Estate Planning: Top Seven Tools to Know

2019 Edition

Estate Planning: Top Seven Tools to Know

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Estate Planning:Top 7 Tools to Know

Elaine T. Yandrisevits, J.D., LL.M. (Taxation)LawPracticeCLE

131 West State Street, Doylestown, PA | 215.230.7500 | www.ammlaw.com

THE ESTATE PLAN

Antheil Maslow & MacMinn, LLP

What are the Goals of Estate Planning?

• Preserve family values and wealth• Prevent payment of excessive taxes• Disposition of assets

– A child with disabilities? A minor? A child with spending problems?

• Liquidity– If assets all illiquid, no ability to pay tax

• Flexibility– Is plan flexible enough to address changing estate tax

laws or the family needs?


Legal Terms

• Decedent: Person who died• Testator: Person who makes a Will• Laws of Intestacy: Laws that control how property will pass if a

person dies without a Will• Executor: Person who is responsible for opening an estate at the

county Register of Wills, gathering the assets of the estate, paying any taxes, and distributing the property

• Trustee: Person who manages and invests money that is held in Trust for a beneficiary

• Beneficiary: A person who will receive assets from an estate or trust

• Guardian: A person who, after a legal proceeding, has the authority to make decisions on behalf of someone else, typically a minor or person who has intellectual disabilities


Fundamental Documents

• Will• Trust(s)• Power of Attorney• Living Will


Benefits of Executing a Will

• Avoid intestacy laws• Choose the executor of your estate• Name a guardian and create a trust for minor

children• Create a trust for a child with special needs• Direct specific personal property to a specific

person• Avoid payment of excessive taxes


TOOL #1:METHODS OF AVOIDING PROBATE


Probate vs. Nonprobate Property

• The Will only controls the disposition of probate assets– Assets owned by the decedent as an individual

that do not include a beneficiary designation• Individually-owned bank accounts• Individually-owned real estate• Vehicles• Tangible personal property• Jointly-owned property owned as Tenants-in-Common


Probate vs. Nonprobate Property

• Nonprobate property will pass to the surviving joint owner or the named beneficiary, regardless of the terms of the Will– IRAs, 401Ks, 403(b)s, other retirement assets– Life insurance– Jointly-owned bank accounts– Jointly-owned real estate owned as Tenants by the

Entireties or Joint with Right of Survivorship


Methods of Avoiding Probate

• Revocable Trust and Pour Over Will• Jointly-Titled Assets with Right of Survivorship • Transfer on Death Accounts


Revocable Trust and Pour Over Will

• Revocable Trust is a “Will Substitute” that functions with a Pour Over Will to transfer property.

• Property titled to a Revocable Trust during life is nonprobate property. – If property is not titled to Revocable Trust during life, it is

probate property. • Pour Over Will directs that any probate property is

distributed to Revocable Trust.– Executor must be appointed to distribute property to

Revocable Trust. • Revocable Trust does not avoid estate or inheritance

taxes.



• I give the rest, residue and remainder of my estate, real and personal ("my Residuary Estate"), to the then serving Trustee of the John Doe Revocable Trust (sometimes referred to as "the Trust" or "the Trust Agreement"), that I have signed before signing this Will, to be disposed of as provided in the Trust Agreement, including any amendments to it signed before today, today or after today. If this gift is ineffective but the terms of the Trust may be incorporated into this Will or otherwise carried out under this Will, then (i) I hereby appoint the Trustee under the Trust Agreement to be Trustee under this Will; (ii) I incorporate the provisions of the Trust Agreement into this Will; (iii) I give my Residuary Estate to the Trustee under this Will; and (iv) I direct that my Residuary Estate shall be disposed of in the manner provided in the Trust Agreement but with the trusts thereby set forth treated as trusts under this Will.



• Revocable Trust and Pour Over Will structure is useful when: – Probate process is particularly expensive/difficult– Testator owns out-of-state real property– Testator has significant nonprobate assets that will

pass by beneficiary designations– Testator may want to begin titling assets into

Revocable Trust during life for asset management purposes


Jointly-Titled Assets with Right of Survivorship

• Pass automatically to the surviving joint owner(s) by operation of law

• Jointly-titled assets do not avoid estate or inheritance taxes– Taxed on the proportion attributable to the

deceased joint owner• Need to ensure that clients that jointly-title

assets do not inadvertently change estate plan– Consider using Power of Attorney



• Mother executes a Will that divides her residuary estate among her three Children. At the time of her death, Mother owns a house, a savings account, and a checking account. Several years before her death, Mother added Eldest Child to the savings account and checking account so that Eldest Child could pay bills for Mother from these accounts; she did not add her other two Children to these accounts.



• Since the house remained titled solely in Mother’s name, it is the only asset that will be distributed according to the terms of Mother’s Will.

• Eldest Child will receive full ownership of the savings and checking accounts, plus one-third of the value of the house.

• The other two Children will receive the remaining two-thirds of the house only.


Transfer on Death (TOD) Accounts

• Accounts transfer to named beneficiaries by operation of law at the death of primary account owner

• Typically handled and completed by bank or other financial institution

• Do not avoid estate or inheritance taxes


FEDERAL ESTATE TAX


Federal Estate Tax

• Tax on the gross value of the decedent’s estate at the time of death.

• Federal Estate Tax Return must be filed when:– The decedent is a citizen of the United States.– The decedent is a foreign citizen owning property

located in the United States.

• Maximum tax rate: 40%


Property Subject to Estate Tax

• All worldwide property. • Nonprobate property – IRAs, 401Ks, etc.• Jointly-owned property is taxed on the

proportion of the decedent’s interest in the property.– Real property owned as tenants by the entireties is

subject to federal estate tax at one-half (1/2) of the date of death value.

• Life insurance.• Property subject to a power of appointment.


Federal Estate and Gift Tax Lifetime Exemption

• If a decedent’s taxable estate and lifetime gifts do not exceed the exclusion amount for the year of death, no federal estate tax will be due.

• 2019 Exemption – $11.4 million



• The exemption is indexed for inflation and has increased every year since 2011.

• 2019 -- $11.4 million– 2018 -- $11.18 million– 2017 -- $5.49 million

• Tax Cuts and Jobs Act of 2017 – Exemption is scheduled to be reduced to $5 million (adjusted for inflation) effective January 1, 2026




Source: https://www.taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax

TOOL #2:PORTABILITY


Portability

• 26 U.S. Code § 2010(c)(5)(A)• Created by the Tax Relief, Unemployment

Insurance Reauthorization, and Job Creation Act of 2010 and made permanent by the American Taxpayer Relief Act of 2013.

• Deceased Spouse’s Unused Exemption (DSUE)– Allows for a surviving spouse to preserve the

“unused” portion of the deceased spouse’s Lifetime Exemption.


Portability

• Effectively allows a married couple to pass assets totaling $22.8 million free of Federal Estate Tax (2019)


Portability

• To elect portability, the personal representative must timely file a Federal Estate Tax Return.

• If the decedent was married at the time of death, portability is automatically applied on the Form 706.– If the surviving spouse does not want portability, the

personal representative must affirmatively opt out. • In cases of multiple marriages and remarriages,

the surviving spouse may only use the DSUE of his or her most recently-deceased spouse.


Portability


TOOL #3:MARITAL DEDUCTION


Marital Deduction

• The value of assets passing to the surviving spouse at the first spouse’s death is deducted from the gross taxable estate if the assets pass in a qualifying manner

• Unlimited in value • Assets will be subject to tax at the surviving

spouse’s death.


Marital Deduction

• “In a qualifying manner” – preserves the property in a manner that provides for the application of tax at the death of the surviving spouse:– Outright– In a qualifying trust


TOOL #4:CREDIT SHELTER/MARITAL DEDUCTION TRUSTS


Credit Shelter Trust

• Allows spouses to utilize their individual Federal Estate Tax Exemption– Assets in individual names – Surviving spouse typically is the beneficiary of the

Trust during lifetime– Residue flows to children or other designated

beneficiaries• Sometimes also called a “Family Trust”• Typically utilizes a formula clause


Credit Shelter Trust

• Allowable Terms:– Income to Surviving Spouse – Surviving Spouse can have absolute right to withdraw

5% of principal or $5,000 annually – Trustee can distribute principal for Health, Education,

Maintenance or Support (HEMS)– Trustee can distribute principal in his discretion – Surviving Spouse can have right to compel required

minimum distributions from IRA/Retirement accounts payable to Credit Shelter Trust

– Surviving Spouse can have a testamentary power of appointment


Marital Deduction Trust

• Shields assets in excess of the Federal Estate Tax Exemption passing to the surviving spouse from Federal Estate Tax

• Assets will qualify for the Marital Deduction and be included in the estate of the surviving spouse

• Sometimes called a “Marital Trust”


Qualified Terminable Interest Property (QTIP)

• Qualifies for Marital Deduction– Surviving Spouse must receive all income for life– Trust cannot direct assets to anyone other than

Surviving Spouse

• Irrevocable election made on Estate Tax Return• QTIP property will be taxed at Surviving Spouse’s

death • Used when decedent wants to control where

assets go after Surviving Spouse’s death


Formula Gift


Residue into Marital Trust


TOOL #5:DISCLAIMER TRUSTS


Disclaimer Trusts

• Permits post-death tax planning by use of a qualified disclaimer of the decedent’s property by the surviving spouse to preserve the surviving spouse’s Federal Estate Tax Exemption

• Disclaimer Trust operates largely like a Credit Shelter Trust


Disclaimer Trusts

• Elements of a valid disclaimer:– Irrevocable and unqualified refusal to accept an interest in

the property– In writing– Received by the person transferring the interest, or his/her

legal representative, within nine (9) months after the date upon which the interest is created

– Disclaimant cannot accept the disclaimed interest or any of its benefits

– Care must be taken to not inadvertently accept assets by managing accounts or investments.

– Interest must pass without any direction on part of the disclaimant


Disclaimer Trusts

• Provides valuable flexibility regarding the Federal Estate Tax Exemption, especially for individuals on the cusp of the exemption limit

• Danger that disclaimer trust will not be properly utilized– Legal counsel should be sought soon after the

passing of a spouse in order to effectively utilize the Disclaimer Trust


Disclaimer Trusts


TOOL #6:MINORS’ TRUSTS


Minors’ Trusts

• Provides a mechanism to maintain resources by a Trustee on behalf of minor children until they reach a certain age, designated by the Testator, at which time full access to the funds will be provided


Minors’ Trusts


Minors’ Trusts

• Typically health, education, maintenance, and support (HEMS) standard

• Avoids young beneficiary without financial savvy from receiving funds outright

• Can last as long as testator wants– Indefinitely– A certain age– Payable in stages


Minors’ Trusts


Minors’ Trusts

• Could be a single/”one-pot” trust– If a single trust, typically lasts until youngest

beneficiary attains a certain age, then divided into separate shares

– Requires guidance for trustee for distributions to older beneficiaries – example, graduate education

– Would still want separate trust feature for qualified plans


TOOL #7:SPECIAL NEEDS TRUSTS


Special Needs Trusts

• Allows an individual with disabilities to benefit from the resources of a Trust while continuing to receive essential public benefits, most notably Medicaid, Supplemental Security Income, and Mental Health/Intellectual Disability benefits


Definition of Disabled

• An adult is considered to be disabled by the Social Security Administration when:– He or she is unable to engage in any substantial

gainful activity – By reason of any medically determinable physical

or mental impairment – Which can be expected to result in death or which

has lasted or can be expected to last for a continuous period of not less than twelve (12) months.


Public Benefits

• Resource- and income-dependent:– Programs have strict limits on the amount and type of

funds an individual can own (resources) or earn (income) in order to be financially eligible for the program.

• Examples:– Supplemental Security Income (SSI)

• Individual resource limit: $2,000.00• Couple resource limit: $3,000.00

– Medicaid/Medical Assistance/Waiver programs• Resource limit varies by program

– Food Stamps


Special Needs Trusts

• Any funds held in a Special Needs Trust do not count as resources for purposes of determining eligibility for public benefits.

• Trust is designed to supplement, not supplant, the beneficiary’s public benefits.

• Trustee has the unfettered discretion in making all distributions from the Trust.


Third Party Funded SNTs

• Holds funds that belonged to anyone except the beneficiary.

• Typically created as part of an estate plan. • No payback to state Medicaid agency


Third Party Funded SNTs

• The estate planning documents must include a specific intent by the testator for the funds to be held in a Special Needs Trust. – Example: “I leave the entire residue of my estate

to the Third Party Funded Special Needs Trust for the benefit of my daughter, Jane Smith.”


If There is no Third Party Funded SNT…

• If the estate planning documents do not include a specific intent that the funds for an individual with disabilities be held by a Third Party Funded Special Needs Trust or in cases of intestacy, the funds must be:– Held by a Self Funded Special Needs Trust;– Held by a Pooled Special Needs Trust;– Held by an ABLE Account; or – Spent down.


Self Funded SNTs

• Holds funds that belong to the beneficiary.– Intestacy– “I leave the residue of my estate to my daughter, Jane

Doe.”• Includes a payback to the state Medicaid agency. • Can only be created by:

– Competent adult beneficiary– Beneficiary’s parent– Beneficiary’s grandparent– Beneficiary’s legal guardian– Court Order


131 West State Street, Doylestown, PA | 215.230.7500 | www.ammlaw.com

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