About Estate Planning
The legal terminology or phrases most commonly used in estate planning may be confusing or frightening, quite often just because you're not familiar with what they mean. To help you better understand these phrases, we offer a list of terms and a description for each one below. Simply click the term's link to view its description.
- Annual Exclusion Gifting
- Attorney for Trustee or Executor
- Credit Shelter Trust
- Dynasty Trust
- Estate Administration
- Generation-Skipping Trust
- Gift Trust
- Land Trust
- Last Will and Testament
- Living Will
- Marital Gifts
- Medical & Educational Expenses
- Powers of Attorney
- Probate
- Revocable "Living" Trusts
- Special Needs Trusts
- Trust Administration
List of Terms
Description
Individuals can give up to $13,000 per person per year. This can be a very effective way to reduce the size of your estate. For example, a parent with five children can give away $65,000 per year. By adding the spouses of each donor and recipient, the gifted amount can be increased to $260,000 per year.
The annual exclusion exception to the gift tax is the cornerstone of irrevocable life insurance trust planning.
Description
I am also available to represent trustees and executors. Being appointed and acting as a trustee or executor is both an honor and a responsibility. It should not be taken lightly. Trustees have a fiduciary responsibility to act prudently, with respect to the investment and distribution of trust assets. In our increasingly litigious society, acting as trustee or executor brings a risk of litigation and liability. Services include reducing the likelihood of litigation and liability, representing trustees and fiduciaries in the midst of litigation, and mediating disputes between beneficiaries and trustees, or among beneficiaries. These services are charged on a hourly basis.
Description
A "credit shelter" trust is a revocable living trust that contains specific provisions designed to maximize estate tax savings. Credit Shelter Trust provisions are recommended when married couples have a combined net worth that exceeds the estate tax credit equivalent.
The current estate tax credit equivalent is $3,500,000, which means that each individual may pass $3,500,000 without incurring estate tax. For married couples with combined assets in excess of the $3,500,000 threshold, credit shelter provisions are designed to use each spouse's $3,500,000 exemption, thereby doubling the amount of assets that could pass to the descendants without estate tax.
Please note that the amount of the estate tax credit equivalent is a moving target. Not long ago, the amount of this credit was only $600,000. Consequently, credit shelter provisions are recommended for married couples with significant wealth.
Description
A dynasty trust is an irrevocable trust that continues in perpetuity, meaning that it lasts forever, or as long as there are trust beneficiaries and trust assets. A common characteristic of dynasty trusts is a very narrow distribution standard. Often, distributions can be made for only for education and medical needs. These trusts are designed to benefit multiple generations. As such, flexibility with respect to trust provisions is essential.
Description
Another service Thomas Clark Law provides is Estate Administration. Estate Administration includes the collection and valuation of a decedent's assets, the payment and resolution of a decedent's debts, the filing of all necessary tax forms, and the distribution of assets to heirs and beneficiaries. Our fees are charged on an hourly basis for time spent, rather than a percentage of the decedent's estate.
Description
A generation-skipping trust is a revocable trust that contains specific provisions designed to take advantage of the generation skipping tax exemption.
Generation-Skipping Tax, or GST, is a tax created to close a loophole that wealthy families once exploited. The concept behind generation skipping trusts is to avoid estate tax upon the death of a trust beneficiary. Instead of Grandpa passing his assets to his children (incurring estate tax) who will eventually pass the same assets to their children (incurring estate tax a second time), Grandpa would pass his assets directly to his grandchildren, thereby "skipping" a generation's worth of estate tax. Often, the children would have some benefits to the "skipped" assets during their life, but not enough benefit to result in a tax.
The close this loophole, the Internal Revenue Service created the "Generation Skipping Tax" which taxes any generation skipping transfer at the highest rate of estate tax. However, the IRS grants each person a lifetime exemption from this tax.
Since the only thing worse than dying, is dying without using your tax exemptions, I recommend generation skipping tax provisions for all clients with significant wealth.
Description
Most estate planners agree that it is more effective to transfer assets during life than at death.
The drawbacks of transferring assets during life in order to achieve tax savings are that A) you have to actually transfer the assets, and B) you cannot retain the ability to get the assets back if the need or desire arises.
Since gift trusts are designed to last a very long time and have all post-gift appreciation escape the donor's taxable estate, the challenge is to draft a trust with sufficient flexibility to adapt to changing family and tax law dynamics, while not giving too much control to the grantor/donor, which would cause the assets to be included in the donor's taxable estate. A common solution to this issue is appointing an independent "trust protector" who has the power to amend the trust if necessary.
Gift Tax Exceptions
As a general rule, any gift of property is subject to gift tax. There are three important exceptions to this rule: Marital Gifts, Annual Exclusion Gifting, Medical & Educational Expenses.
Description
For an annual fee, some trust companies will act as the trustee of a trust which owns a specific piece of real estate. The trust agreement, which is a standard form, provides a space where the homeowner can specify what should happen to the property in the event of their death. The drawbacks of a "land trust" are the annual fee charged, the lack of flexibility in property distribution, and the inability to add property to the land trust.
Description
A will is the most well known, yet often misunderstood, estate planning tool. The purpose of a will is to give the testator (the person executing the will) the ability to make five important decisions.
Naming Your Executor
The executor is the person who will be responsible for making all estate administration decisions, including but not limited to: filing tax returns, making funeral arrangements, paying outstanding debts, and distributing whatever assets remain. Choosing an executor is a very important task that should not be taken lightly.
Similarly, accepting the role of executor should also not be taken lightly. An executor has fiduciary duties that, if not performed adequately, could lead to liability. One of the services I provide is acting as counsel for executors during the period of estate administration.
Disposition of tangible personal property
"Tangible Personal Property" are a persons possessions, including jewelry, furniture, clothing, automobiles, artwork, and other household items. The disposition of these assets is ofen a cause of interfamily strife and litigation, especially when personal property is to be "divided equally as the beneficiaries agree."
Disposition of your estate
Depending on the value and type of your assets, a will may be the appropriate place to state how you want your assets distributed. This is especially true if you do not own real estate and the value of your possessions is less than $100,000. When used in conjunction with a living trust, a will contains a "pour over" provision, which acts as safety net in the event an asset is not properly titled at the time of death.
Naming of Guardians
For parents with minor children, the naming of guardians in the event of their deaths is perhaps their most important estate planning decision. As with naming an executor, care should be taken when naming guardians of minor children and care should be taken before agreeing to act as the guardian of minor children. Often a parent's initial choice as guardian may be problematic for reasons they had not considered.
Exercising a Power of Appointment
Exercising a power of appointment may be an option for clients who benefit from a trust established by their parents or grandparents. A current beneficiary of an irrevocable trust should ask the trustee whether they have a power to appoint the assets of their trust, and if they have such a power, ask how such a power is exercised. This power to appoint trust assets may offer unique planning opportunities and should be considered in the context of your overall estate plan.
Description
A well-known, though less effective, estate planning tool is a living will. A living will is a written statement to your doctor to be considered if you are in a terminal condition with no hope of recovery. The Illinois Living Will Act releases your doctor from the responsibility of providing life sustaining treatments. Contrary to popular opinion, a living will does not apply to artificial nutrition or hydration, nor can it used to suspend treatments once they have begun.
Given the limited scope of a living will, I recommend clients execute a Health Care Power of Attorney instead of or in addition to a living will.
Description
The IRS generally does not tax gifts between spouses. The ability to make tax free gifts to your spouse is the foundation upon which credit shelter trusts are built. However, this gift tax exemption does not apply to spouses which are not United States citizens.
Description
Individuals may pay the medical or education expenses of another person without incurring income tax. However, the payments, which must qualify under the IRS definitions of deductible medical or education expenses, must be made directly to the provider. For example, you cannot write a check in the amount of $20,000 to your son to pay for your granddaughter's college tuition. The check must be written directly to the school.
Description
Using a power of attorney, a person may nominate an agent to act on their behalf in the event they are unable. Illinois law has statutory power of attorneys for both property and health care.
Power of Attorney for Health Care
Similar to a property power of attorney, a power of attorney for health care allows the maker (the principal) to nominate a person (the agent) to make health care decisions in the event of a temporary or permanent disability.
More powerful and flexible than a living will, a health care power of attorney allows the agent to stand in the principal's shoes and make a wide range of medical decisions. Given HIPPA laws and privacy protections, a health care power of attorney is essential for unmarried couples, who want their significant other to make decisions on their behalf, though they have no apparent legal authority to do so.
An effective and affordable estate planning protection, we recommend property powers of attorney for all our clients.
Power of Attorney for Property
A property power of attorney is commonly used to administer property in the event of the maker's disability. Using this statutory form, the maker (called the principal) names a person (called an agent) to administer his/her property in the event of his/her disability. Property powers of attorney may also be used to fund trusts, make annual exclusion gifts, and sign tax returns.
An effective and affordable estate planning protection, I recommend property powers of attorney for all our clients.
Description
Probate is a court proceeding required to transfer or administer assets owned solely by a person who is unable to transfer or administer these assets themselves, due to disability or death.
The most likely asset to trigger probate is real estate. Most people own the home they live in, and if they are single, divorced, or widowed, a trust should be created to own the real estate. Some trust companies offer "land trusts."
Description
A revocable trust, often called a "living" trust, is the most flexible way to own property and is commonly used to avoid probate in the event of death or disability.
While a revocable trust is more costly to establish than a will or a land trust, the avoidance of probate and land trust expenses more than make up the difference.
The primary benefit of executing and funding a revocable trust is the ability to determine, with few limitations, exactly how you want your assets administered in the event of your disability or death. There are few limits on how specifically you can direct your assets to be administered following your death. As importantly, trusts allow you or your successors the flexibility to change trust provisions if the need arises.
Since a trust's provisions are effective only for the assets held in the trust, I recommend that clients place nearly all of their assets in the trust they establish.
Description
Special Needs Trusts are irrevocable trusts with specific provisions designed for beneficiaries in need of public assistance. The purpose of a special needs trust is to provide the beneficiary with more than what public assistance provides, without disqualifying the beneficiary from receiving public assistance in the process. To do so, the beneficiary must have no control over the trust assets, and the distribution provisions in the trust must be limited.
In situations when a person with special needs has or receives assets that will disqualify them from public assistance, these assets may be placed into a self settled "OBRA" (aka Payback) trust, a special needs trust that “pays back” whatever assets remain at the termination of the trust to the government agency providing the assistance. Using this procedure will prevent the government from taking the trust assets or disqualifying the beneficiary from public assistance.
If you intend to leave assets to a person with special needs or receiving public assistance, care should be taken to make sure the gift does not affect any benefits the donee is receiving.
Description
Another service we provide is Trust Administration. Trust Administration includes the investment of trust assets, distribution of trust income and/or principal to trust beneficiaries, and filing of the trust income tax returns. When providing trust administration service, we will either act as trustee, or as the agent for a trustee. Fees for trust administration are charged on an hourly basis for time spent, rather than a percentage of the decedent's estate.