Estate Planning – Uncle Sam Hopes You Won’t Do It

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No one wants to talk about dying. But, as the quote often attributed to Ben Franklin says, “nothing is certain but death and taxes.”

And if you don’t make plans for what happens to your assets after you die, Uncle Sam, as well as several state governments will reap a good portion of the assets you’ve accumulated from working, saving, and investing. Your first goal should be to protect your estate from taxes, so you can maximize the monies that you pass on to your heirs and beneficiaries.

But you may have other goals, too, including:

  • Protecting your business and making sure there is a plan in place so that it will continue after your death. You’ll want to ensure it is incorporated properly to minimize taxes and you’ll want to ensure that you have enough insurance to keep it going, at least in the short-term.
  • Providing for long-term care for yourself and your spouse.
  • Allocating assets to care for minor or disabled children, or your pets.
  • Supporting a non-profit or charitable organization.
  • Directing the use of assets for your children’s or grandchildren’s education
  • Protect your wealth against creditors.

Consequently, it’s time to make a plan!

Let’s start very simply—with information. There are two primary taxes you have to worry about:

  • Estate Tax. As of this year, your estate must file a U.S. estate tax return if your individual estate is valued at $11,580,000 (if single) and $23,160,000 (if married) or more upon your death (which is why this is also sometimes referred to as the Death Tax). For the vast majority (99.8%) of Americans whose estates are below that level there will be no estate tax from Uncle Sam. Here is a link to current estate tax rates: If you live in Connecticut, Delaware, Hawaii, Illinois, Massachusetts, Maryland, Maine, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont, Washington State, and Washington, D.C., your state also has an estate tax, and some of those are applicable to estates much smaller than $11,580,000. Make sure you check the threshold in your state.The Executor—not the beneficiaries—of your estate will be responsible for paying your estate tax—before any proceeds are paid out to your heirs.
  • Inheritance Tax. Also sometimes referred to as a Death Tax, this is a state tax that your heirs (the beneficiaries of your property) pay on the assets they inherit from your estate. It is calculated separately for each beneficiary. Currently, six states levy inheritance taxes: Iowa, Kentucky, Maryland, Pennsylvania, Nebraska and New Jersey. Here’s a link to current rates: It’s important to note that spouses are exempt from inheritance taxes (federal and state). And if your children and grandchildren live in Iowa, Kentucky, Maryland, or New Jersey they won’t pay an inheritance tax either.

How to Avoid or Reduce Estate and Inheritance Taxes
At the most basic level there are three things you can do to reduce the estate and inheritance tax when you die:

  • Give your money away before you die
  • Write a Will.
  • Set up a Revocable or Living Trust

 Let’s delve into each one of these methods that can help you avoid or reduce the death taxes.

Gifting: For 2020, you can help your heirs to pay less taxes by gifting them up to $15,000 each and every year (up to $30,000 if you are married and hold the property jointly). However, there is a lifetime gift exemption. For this year, it is $11.58 million ($23.16 million for married couples), which means you can give away up to those amounts during your lifetime, without having to pay gift tax on them.

A couple of caveats: 1) Even if you don’t go above the exempted amount, you may still need to file a gift tax return with the IRS. Consult your accountant; and 2) Your state may also levy a gift tax. Right now, it looks like Connecticut is the only one to do so, but again, consult your accountant or attorney.

And one more important thing to know. There are some gifts that are always exempt and for which you do not need to file a gift tax return, including:

  • Gifts to charities approved by the IRS (these can also be deducted from the total amount of gifts you make, for exemption purposes)
  • A gift to your spouse (as long as he or she is a U.S. citizen)
  • A gift to cover someone’s education tuition, if paid directly to the educational institution (does not cover gifts to cover room and board, books or supplies)
  • Gifts to cover someone’s medical expenses, if paid directly to the medical facility
  • A gift to a political organization

Wills: This legal document stipulates how you want your assets to be distributed among your heirs, and if you are responsible for minor children, it will set forth the terms of their care.

There are three primary types of wills:

Joint wills are executed by two people, usually a married couple, and take the place of separate wills for each partner. Usually, they stipulate that when one spouse dies, the estate passes to the other. And then when the last spouse passes away, the entire estate goes to their children. And while this seems simple, some states don’t recognize them and most attorneys advise against them, as they are very inflexible.

Mutual wills are usually set up by a married or committed couple. These are very common, especially in this day of blended families, as they bind the surviving partner to the terms of the will. For example, you may want your property to pass to your children, not those of your spouse’s, and a mutual will can ensure that. Note, a mutual will is not the same as a joint will.

Pour-over wills are used in combination with creating a trust, and are recommended if you have minor children. It will name your children’s guardian and make sure that all the assets you want in the trust are there, even if you fail to retitle some of them before your death.

Wills are not the be-all and end-all of estate planning. Certainly, they allow you to select the distribution of you bank balances, property, or prized possessions, as well as businesses or investments. You can also name how assets are to be directed to your favorite charities or organizations and who should become the guardians or caretakers for minor children.

But…wills do not address what can make up the majority of your estate, such as life insurance policies (they have specified beneficiaries), ‘transfer on death’ titled investment accounts, or even some jointly-owned assets. Every state but Georgia has elective-share or community property laws that regulate the ownership and inheritance of your marital assets. Elective-share simply means that the surviving spouse may ‘elect’ not to accept the share of property dictated by your will, and instead, require a more equitable split.

In the U.S., there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. And Alaska is considered an opt-in community property state, which means that both spouses have the option to make their property community property. In a community property state, both spouses equally own all marital property.

Bottom line, this means that in an elective-share or community property state, your will can be overruled. Naturally, there are plenty of exceptions as to which assets constitute marital property, so please consult a professional to determine your specific requirements.

And even if you do create a trust, a will is recommended. Your trust will deal with specific assets, and your will can cover the miscellany.

As you can see, a will should be the first step in your estate planning process. Unfortunately, most people (some 60% of Americans) do not have a will. And that is not a good thing, because, if you die without a will (intestate), your state gets to determine how your assets are disbursed. Most of the time, that means your spouse gets one-half of your estate and the other half goes to your children. And that can create havoc.

What if your children want to cash out by selling the family home, which can leave your spouse with nowhere to live? Or you have a minor or disabled child, and no one is appointed to look after him? Or you have children that don’t get along and spend years in court fighting each other over your assets?

Lastly, let’s not even think about the taxes! A good, executed will can help you avoid or reduce estate taxes (especially on large estates) or the inheritance taxes that your heirs will have to pay.

So, let’s agree you need a will. I know it sounds overwhelming to think about, but now’s the time! And if your break the process down, step-by-step, it will go much easier.

Here’s the Financial Freedom Federation 6-Step Process to Creating Your Will

Step 1: Write down a list of all your assets and debts.
This will include the contents of safe deposit boxes, family heirlooms (especially jewelry and antiques), art, furniture, collectibles, real estate, vehicles, business ownership/interests, health savings accounts, intellectual property, bank accounts, investment accounts, life insurance policies, retirement accounts, and other assets that you wish your heirs to inherit.

Step 2: Write down which of your heirs get what.
You may also want to write a ‘letter of instruction’ to keep with your will. The letter should include a list of accounts and numbers, passwords, and burial instructions. By itself, please be aware that the letter of instruction may not be valid in some states; so, make sure you also include these items in your will. While your making your list, also consider a power of attorney or living will (medical directive), and who you would want to be responsible for financial and/or medical decisions should you become mentally or physically incapacitated (more on these later). And don’t forget about providing caretaking for your pets.

Step 3. Prepare and validate your will.
You don’t need an attorney to prepare your will; there are plenty of tools available on the internet, but I would strongly recommend an estate planner or attorney, just to make sure you close all the loopholes.

However, should you decide to go it alone, your will needs to be witnessed by two adults of ‘sound mind’, with whom you are well-acquainted. And to prevent trouble ahead, those witnesses should be ‘disinterested’ people—those who have no financial or personal stake in your estate. If your attorney prepares your will, he should not serve as a witness. And lastly, your state may require that your will be notarized, which can help ease your heirs through the probate process (if you don’t manage to avoid that!)

Step 4. Choose an executor.
Choose wisely. You may want your best friend, but if you two are the same age, your best friend may not be around when you die. And your executor should be willing and able to administer your estate, even if it takes several years to be closed.

You can name pretty much whomever you desire—your spouse, an adult child, a trusted friend or relative, or your attorney. And you can name joint executors. But if your estate is large and/or complicated, consider a professional to manage its disbursement. And make sure your executor is empowered to pay your bills and deal with debt collectors and any related issues that may arise.

Step 5. Store your will in a safe, but accessible place.
People often first think of a bank safe deposit box, but if you die and your heirs do not have access to the box, it may take a court order to open it, which can delay the processing of your estate. A good, water- and fireproof safe can solve that problem. Make sure to give your executor and attorney a copy of your will and tell him where the original is located. Otherwise, trying to locate the original will can hold up the settling of your estate.

Step 6. Review your will every couple of years.
Life changes: beneficiaries die, people divorce, children are born, more assets are acquired. Any of those scenarios may prompt a change in your desired asset distribution. If that happens to you, you can either write a new will or add a ‘codicil’, witnessed by two people and notarized, outlining your change of heart.

  • No will—no control over the disbursement of your estate.
  • You can prepare a valid will yourself, but you must have it witnessed to decrease potential challenges.
  • Review your will—and revise, if necessary—every few years.
  • Oral wills are not widely recognized as valid.
  • While holographic wills (written, signed, but not witnessed) are recognized in some states, they often lead to challenges of their validity.
  • Life insurance proceeds, investment accounts, and jointly-owned assets are generally excluded from wills.

Don’t Forget about a Living Will
A Living Will has nothing to do with your Will or how your assets are distributed. Instead, it’s a legal document in which you express your wishes for any medical care that you may need in case you’re are incapacitated and cannot direct your own care. It tells your medical professionals whether or not you agree to resuscitation or life support to prolong your life. A living will may be attached to your will as an addendum; that way, in case of a medical emergency, it will be easily accessible.

If you become incapacitated and don’t have a living will, it will be up to the medical professionals to determine what life-prolonging care you will receive. A living will may also be called a declaration regarding life-prolonging procedures, an advance directive, or, a declaration.

The requirements for a living will vary by state so many people hire a lawyer to prepare their living will. Most people can create this simple document – along with the other typical estate planning documents – without incurring legal fees by using a quality software application that accounts for their state’s laws.  Like your regular will, in most states, your living will must also have two witnesses and be notarized. Please consult your own state regulations for exact requirements.

A living will is often accompanied by a Durable Power of Attorney (DPOA) for healthcare. The DPOA appoints an ‘agent’, ‘healthcare proxy’, or ‘attorney-in-fact’ to carry out your directives in your living will.

You may revoke your living will, and DPOA, at any time. The living will generally terminate at your death, unless it allows your agent to make decisions about organ donation or autopsy. The DPOA is only effective while you are alive.

Trusts are legal documents that can be set up prior to death and they survive a person’s death. They can also be created by a will and formed after death. A trust is a fiduciary relationship, in which one party, the trustor (also called trustmaker or grantor), gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. The primary reasons to form a trust are to:

  • Ensure your assets are distributed as you desire
  • Provide legal protection for your assets
  • Save your heirs time and streamline the paperwork of the estate
  • Avoid or reduce estate and inheritance taxes.

Once your assets are placed in the trust, they belong to the trust itself, not the trustee. There are lots of different types of trusts, but the two basic and most common types are revocable and irrevocable.

Revocable Trusts are created during your lifetime, and you can change them or revoke them at your pleasure. They may also be called Living Trusts. The mechanics are this: You establish the trust, put in the assets you desire, and you serve as the initial trustee.

You are the only person designated to add or remove property from the trust during your lifetime. The big advantage: any assets you transfer into the trust during your lifetime are not subject to probate (more on that in a little while), which can save you and your heirs a lot of money.

However, asset protection is not a major advantage, as with a revocable trust, your creditors may possibly still access your assets within the trust (with a court order)

When you die, typically, your revocable trust becomes an Irrevocable Trust.

An Irrevocable Trust cannot be changed or revoked after you create it. It’s permanent—until you die, and your assets are given to your heirs.

An Irrevocable Trust has a couple of advantages: 1) It protects the assets in the trust from lawsuits and judgments. Often used by business owners, doctors and attorneys, the assets in the trust cannot be removed by court orders and judgments; and 2) If you have a large estate and you have already reached your lifetime tax-free gift limit, and you are leaving additional funds (above the limit) to your heirs, the trust will exempt your estate from the 40% federal tax levy that it would normally be subject to for gifts above the exempted amount.

Here are a few more types of trusts:

Asset Protection Trusts insulate your assets from your creditors. They can be set up in the U.S. or in a foreign country. They are generally created as irrevocable trusts.

Charitable lead trusts (CLT) and Charitable Remainder Trusts (CRT) convey assets into a trust, which will then pay income to one or more parties during the lifetime of the trust (no more than 20 years), and then distributes the remaining assets of the trust to one or more parties at the end of the trust’s term.

In a CLT, your selected charity benefits from the first part of the trust—the lead. And at the end of your trust’s term, the remaining assets are distributed to you or your beneficiaries.  In a CRT, the income from the assets in the trust is first distributed to the trust’s beneficiaries for a specific period of time, and then any monies remaining are donated to the designated charity

Special Needs Trusts are created on behalf of a beneficiary who receives government benefits. It allows the beneficiary (for example, a disabled person) to receive luxuries, dental and vision benefits, transportation, education, rehabilitation, insurance, special dietary needs, spending money, vacations, payments for a companion or other items, without reducing his eligibility for government benefits. The primary stipulation is that the beneficiary may not have any control on the amount or frequency of the trust’s distributions, and he cannot revoke the trust. Ordinarily when a person is receiving government benefits, an inheritance or receipt of a gift could reduce or eliminate the person’s eligibility for such benefits.

Spendthrift Trusts do not allow the beneficiary to sell or pledge away interests in the trust, so it offers protection from the beneficiaries’ creditors, until such time as the trust has distributed all property to the beneficiaries.

Tax By-Pass Trusts enable a spouse to leave money to the other spouse, reducing the federal estate tax when the second spouse dies. Normally, at that time, the remaining assets that are more than the exempt limit will be taxable to the couple’s children, up to a whopping 55%. With a tax by-pass trust, that amount is substantially reduced.

Totten Trusts cover accounts and securities in financial institutions, not property. They are set up during your lifetime by depositing monies in a financial institution in your name as trustee for someone else. They are revocable trusts which are not ended until your death and then the monies (gifts) are transferred to your individual or entity beneficiaries, without going through probate.

Lastly, if you do create a trust, fund it promptly. Otherwise, if you die before it is funded, it will be useless.

A will and a trust go hand-in-hand, whereas a will generally covers the totality of your assets, and a trust provides for dealing with specific assets, such as life insurance or a particular piece of property. Make sure all the assets that you want to be in the trust are put into it. Any asset that is not retitled in the name of your trust are subject to probate.

I’ve mentioned probate several times, so let’s tackle exactly what that means to your estate.

Probate is a court of law whose purpose is twofold:

1) It verifies your will is legal and that your wishes are carried out; and

2) If you don’t leave a will, a probate court will decide how to distribute your assets. Probate can take a few weeks or months, if your estate is small, or for larger estates, it can take years. Probate is where anyone who wants to contest a will files a petition. And the legal fees can quickly add up. Not only that, but once probate is filed, those records are available to the public.

Not every asset is subject to probate—bank accounts, retirement funds, and life insurance usually name beneficiaries, so those assets can go directly to your heirs.

But probate is a pain—tons of paperwork for your executor to wade through and file, including an inventory of every one of your assets. Creditors can come out of the woodwork with their claims. The estate can’t be settled until the court makes sure any potential heirs are notified.

Consequently, you probably want to avoid probate—at all costs. And you can do that by creating a will, establishing a trust, and/or making sure all your assets are titled properly.

Make Sure your Assets Are Titled Properly
How the title to any property you own is held can make a big difference on the tax implications and who controls the property.  There are many ways to title your assets. Which one is best for you depends on your circumstances and your objectives.  This is an area where you may well want to seek legal advice.

Here are a few of the most common types of title methods:

Joint Tenancy is when two or more people hold title to real estate with equal rights to the property during their lives. If one dies, ownership reverts to the surviving owner. The owners do not need to be married or even related. Properties entitled this way cannot be transferred by will if one owner dies. One disadvantage: if one of the owners dies and has debts, the creditors can secure a judgment to collect from the other party.

Tenancy In Common (TIC) is when two or more people hold title to real estate jointly, with equal rights to enjoy the property during their lives. Either owner can pass his ownership onto his heirs (or sell it if he desires), but any outstanding debts on the property for which the deceased owner signed are the responsibility of his heirs.

Tenants by Entirety (TBE) is only for legally married couples. The couple, for legal purposes, is one entity. This method conveys ownership to them as one person, with title transferred to the other in entirety if one of them dies.

Sole Ownership is when one person or entity owns the property. That may include single or married persons, or businesses. This type of ownership would need to be included in a trust and/or will to be properly passed on to your heirs.

Community Property is when a husband and wife—during their marriage—own property together. Under this title, either husband or wife may dispose (or will) of one-half of the property to someone other than their spouse. Generally, property acquired during marriage (except real estate) is community property. Real estate acquired during a common-law marriage is also community property. In that case, I would recommend consulting an estate attorney.

Corporation Ownership is property by a corporation which is owned by its shareholders but having an existence separate from those shareholders.

Partnership Owners are two or more people who share ownership of a business. They may be equal or limited partnerships. If limited, the limited partners have ownership benefits but no management rights, and the general partner is responsible for all business decisions.

Trust Ownership in which real estate is owned by a trust and is managed by a trustee on behalf of the beneficiaries to the trust.

Calculate your Life Insurance Needs
Not everyone needs life insurance, but most people will have at least some type of term insurance policy. A full review of the types of insurance you may want or need is a much longer discussion, one we will cover in a future issue.  For now, here are just a few reasons why you might want to include insurance as part of your estate plan:

  • Your family is dependent upon your income
  • You have a mortgage which could be paid off at your death
  • Your business partners could use insurance to pay your heirs to buy out your ownership
  • You have a minor or a disabled child who will need extended care or expensive education if you die
  • You have debts that could be paid with the proceeds
  • Your heirs can use it to pay your burial expenses

You can name a beneficiary to your life insurance policy.  That beneficiary can also be a trust you set up, which would be the likely course of action if you have a minor or disabled child who is unable to make financial decisions.

Granting Power of Attorney
A power of attorney allows a person you appoint—your “attorney-in-fact” or agent—to act in your place for financial or other purposes when and if you ever become incapacitated or if you can’t act on your own behalf.

You can have your attorney create the necessary documentation to name your attorney-in-fact and there are many forms and online tools to enable you to do it yourself.

Here are the four types of Powers of Attorney you can confer:

Limited—allows someone else the power to act in your place for a very limited purpose and is usually valid for a specified time period. For example, to sign a deed to property for you on a day when you are out of town.

General—is comprehensive and gives your attorney-in-fact all the powers and rights that you have yourself. For example, you can have a Financial Power of Attorney which enables your representative to sign documents for you, pay your bills, and conduct financial transactions on your behalf. It ends on your death or incapacitation unless you rescind it before then. You can also create a Medical, or Healthcare, Power of Attorney which designates a representative to make medical decisions on your behalf. The Healthcare Power of Attorney goes further than a living will, which is only valid if you are incapacitated.

Durable—can be general or limited in scope, but it remains in effect after you become incapacitated. If you become incapacitated, no one can represent you unless a court appoints a conservator or guardian. A durable power of attorney will remain in effect until your death unless you rescind it while you are not incapacitated.

Springing—can allow your attorney-in-fact to act for you if you become incapacitated, but it does not become effective until you are incapacitated. Be sure to specifically detail the standard for determining incapacity and triggering the power of attorney.

Finally, once you have created an estate plan, make sure your executor has a copy of your will and trust documents, as well as a list of your assets, credit cards, any loans, insurance policies, investment and bank accounts, account numbers, recent home appraisal, the location of your assets (i.e., safe deposit boxes, storage facilities), and instructions regarding your desires for burial, cremation, funeral ceremonies, and organ donation.

And don’t forget to regularly review and update your estate plan, beneficiaries on your accounts (as well as contingent beneficiaries), and include all items in your trust that should be in there.

Please note, while I have tried to make sure all of the information in this article is up-to-date laws and regulations are constantly being added or amended, so don’t use it as a substitute to consulting the professionals—lawyers, trust officers, investment advisors, and accountants—who can give you specific information on the state and federal laws that will govern your plan.


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