Estate Planning Simplified
Law Office of
RICHARD M. BASKETT
Attorney - CPA
Suite 234
210 North Higgins Avenue
Missoula, Montana 59802-4497
(406) 5459-1110
www.baskettlaw.com
1
Some Estate Planning Tools
Pre-Death
• Living (Revocable) Trust
• Irrevocable Trust
• Gifts
• Durable General Power of
Attorney
• Durable Health Care Power
of Attorney
• Living Will
• Guardianship
• Conservatorship
At & After Death
• Probate
– Will
• Non-Probate
– Living (Revocable) Trust
– Joint Property
– Beneficiary Designations
•
•
•
•
•
Life Insurance
Retirement Plan
TOD Account (Stocks)
POD Account (Bank Accts)
Beneficiary Deed
2
Common Terms
• Will
• Trust
– Inter Vivos Trusts
• Living (Revocable) Trust
• Irrevocable Trust
– Life Insurance Trust
– Testamentary Trusts
3
How They Compare
Will
• Not effective until death
• Governs Probate assets
• Personal Representative
controls the estate
Living Trust
• Can be used while alive and
to control disposition of
assets after death
• Governs assets held in the
trust
• Trustee controls the trust
4
Elements of a Trust
• Trustor / Settlor / Grantor
– The person who creates a
trust
• Trustee
– Owns legal title to assets in
trust
– Administers trust in
accordance with trust
instrument for benefit of
the beneficiaries
• Beneficiary
– Receives the benefit of the
trust
Trustee
Trustor
Beneficiary
5
Different Uses for Different Trusts
• Living Trust
–
–
–
–
–
Will substitute
Same person is usually Trustor, Trustee & Beneficiary
Avoids probate as to those assets in the trust
May or may not have tax planning use
May or may not continue after death
• Irrevocable Trust
– Usually, tax planning use, such as lifetime gifts to minors or to hold life
insurance policy
– Very restrictive as to any benefit that can be provided for person setting it up
(Trustor)
• Testamentary Trust
– Created under Will, so does not avoid probate
– Not in effect while Testator is alive
– Used for tax planning (e.g., bypass trust) or for asset management (e.g., minor
children)
6
Common Terms (Cont’d)
• Power of Attorney
– Principal
– Agent
• Living Will
– Comfort One
– Advance Directive
• Testate
– Die with a valid Will
• Testator / Testatrix
• Intestate
– Die without a valid Will
7
Common Terms (Cont’d)
• Personal Representative (Executor)
• Trustor / Settlor / Grantor
– Used interchangeably
•
•
•
•
Trustee
Beneficiary
Principal
Agent
8
Common Terms (Cont’d)
• Gift
– Lifetime
• Devise
– Formerly: Real Estate
– Now: Everything
• Bequest
– Cash or other personal property
• Estate Tax
• Inheritance Tax
• Gift Tax
9
Common Terms (Cont’d)
• Probate
– Court-controlled process of distributing an estate
• Probate Assets
– Pass through the hands of the Personal
Representative
• Non-Probate Assets
– Pass directly to the beneficiary
• Estate
– Taxable Estate
– Probate Estate
10
The “Estate”
Probate Estate
• Assets that pass through the
hands of the Personal
Representative and are
subject to control by the
probate court
• Does not include nonprobate assets
Taxable Estate
• Probate Assets +
Nonprobate Assets –
Liabilities
• If less than $3.5 Million, no
estate tax
11
Probate
•
•
•
•
•
•
•
•
Submit Will, if any, to Court
Appoint Personal Representative (Letters)
Collect assets
Publish notice to creditors and pay debts
File decedent’s final income tax return
File any necessary estate/inheritance tax returns
Account for administration of estate
Distribute to Devisees
12
What the Will Controls
• Assets that do not pass by non-probate means
• The Will does not override non-probate
transfers
• Will is effective upon your death
– Can be amended, revoked or replaced any time
prior to your death as long as you have
testamentary capacity
13
What the Will can do
• Pass probate assets
• Create testamentary trusts
– Often, for tax planning purposes
– Also to provide for asset management
• Name Personal Representative
• Name Trustee of Testamentary Trusts
• Name Guardian
14
Elective Share
• A surviving spouse has a right to elect against
a Will and receive the value of the electiveshare percentage of the “augmented estate,”
determined by the length of time the spouse
and the decedent were married to each other
– The elective-share percentage ranges from 3%
after 1 year of marriage to 50% after 15 years
15
Testamentary Trusts
• Created under the terms of a Will
– So, not created until your death
• Tax Planning Uses
– Trust can be created to hold assets for surviving
spouse, but which will not count as part of
surviving spouse’s estate for tax purposes
• Asset Management Uses
– Beneficiary may not be capable of managing
assets (e.g., minor children)
16
Dying Without a Will (Intestacy)
• The state provides a “Will” for you
• Probate assets pass in manner prescribed by
intestacy statute
– In general, to surviving spouse, and then to
children
– Beware: Convoluted rules when decedent has
children other than with spouse
• Still, only probate assets are governed by
intestacy statute; non-probate assets are not
17
Intestacy Examples (Montana)
• Example 1: Husband and Wife have had three
children during their marriage. Upon
Husband’s death, Wife and all (or any) of the
children are still living. His entire estate will
pass to Wife.
• Example 2: Same facts as Example 1, and now
Wife dies. Her intestate estate passes in equal
shares to the three children.
18
Intestacy Examples (Montana)
• Example 3: Husband and Wife have no
children. Husband’s mother is still alive when
Husband dies.
– Wife takes the first $200,000 plus ¾ of the balance
of Husband’s intestate estate.
– Husband’s mother takes ¼ of Husband’s intestate
estate in excess of $200,000.
– However, had any descendant of Husband
survived him, Husband’s mother would not have
taken any share.
19
Intestacy Examples (Montana)
• Example 4: Wife had a child born of her first
marriage. She married a second time, during
which marriage she died, survived by her
second husband and her child.
– The second husband takes the first $100,000 plus
one-half of the balance of Wife’s intestate estate.
– The child takes the other ½ of the intestate estate
in excess of $100,000.
20
Intestacy Examples (Montana)
• Example 5: Wife had a child with Husband
during their marriage and Husband has a child
from a prior marriage. Wife is survived by
Husband, her child and her step-child.
– Husband takes the first $150,000 plus ½ of the
balance of Wife’s intestate estate.
– Wife’s child takes the other ½ of the intestate
estate in excess of $150,000.
– The step-child takes nothing.
21
Non-Probate Tools:
Living (Revocable) Trusts
• Management of assets owned by the trust
– While you are alive (distinguish Wills)
– After you are dead (similar to Wills)
• Tax planning (same as Wills)
• Avoid probate
– Assets in the trust
– Especially useful when assets in multiple states
22
Non-Probate Tools:
Life Insurance
• Beneficiary Designation
• Insurance company pays directly to the
beneficiary, not the Personal Representative
(unless the Estate is the beneficiary)
23
Non-Probate Tools:
Retirement Plans
• Beneficiary Designation
• Again, paid directly to named beneficiary, so
non-probate
24
Non-Probate Tools:
Joint Tenancy
• Passes automatically on death to surviving
joint tenant
• “A & B as joint tenants” or “A & B as joint
tenants (and not as tenants in common)”
• Different tax treatment if joint tenants are
married than if not
• Contrast Tenancy in Common
25
Joint Tenancy vs. Tenancy in Common
Joint Tenancy
• Each co-tenant has
undivided interest in the
entire property
• Deceased co-tenant’s
interest passes
automatically at death to
surviving co-tenant(s)
Tenancy in Common
• Each co-tenant has
undivided interest in the
entire property
• Deceased co-tenant’s
interest passes through
probate estate in manner
directed by Will (or
intestacy statute)
26
Joint Tenancy Pros & Cons
Advantages
• Simple
• Avoids probate
• Especially useful for
husband and wife
Disadvantages
• May frustrate tax planning (in
Will or Living Trust)
• May lose stepped up basis
• May pass to unintended
beneficiary
• Potential claims of creditors of
other joint tenant
• May have right to draw out
account
• May require consent of other
joint tenant to transfer or
encumber
27
Non-Probate Tools:
POD Accounts
• Similar to joint tenancy in that asset passes to
named beneficiary at your death without
probate (need beneficiary designation)
• But, beneficiary has no ownership interest in
account prior to your death
• Change beneficiary at any time
• “POD” means payable on death
• Bank accounts only
28
Non-Probate Tools:
TOD Accounts
• Same as POD Accounts, but applies to security
accounts held at stock brokers
• “TOD” means transfer on death
• Need to fill out a beneficiary designation
29
Non-Probate Tools:
Beneficiary Deeds
• New: Available in Montana as of 10/1/2007
• Operate similarly to POD and TOD Accounts:
– Designate a beneficiary
– Beneficiary has no ownership interest in property
until your death
– Upon your death, your interest transfers
automatically to beneficiary without probate
• Subject to Joint Tenancy
30
Drawbacks to Beneficiary Designations
• Each institution has its own form
–
–
–
–
Life insurance company
Bank (POD Account)
Stock broker (TOD Account)
Retirement Plan
• Each form may differ in what happens if a
beneficiary does not survive
• Each time you want to change your beneficiaries,
requires filling out multiple designation forms
31
Drawbacks to Beneficiary Designations
(Cont’d)
• Example: You have designated your children, A, B & C,
as TOD beneficiaries in equal shares of your account at
a stock brokerage. A has 2 children; B has 3 children,
and C has no children
– If A does not survive you, does A’s share pass to A’s 2
children, or is it divided between B & C?
– If neither A nor B nor C survive you, would you like their
children to receive equal shares (1/5 each) or would you
want A’s children to get 1/6 each and B’s to get 1/9 each?
– If shares pass to anyone who is young, would you want
them to receive their share outright, or should it be
managed by a trustee or custodian?
32
Drawbacks to Beneficiary Designations
(Cont’d)
• Each beneficiary designation form may have
different results as to these issues.
• It is up to you to coordinate all the beneficiary
designation forms to carry out your intentions
33
Drawbacks to Living Trusts
• Inconvenience: If you “fund” (i.e., transfer
assets into) your living trust while you are
alive, from then on you need to deal with
those assets as trustee, rather than in your
individual capacity
• Probate: If the purpose of the trust is to avoid
probate, but at the date of your death not all
your assets are in the trust, a probate may be
required anyway
34
Simplifying Matters
• The goal is to find a way to
– Keep things simple during your lifetime by
avoiding the necessity of dealing with your own
assets through a living trust
– Achieve the benefit of avoiding probate
• Note: For some individuals, especially professionals,
going through a probate provides significant benefits
35
The Solution
• Create a living trust, but do not fund it
– Certain exceptions to this rule
• Use beneficiary designations to name your
trust as beneficiary, with transfers to take
place at time of your death but outside of
probate
36
Benefits of the Unfunded Living Trust
• Avoids the “Drawbacks to Beneficiary
Designations”
– The trust sets forth what happens when a beneficiary
does not survive you
– The trust can be amended from time to time, without
having to go back to amend multiple beneficiary
designation forms
– The Trust can provide for asset management for
beneficiaries who are too young or for any other
reason unable to manage finances
• There is no need to fund the trust while you are
alive
37
The Unfunded Living Trust
• Designate the Trust as the beneficiary where
possible
– Beneficiary of TOD Account
– Beneficiary of POD Account
– Beneficiary of Beneficiary Deed
– Beneficiary of Life Insurance
– Beneficiary of Retirement Plan
• Caution: Often the surviving spouse is the preferred
designated beneficiary of a retirement plan
38
The Unfunded Living Trust
• Transfer assets into the Trust when necessary
– Tangible personal property
• Personal and household effects
• Automobile titles
– Stock in closely held corporations (not held at
stock brokerage) where permitted
• Beware of any agreements restricting transfer
39
You Still Need a Will
• Even with an unfunded living (revocable) trust,
you still need a Will, in case you leave probate
assets
• The Will is where a guardian is nominated if
you have any minor children
• But the Will is very simple, when used in
conjunction with a Living trust
40
Tax Considerations
• No federal estate tax on estates under $5
Million
– Scheduled to drop to $1 Million exemption in
2013
– Probably will not change as scheduled
– If stays at $5 Million, most can plan their estates
without taxes as a concern
• No Montana inheritance tax
41
Tax Considerations (Cont’d)
• Gift tax on gifts over $13,000 / year / person
– $26,000 / year /person for a married couple
– Lifetime exemption of $1 Million
• Cuts into $3.5 Million Estate Tax exemption
42
Some Other Tools
•
•
•
•
•
Durable General Power of Attorney
Durable Health Care Power of Attorney
Living Will
Guardianship
Conservatorship
43
Durable General Power of Attorney
• Designates an agent who is authorized to act on your
behalf
• The agent is to act in your best interests
• The agent does not supplant your authority, cannot
override you
• The agent can, however, do many things that would
otherwise require appointment of a guardian
–
–
–
–
Sign your income tax return
Have access to your bank account
Buy and sell assets in your name
Transfer assets into your living trust
44
Durable General Power of Attorney
• “Durable” if it has language that provides it is to
continue even if you become incompetent
• Can choose whether it is effective immediately, or
only once you become incompetent
– Advantages and disadvantages to both, but generally
recommend making it effective immediately
• Power of Attorney terminates upon your death;
effective only while you are alive
45
Durable Health Care Power of
Attorney
• Same idea as Durable General Power of
Attorney, but limited to medical decisions
• If you are unable to consent to medical
procedure or treatment, someone can be
named to give consent and make decisions on
your behalf
46
Living Will
• Limited to the decision whether life support
should be provided when:
– You have a terminal condition
– Without life support, your death would be imminent
• Usually provides that life support can be
withdrawn, but can provide that life support is to
be continued
• Can name agent to make this decision, or leave it
to the doctors
• Define “life support”
47
Guardianship
• You are no longer competent to handle your
own affairs
• You lose control to the guardian (vs. agent)
• Requires court hearing as to competency, so
lawyers, doctors, witnesses
• If established, requires periodic accounting to
the court
48
Conservatorship
• Similar to Guardianship, except conservator is
responsible for management of your finances,
while guardian is responsible for your person
49
Questions
50