Why have an Estate Plan?

  • For an orderly transfer of your property as soon as possible after your death
  • To avoid paying unnecessary taxes and fees
  • To avoid probate
  • To avoid public disclosure of your estate

What options are available
when planning my estate?

In planning your estate there are various options from which you may choose, depending on the size of your estate, the type of assets you own, and your objectives. Sit down with your attorney and discuss your situation to come up with an estate plan that is right for you and will accomplish your objectives.

What are the advantages of a Will?

  • Choose who will receive your assets
  • Choose the person who will administer your estate
  • Appoint a guardian for your minor children
  • Save capital gains income taxes on the sale of appreciated property. Heirs will get a step up in basis.

Why avoid Probate?

Probate is the legal process through which the court oversees your estate to ensure that your debts are paid and your assets are distributed. An estate is probated with or without a will. With a will, your assets are distributed as you direct. Without a will, your assets are distributed according to state law. If you own real property in more than one state, your family could face probate in each state. Probate is also a lengthy public process, usually taking anywhere from 9 months to 2 years. Assets are generally not fully distributed until probate is completed.

Why won't Joint Ownership avoid Probate?

Joint ownership will just postpone probate. When one owner dies, full ownership transfers to the surviving owner without probate. But when that owner dies without adding a new joint owner, or if both owners die at the same time, the asset must be probated before it can go to the heirs. In addition, the surviving joint owner will not receive a step up in basis, therefore, paying a capital gains income tax on the original basis of the property.

What is a Step Up in Basis?

Your basis in an asset is what you paid for the asset at the time you bought it. A step up in basis is the fair market value of the asset at the date of death. This theory can best be illustrated in the following example: If you bought a parcel of land in 1960 for $5,000 and have it in joint ownership with your beneficiary and you die, your beneficiary will have a basis in the property of $5,000. If your beneficiary sells the property for $100,000, a $95,000 capital gain will be taxed, (the difference between $100,000 and $5,000). Your beneficiary will have to pay income tax on this increase in value. Compare this to putting this same parcel of land in a living trust. When you die, your beneficiary will get a step up in the basis to $100,000 rather than the $5,000 basis that you had. The step up in basis is the fair market value of the asset on the date of your death. Thus, if your beneficiary were to sell the property for $100,000, there would be no capital gain to be taxed because of the step up in basis.

How can I take advantage
of the Federal Exemption?


With no living trust
Married couple has 3 million dollars in assets and each has a simple will naming the other as beneficiary. 1. Husband dies first. On his death, there may be no tax due because of the unlimited marital deduction. All the property passes to the wife tax free. 2. Wife dies in 2005. On the death of the wife, taxes would total about $720,000! The estate of the second to die is assessed for Federal/State Estate Taxes.

With a living trust*
Married couple has 4 million dollars in assets and both have revocable living trusts with 1.5 million in assets in each trust to preserve the individual Federal Exemption. 1. Husband dies first. No taxes. His trust takes advantage of his 1.5 million Federal Exemption for 2005. The husband's 1.5 million trust generates income for his wife until her death, at which time his trust assets are distributed to beneficiaries named in his trust. 2. Wife dies in 2005. No taxes. Her trust takes advantage of her 2 million Federal Exemption and her trust assets are distributed to the beneficiaries named in her trust.

* The Federal Exemption in the above example will increase each year until 2010. Beginning in 2010, there will be a stepped-up basis provided for 1.3 million of an estate's capital gains with an additional $3 million exemption for gains transferred to a spouse. Beyond that, and unless Congress changes the law, a carryover basis will apply.

Is a Living Trust expensive?

Not in the long run when compared to the costs and loss of control that come with court supervision at incapacity and death. How much you pay for preparing a trust and pour over will depends on how complex your estate plan is.

If I have a Living Trust,
do I still need a will?

Yes, you should have what is called a "pour over" will. This is a safeguard for any assets not transferred to the trust. For example, if you win the lottery and have a heart attack and die before you can transfer the winnings to your trust, a pour over will "catches" the forgotten asset (lottery winnings) and sends it into your trust. The asset may still have to go through probate first, but at least it can then be distributed as part of your living trust.

The Future of Estate Taxes

The economic Growth & Tax Relief Reconciliation Act of 2001 ("EGTRRA") is the most significant gift, estate and transfer tax legislation in 20 years. However, as of 2010, all estate tax and generation-skipping transfer tax (but not gift tax) is repealed, unless legislation is reenacted. Pre 2002 law returns in 2011. While we must plan for the law as it now exists, we must also keep in mind that things may (and probably will) change again over the next ten years.

What should a basic
Estate Plan include?

  1. Will or Trust depending on the size and nature of your estate
  2. Power of Attorney for property to appoint another person to handle your assets for you while you are living but are disabled and unable to do it yourself
  3. Power of Attorney for health care to appoint another person to make decisions regarding life support if you are unable to do so yourself

How do I determine my Gross Estate?

Your gross estate will include all real and personal property, including jointly-owned property, interests in pension plans, life insurance and stock. A wide range of other assets are included for estate tax purposes.

What are the disadvantages of a Will?

  • A will must be probated
  • Probate is expensive
  • Distribution of assets is delayed
  • Your will becomes public
  • Possible will contest

What is the difference between a "Living Will" and a "Living Trust?"

A living trust is for financial affairs and it protects your assets. A living will with medical power of attorney is for medical care. It lets others know how you feel about life support in terminal situations.

What are the advantages
of a Living Trust?

Same benefits as a will with none of the disadvantages PLUS:

  • Avoids probate
  • Avoids multiple probate if you own property in more than one state
  • Can reduce or eliminate Federal/State estate taxes
  • You can be your own trustee until your death when a successor trustee, whom you have named, takes over
  • Brings all your assets together under one plan
  • Allows quick distribution of assets to your beneficiaries
  • Assets can remain in your Trust until beneficiaries reach the age(s) at which you want them to inherit
  • May be changed or canceled at any time
  • Prevents unintentional disinheriting and other problems of joint ownership

What is a Living Trust?

A living trust is a legal document containing instructions for ownership of your assets. You transfer the title to assets from your name into the name of your living trust. You keep full control of the assets in the living trust and act as trustee. As trustee of your living trust, you can do anything you could do before the transfer, nothing changes but the names on the titles. And, as long as you are the trustee of your living trust, no separate income tax returns need to be filed. One of the many advantages of a living trust is maximizing the unified tax credit which calculates the Federal Exemption. According to the table below, if the new value of your estate is more than the amount shown in table 1, Federal/State Estate taxes must be paid. However, if you are married and you and your spouse each have a living trust, each of you can take advantage of the amount exempt. Thus, in the year 2003, you and your spouse can leave up to $2 million tax free to your beneficiaries. This will save about $490,000 in estate taxes, plus thousands of dollars in probate costs.

Table 1.
Amounts exempt from federal transfer tax, 2004-2011

Calendar YearExemption from Estate Tax and Generation-Skipping Tax at DeathHighest Estate Gift and Generation-Skipping Tax Rates
2004$1.5 Million48%
2005$1.5 Million47%
2006$2.0 Million46%
2008$2.0 Million45%
2009$3.5 Million45%
2010N/A (Taxes Repealed)35% (Gift tax only)
2011Pre-2002 Law Returns Unless 2001 Law Reenacted55% (?)

Starting in 2002, the gift tax exemption amount will be increased to $1 million and will remain at that level. Starting in 2010 (the scheduled year of repeal of the estate gift tax), gifts in excess of a lifetime $1 million exemption will be subject to a gift tax equal to the top individual income tax rate at that time (35% under the act). Retaining the gift tax is intended to prevent the use of gifts to transfer income-producing property for higher-bracket to lower-bracket taxpayers.