Estate Planning Overview: Basic Rules

Basic Estate Planning Considerations

Minimizing current and future income taxes - ways to handle and/or structure assets to provide optimum income tax relief while meeting the current and future goals of the client

Minimizing possible estate and GST taxes upon death - lifetime gifting and testamentary planning and asset structuring to provide optimum estate tax treatment; can also include planning for payment of estate taxes expected in larger estates

Controlling division and distribution of estate - deciding who gets to share in your estate, what they get, and under what conditions they get or don’t get their share; provides vehicle for clarifying your testamentary intentions and desires

Emergency contingencies - use of durable powers of attorney, and Living Trusts, to designate persons to act on your behalf when you cannot act for yourself; also allows you to provide guidance and instruction concerning personal care, life-sustaining treatments and financial matters

Long-term healthcare - planning to ensure sufficient resources to provide for long-term care and treatment if needed

Elder care - care and treatment of the elderly, including obtaining Medi-Cal, assisted living and conservatorships

Simplification of estate administration and reduction of costs thereof - organizing estate and assets so estate can be administered in an orderly and easy manner; reduces costs by streamlining administration and avoiding probate

What is the "Estate?"

Ë Market value of all assets – including life insurance, pension benefits, business interests, tangible personal property.

Includes property owned by or in which an individual has an interest – may even include assets previously sold or gifted to children or loans provided to children.

What can you gift to others without paying tax dollars out-of-pocket?

Unlimited gifts to U.S. citizen spouse, either during lifetime or at death.

Non-U.S. citizen spouse, can gift up to $110,000 per year. Note this amount is indexed for inflation and may increase slightly each year.

Annual gifts to others not in excess of $11,000 per recipient per year.

Lifetime transfers in excess of the annual exclusion not to exceed $1,000,000

Spouses can join in gifts to double the exemption amounts.

Unlimited gifts to charity, either during lifetime or at death.

What are the forms of holding title?

Separate Property – owned prior to marriage or received by gift or inheritance.

Community Property – acquired during marriage through the earnings of either spouse (absence a written agreement to the contrary).

Tenancy-in-Common – each tenant owns a fractional interest in the whole.

Joint Tenancy – each tenant owns 100% of the asset. (Don’t understand? That’s why you need a lawyer.)

Trust – the trustee holds title for the benefit of another (this can be you).

Custodian – the custodian holds title for the benefit of another, usually a minor child or young adult (age 25 or under).

What are the techniques of leaving property to others?

Will: Testamentary gift; requires probate. Do not confuse probate with estate taxes. Statutory compensation for attorneys and executors based upon gross value of assets. For example, on $1 million in assets the attorney and executor each receive compensation in the amount of $21,150.

Joint Tenancy: Property automatically owned by surviving joint tenant

"Totten Trust": Bank account left to a surviving beneficiary (a.k.a. pay-on-death account).

Living Trust: Created during lifetime, revocable; designed to avoid probate. Can minimize the effect of estate taxes.

Irrevocable Trust: Created during lifetime, irrevocable; designed to avoid probate, usually for avoidance of estate taxes.

Uniform Transfers to Minors Act: Available to minor children and young adults (age 25 and younger).

Contract: Life insurance, pension and IRA, salary continuation agreements.

Life Estate: Retained life interest in personal residence or farm, then passing to charity.

Charitable Remainder Trust.

Pooled Income Fund.

Lead Trust.

There will be no estate tax for deaths occurring during 2010. However, the changes made by EGTRRA automatically expire on December 31, 2010, at which time the top estate tax rate will revert to 55%, the large-estate surcharge will apply, and the amount that can be protected from estate taxes will drop to $1 million.

When an asset is sold, the owner pays capital gains taxes on the profit. For these purposes, "profit" is the excess of the sales price over the owner’s tax basis in the property. If the owner bought the property, his or her tax basis is generally equal to what he or she paid for it.

Under current law, when a death occurs, a beneficiary who inherits an asset is allowed to use the asset’s value on the date the deceased owner died as his or her new tax basis in the asset. Because of this "step up" in basis, only the post-death appreciation is subject to capital gains taxes if the beneficiary decides to sell the asset.

Under EGTRRA, for people dying in 2010, this "step up" is greatly limited. For assets inherited during 2010, the beneficiary’s basis will be the lesser of 
(i) the deceased’s adjusted basis, or 
(ii) the asset’s value on date of death. The new basis could go down, as well as up. 

So if you paid $1,000 for the asset originally, and it was worth $500 on the date of your death, your heirs would inherit the asset with a $500 cost basis ("stepped down").

To help offset the additional income (or capital gains) tax beneficiaries will pay, EGTRRA gives every U.S. citizen and resident a $1.3 million "aggregate basis increase" to allocate among the deceased’s assets. Estates of non-resident aliens are given only a $60,000 basis increase.

This increase can be allocated among assets in any way the deceased’s personal representative decides, but no asset’s basis can be increased above its date of death value. The basis increase cannot be applied to several types of assets, including, for example, assets in your retirement plan.

The estate of a married person receives an additional $3 million basis increase to be allocated to property passing to the surviving spouse. For non-resident aliens, this $3 million additional basis increase is not available. The additional increase can be combined with the basic $1.3 million increase, so that assets passing to a spouse are eligible for a $4.3 million basis increase.