Advisor - 12 Things

Wills and revocable trusts: together, these two documents direct the distribution of assets at your death, appoint the personal representative (executor) and trustee who will administer your estate at death, appoint a guardian for any minor children, direct which beneficiaries will suffer any taxes that might be due at death, permit the personal representative to sell real estate without court oversight, and (usually) waive the requirement that your estate purchase a surety bond to insure against misdeeds of the personal representative.
The expense and delay of the probate process at death, that in some states is terrible and in others not so bad, and how to avoid it with jointly owned property, using beneficiary designation features where available, and by funding your revocable trust with your assets during your lifetime.
Leaving a beneficiary’s inheritance to a trust for his or her benefit in order to protect the funds from the beneficiary’s creditors and from any divorcing spouse of the beneficiary.
• Only an independent Trustee will be authorized to make distributions to the beneficiary.
• Consider not mandating distributions to a beneficiary at any specific ages, even for a high-functioning adult beneficiary.
Empowering an adult (say, over age 25) beneficiary where a trust is used.
• Name the beneficiary as a co-Trustee to participate in investment decisions.
• Allow the beneficiary to choose his or her own independent Trustee.
• Give the independent Trustee broad discretion to make distributions.
• Authorize the beneficiary periodically to remove the independent Trustee.
• Allow the beneficiary’s own will to direct the distribution of any property remaining in the trust at the beneficiary’s death.
Trust administration.
• Options for choosing an independent Trustee, consideration of conflicts of interest, compensation of the Trustee.
• Rules governing prudent investment of trust assets.
• Setting efficient automated distributions to the beneficiary and how the independent Trustee handles less frequent discretionary distributions.
• How Trustees account to beneficiaries and obtain release from liability.
Impact of federal and any state estate taxes on inheritance.
• Federal exemption is now $12.06 million, and tax applies only to amounts that exceed the exemption; so, a married couple ought to be able to exempt just over $24 million before beneficiaries suffer federal estate tax. 40 percent tax on amounts in excess of the exemption.
• Many states have no separate estate tax. Others have a separate estate tax but offer an exemption equal to the federal exemption, while other states have smaller exemptions. Massachusetts has no estate tax on an estate of $1 million or less, but if the estate is greater, there is estate tax on the entire estate with no exemption. Rates range from 4 percent to 16 percent. Any state estate tax is deductible against the federal estate tax.
• The estate taxes do not apply to assets passing to the surviving spouse (so long as the surviving spouse is a U.S. citizen) or to a so-called “marital trust” for the benefit of the surviving spouse. And the estate taxes do not apply to assets passing to charitable organizations.
Common estate plan for the benefit of the surviving spouse of a married couple:
• Establish a trust for the benefit of the surviving spouse, with distribution options that can be considered after the first death of a spouse. The Personal Representatives and the Trustees, in conjunction with the surviving spouse, can determine whether funds will remain in one or more trusts for the benefit of the surviving spouse or pass outright to the surviving spouse, and the choices will provide different opportunities for estate tax savings and capital gains tax savings.
• Discuss whether each spouse has sufficient assets in his or her own estate to be able to fund a trust for the benefit of the surviving spouse with at least up to $1 million, so that the option exists of using (and not losing) an exemption from Massachusetts estate tax. Consider transfers of assets or division of joint assets in order to achieve sufficient separate assets.
After your death and after all estate taxes are paid that must be paid, consider that an inheritance passing outright to a child will be exposed to estate tax all over again at the child’s death. Eliminate exposure of the inheritance to estate tax at the child’s death by leaving the inheritance to a trust for the benefit of the child and allocating to the trust your exemption from generation-skipping transfer tax (GST tax). Your exemption from GST tax is now $12.06 million—same as the exemption from federal gift/estate tax.
Income taxation of trusts and beneficiaries.
• General rule: after your death, your revocable trust becomes a separate taxpayer—it files an annual return and pays tax on its ordinary income and gains.
• Exception: in a year that the trust distributes funds to a beneficiary, the distribution includes the ordinary income earned by the trust, and so the beneficiary pays the tax on that income instead of the trust. Helpful because beneficiaries are often at a lower income tax bracket than the trust.
Additional techniques for reducing exposure of assets to estate tax.
• Consider making lifetime gifts to reduce exposure to estate tax, but only when you no longer need the assets for your own support. Gifts are often made to irrevocable trusts for the benefit of family members for the same reasons discussed in paragraph three above.
• A life insurance policy can often make a great gift—all you have to do is give up control of the policy (ability to surrender or sell the policy, to borrow funds from the policy and change the beneficiaries) to avoid estate tax on the death benefit.
• For estates with potential exposure to federal estate tax, consider making lifetime gifts to use the annual exclusion from federal gift tax of $16,000 per donee. Also consider making use of the larger federal estate tax exemption during life in order to remove from the estate the future income and appreciation of the assets given.
Charitable techniques for reducing exposure to estate tax.
• Charitable bequests at death (during lifetime is even better in order to obtain an income tax charitable deduction).
• Consider donating retirement benefits and IRAs at death, which otherwise are burdened by both estate tax and income tax.
Additional estate planning documents:
• A power of attorney that names one or more agents to handle your financial matters— generally intended to be used if you are not competent to handle such matters.
• A health care proxy that names one or more agents to handle your health care matters if you are not competent to handle such matters.
• A so-called “living will,” providing direction to your health care agent regarding your wishes with respect to life support.
• A waiver of your federal health privacy rights in favor of your health care agent and other family members.