of his property, to take effect after his death, and which by its own nature is ambulatory (alterable; changeable) and revocable during his lifetime.  …The legal declaration of a man’s intentions which he wills to be performed after his death… A written instrument executed with the formalities required by statutes (law)… Conditional will …is one which depends upon the occurrence of some uncertain event… Joint will …is made by two or more persons and is jointly signed by them…”[ii]  Because wills are legal documents, they are subject to the laws of the state in which they are written or executed.  Many states allow an oral will (nuncupative will) which is witnessed at a person’s deathbed.  You do not have to file your will with the court; however, it is typically required that your will be witnessed.  You should have your will notarized and give copies to at least two trusted and reliable children, siblings, and or friends.

Your Will should include your full name (names if joint) and state of residence; and an introductory and or declaration clause that explains the Will is your ‘last will and testament;’ and often states ‘I hereby revoke all prior wills…’  It should name your executors.  It should give the full names of all your children; and appoint or name intended guardians and or custodians for children under 18.  It should express your desire for your residence(s).  It should list the assets or major assets that you own at the time of the will.  It should list your intentions and conditions for the distribution of the assets.  It should be signed and witnessed.

IX. TRUSTS:

A trust is a legal arrangement created by one or more persons for the benefit of another or others.  It is a vehicle or entity which holds money or property for the beneficiaries.  Real or financial assets are given by a person(s) (the donor) to be held by one party (the trustee) for the benefit of a third party (the beneficiaries).   There are numerous ways to use revocable and irrevocable trust arrangements.

Revocable trusts allow the grantor or donor to amend or terminate the trust arrangement.  The donor maintains control over the terms and parties of the trust.  Revocable trusts allow property to bypass probate and its often excess costs, and it usually will keep the trust assets from public disclosure. The greatest disadvantage is that because the donor maintains control over the assets, the assets are not removed from the estate and are subject to estate taxes.

Irrevocable trusts as the name implies are permanent and unalterable contracts.  The terms, conditions, and assets of the trust are put in writing and the contract is signed binding the donor’s words and wishes to the beneficiaries.  Nevertheless, the donor or grantor can make pre-determined conditions and set up the trust in such a way that executors and trustees can be replaced if they are not serving the best interest of the beneficiaries.  The terms of when and how the beneficiaries can get the assets can be defined.   Additionally, Charitable Trusts can be used to reduce current taxable income as well as future estate taxes.

There are advantages to putting life insurance into a trust, such as the peace of mind that premiums will be paid and the policies will be used according to your wishes. However, trusts also pay high taxes; and as stated, if it is revocable or if the owner(s) retain any substantial rights or powers over the trust, the assets will remain in the estate.  Whereas, if the beneficiaries are of age and responsible, making them joint-owners of your life insurance policies (if they are the original owners or if the ownership transfer occurred at least three years ago) would normally allow them to receive the death proceeds tax-free.  NOTE: IRS Form 1041-ES (2012) income ‘Tax Rate’ for estates & trusts ‘over $ 11,650 …the tax is $ 3,011 + 35%.’

X. Charitable Giving:

Carnegie is quoted saying, ‘As I grow older, I pay less attention to what men say.  I just watch what they do.’  It has been recorded of the industrialist Andrew Carnegie, one of the richest men in the world at the time, that before he died he spent his last two decades giving away more than 90 percent of his wealth.  He funded or helped fund over 2,500 libraries in over a half-dozen countries.  He put conditions on their free public use and required the local towns to put up a portion of the funds.  Giving to charities is one of the best ways to reduce income and estate taxes.  It is often wise to give directly and at times with conditions; also, you should consider researching the charity’s administrative cut and costs.

XI. Taxes:

As stated by the IRS website in 2012: “The Estate Tax is a tax on your right to transfer property at your death.  It consists of an accounting of everything you own or have certain interests in at the date of death (refer to Form 706).  The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your ‘Gross Estate.’  The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets… Once you have accounted for the Gross Estate, certain deductions… are allowed in arriving at your ‘Taxable Estate.’  These deductions may include mortgages and other debts, estate administration expenses, property that passes to a surviving spouse and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify… Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return.  A filing is required for estates with combined gross assets and prior taxable gifts exceeding …$5,000,000 or more for decedents dying in 2010 or later.”

The unified credit on the current 2012 basic exclusion amount is $ 1,772,800 exempting $ 5,120,000 from tax.  Nevertheless, if Congress does not act, in 2013 the Federal estate tax exclusion is set to revert back to $ 1,000,000 per individual, with a maximum marginal estate tax rate of 55% on amounts over $ 3,000,000 after deductions. The primary estate tax deductions are: the marital deduction, charitable deductions, mortgages and debt, and expenses and losses during the administration of the estate.  While you are still kicking, remember the IRS states, ‘…you generally can give gifts valued up to $ 13,000 per person, to any number of people, and none of the gifts will be taxable.’

In addition to filing Form 706, the United States Estate and Generation-Skipping Transfer Tax Return, you may be required to enclose a copy of the death certificate, the decedent’s will and relevant trusts, appraisals, proof of losses, transfers, and other documents.  The ‘706’ estate tax is paid by the estate, whereas state inheritance taxes are paid by individuals heirs.

XII. Succession:

All states have succession laws; however, many states do not assess inheritance taxes.  Succession is the body of law dealing with the distribution of a person’s property after they have died.   The process will vary per state and size of estate.  Some states have time constraints on when a succession must be opened.  Successions are affected by the wishes of decedent and whether they died testate (with a valid testament or will); or intestate (without a valid will) and thus subject to the states laws as to who inherits what property and how it is distributed.

You should always make sure of the current federal and state laws before basing your decisions on previous legislation affecting successions, probate, trusts, taxes, gifting and estate planning.  Depending on your goals and the size and needs of your estate, you should consult the appropriate tax, legal and professional advisors.  You should feel reasonably comfortable with both your choices and your ‘paid’ advisors.  You should be free to review and amend your decisions.  Before committing to irrevocable plans or signing half your estate over to the ‘trustworthy and caring’ nurse, housekeeper, ‘spiritual advisor,’ or 4th spouse, you should consider the long-term results of your decisions and whether you want to divide or apportion differently among your children, grandchildren or charities.  There is a proverb stating: ‘A good man leaves an inheritance to his grandchildren.’