Estate Planning to Supplement Your Last Will and Testament

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A Last Will and Testament, commonly referred to as a Will, is the most commonly known estate-planning document, specifying what happens to your estate at your death. Without a Will, your estate will be distributed according to the law of intestacy in your state. Having a Will allows you to make specific gifts of money or property to individuals and organizations and to designate who should get the remainder of your estate. However, even with a Will, distribution of your estate can be time-consuming and expensive for those who remain.

Probate
One aspect of a Will that can be time consuming for those who remain is Probate. Probate is the process of verifying that the Will is in fact your Last Will and Testament and of administering the estate. Your Will should be administered in the state where you lived, owned real estate, or if you pass without real estate, within the state where you pass away. If you own real estate in several states, your estate would have to be probated separately in each state in which you own real estate. In your Will, you've most likely named an Executor who will be in charge of probating your Will. Typically it is recommended that the Executor start the Probate process approximately thirty days after your passing, but there is no set time limit. The Executor will take inventory of your assets and liabilities, and will make sure the assets are distributed and the liabilities paid.

Your beneficiaries will not have title to your assets until the Probate court enters an order changing the title. Depending on the size of your estate and how you've titled certain assets, the assets may be tied up in Probate for years.

Estate Tax
One very important task that your Executor will carry out in addition to the Probate process is the payment of estate tax. To calculate your estate tax, your Executor will have to use the inventory of your assets as of your death to determine your Gross Estate. Some deductions are allowed from the Gross Estate in order to arrive at your Taxable Estate, including mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. Also, your administrator must take account of all taxable gifts you've made in your lifetime by adding it to the Taxable Estate in order to compute your estate tax. Finally, the unified credit is subtracted from the estate tax to arrive at the amount you owe. In 2012, the unified credit allows you to exempt $5,120,000 from tax. However, this unified credit amount is set to expire in 2012, which would lower the exemption to $1,000,000 in 2013 and raise the estate tax rate from 35% in 2012 to up to 55% in 2013.

Avoiding Probate & Minimizing Your Estate Tax
While it is difficult to avoid Probate all together, you may be able to shorten the process for your beneficiaries while decreasing your estate tax by taking action while you are alive.

Annual Gifts
First, consider piecemeal giving. The IRS establishes a yearly gifting amount that you can pass on to an individual tax-free. For 2012, that amount is $13,000. If you are married, you and your spouse can each gift $13,000 per year per individual. If you and your spouse have four children, you are able to pass $26,000 per child, totaling $104,000 per year, tax-free. Note that if spouses make combined gifts of $26,000 in a year, they are required to file a Gift Tax return (IRS Form 709) in the year they made a joint gift, with both spouses signing to agree that they elect to treat the gift as split between them. No tax would be due in this example, but the Gift Tax return is still required to be filed.

Joint Title
Next, check the title on your assets. If you intend to pass a family home, you may want to change your ownership to include your beneficiary as a joint tenant. Owning in joint tenancy means that when one of you passes away, the other will assume the entire property. By establishing joint tenancy, however, you are opening yourself up to some risk with your joint tenant, including being liable to their creditors or being unable to transfer the property without their consent.

Outright Gifts and Asset Freezing Transactions
An alternative to owning in joint tenancy is an outright gift of the asset. Here, you eliminate your risk so far as being liable to your beneficiary's creditors, but of course, you lose control over the asset. Also, any gift amount over $13,000 in one year will be added to your taxable estate when you pass. This can still be beneficial if you expect the value of the gifted asset to increase during the remainder of your life. For example, if you transfer a house worth $250,000 to a child during your life, then $237,000 of the gift ($250,000 minus the $13,000 annual exclusion) would be treated as a taxable gift. You would have to file a Gift Tax return (IRS Form 709) for that year and either pay the Gift Tax or elect to apply the gift towards your lifetime exclusion. Let's assume that you live 30 more years after making the gift, and that the property increases in value from $250,000 to $1 Million during that 30 year period. Rather than having a $1 Million house in your estate at your death, your unified credit for gift and estate tax would only be reduced by the $237,000 gift that was made 30 years prior to death. You have "frozen" the value of the asset at the time of the gift, and the future appreciation is not part of your estate.

Family LLC / Family Limited Partnerships
If you're not ready to completely relinquish your control today, or if you'd like to pass an asset to multiple parties, consider the benefits of forming a limited liability company (LLC). By forming an LLC, you are able to transfer your asset into the LLC, name your beneficiaries as co-owners, designate duties and responsibilities for the maintenance of the property, and set restrictions on transfer of interests in the event of death, disability or dismissal of a member. The ownership of the LLC can be shifted over time by making annual gifts of a partial LLC interest that are below your annual gift tax exclusion amount (see "Annual Gifts" above).

Trusts
Similar to forming an LLC, consider the benefits of using a trust. There are several types of trusts that allow you to retain control of your assets while you are alive and protect your assets while avoiding Probate.

  • Revocable ("Living") Trust: Revocable Trusts can be used in place of or in conjunction with a Will, and have the advantage of passing assets to your beneficiaries without the expensive public court supervised process of Probate that governs the distribution of estates.
  • Asset Protection Trust: Asset Protection Trusts allow you to avoid Probate, protect your assets from lifetime creditors, and protect your assets from the costs of long term care such as nursing home or in home care expenses. In addition, a properly structured Asset Protection Trust can ensure that you receive the highest possible standard of care for your situation by allowing your assets to be used to supplement your care during your life.
  • Grantor Retained Annuity Trust (GRAT): GRATs are established by you with invested assets for a specified term. During the term, you receive an annuity, but at the end of the term, anything remaining in the trust, including earnings on the investment, passes to your beneficiaries tax-free.
  • Qualified Personal Residence Trust (QPRT): With a QPRT, you transfer a primary or secondary residence into a trust, but retain the right to use the residence for the term of the trust. When the term is up, the residence passes to the beneficiaries you've named in the trust. Any appreciation on the residence from the time the trust was formed passes to the beneficiaries tax-free.

If you would like to discuss your estate planning options, contact us. We offer fixed rate packages to meet the needs and budget of a wide range of individuals and couples.

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