Estate Planning, Wills and Trusts Designed to Protect Your
Loved Ones
by Michael D.
LarsenThere will always be difficult
decisions to make when it comes to estate planning and
estate taxes. Understanding estate taxes is essential to
estate planning, and estate planning requires making choices
about who should inherit and who should implement your
estate plan. And the sooner you start planning your estate,
the better the outcome.
Here is an overview of
current estate taxes:
- For 2011, and for at least the next two years,
Congress has set the exemption amount—the amount of
money you can pass tax-free to your family—at five
million dollars. For the next two years, a married
couple can pass up to ten million dollars to their heirs
by taking advantage of “portability,” which basically
allows a surviving spouse to use any exemption amount
not used by the deceased spouse. If you are single, with
planning, you can also “double” your exemption in this
way, if you want to leave your estate to a loved for his
or her lifetime. All of this means that for most
people--for at least the next two years-- estate taxes
are not likely to be a problem. If your estate exceeds
these amounts, the estate tax rate starts at thirty-five
percent.
- If you are lucky enough to have an estate that
exceeds five million dollars, you should seriously
consider some tax planning. I frequently recommend to
clients that they can set up an estate plan so that the
surviving spouse can put money into a new trust, called
a “disclaimer trust,” when the first spouse dies. (It’s
called a disclaimer trust because the surviving spouse
puts the money into it by “disclaiming” a certain
amount—saying that he or she doesn’t want the money
directly but wants it to go into a separate trust for
his or her benefit.) Married couples should consider
this even with the current law on “portability.” The
disclaimer trust gives you flexibility in the future if
Congress does not extend the portability feature.
- For a wealthier couple with ten million dollars in
an estate, including bank accounts, retirement accounts,
real estate and life insurance and so forth, the
survivor can decide to put up to the exemption amount
(or less!) into the disclaimer trust. This passes
estate-tax free, because an individual can bequeath up
to five million dollars under current law.
- The surviving spouse does not technically “own” the
money in the disclaimer trust, because a trustee decides
how the money in it is spent. This is true even if the
surviving spouse acts as the trustee of the disclaimer
trust. Regardless of who serves as trustee, the
surviving spouse gets the benefit of the money—the
trustee can spend it on his or her health and welfare.
- The surviving spouse gets the other five million
dollars of the estate directly. She does “own” this
money. When she later dies, she can use her personal
exemption of five million dollars to pass the rest of
the estate to her heirs. Because she does not
technically “own” the other five million dollars in the
disclaimer trust, this is not counted in her estate for
computing the estate tax. In this way, the married
couple has passed a total of ten million dollars without
paying any estate tax.
- Rather than using a disclaimer trust, you can also
set up these trusts so that the tax-saving trust is
funded automatically—the surviving spouse does not have
to make a decision about whether or how much to put into
the disclaimer trust. I often recommend use of the
disclaimer trust for two reasons. First, the surviving
spouse may not want to put the entire exemption amount
into the tax-saving trust. Rather than dealing with the
hassle of having a trustee and filing tax returns for
the trust, he or she may want to own the money outright.
Second, the estate tax exemptions and rates are moving
targets. In the year that the first spouse dies, the
exemption amount may be 5.0 million, 1.0 million or some
other figure. If the tax-saving trust is funded
automatically, the surviving spouse may have “too much”
money in that trust.
- Congress has to revisit this issue in two years, and
it looks like this uncertainty could continue for years
to come. With the disclaimer trust, the surviving spouse
can make a decision about an estate-tax savings trust
when her spouse dies and she has all the facts before
her.
- Even a couple with a more modest estate should
consider the estate-tax savings available through a
disclaimer trust. Your estate can grow over the years,
and Congress could always make the exemption amount low
enough that you are covered when one of you dies.
- Single people can also use these tax-saving trusts,
provided they are willing to leave some of their estate
to someone for life, with any balance going to other
people when that person dies. These mechanisms also work
well for married couples with children, because they
often want to leave the estate to the surviving spouse
for life, with any balance to their children when the
survivor dies.
Regardless of changes in the estate tax in the years to
come, and even if you never have to pay estate taxes, you
should have an estate plan. Families need estate planning to
avoid family conflict and the need to go to court. For
example, if you become disabled without a plan, your family
members will have to go to court to decide who will manage
your affairs. And they may not agree on who should do this.
Going to court can be expensive, can be time-consuming and
can create conflicts within families.
It is
important to remember that if you are sick and unable to
make decisions, your family members will already be under
considerable stress. You don’t want to give them the added
stress of having to go to court to make decisions.
The same logic applies to handling your affairs upon death.
When family members fight over an estate, they all believe
that their view of matters is what their deceased loved one
would have wanted. You don’t want them to have to guess
about what you want! Make it clear, and put it in writing.
You should seek legal advice before drafting an estate
plan. This synopsis cannot take into account the many
factors that may affect your estate plan, so you should use
it as a starting point only for discussion about estate
planning.
Michael Larsen, Esq. is a wills, trusts
and estates attorney with offices in Santa Rosa and San
Francisco. Contact Michael at 707-573-3901 or 877-246-2317
and at Michael@larsenlaw.net. He received his JD from the
University of Chicago in 1985; his website is
www.larsenlaw.net. Michael specializes in estate planning,
probate and trust administration for families with assets
and family in California and France.
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