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Estate Planning – Frequently Asked Questions

By Stuart G. Schmidt, Esq.

What is estate planning?

Estate planning is the process of addressing the possibility of your mental and / or physical incapacity and the inevitability of death and taxes. By taking some time to plan for these issues, you can ensure that your wishes are honored and your loved ones receive the greatest amount of your assets. You can start now by understanding the main issues that should be addressed in estate planning.

Estate Planning has five primary objectives:

1) Minimize taxes. Without proper tax planning, your beneficiaries can end up paying more in estate tax and income tax.

2) Avoid Probate. A court supervised probate proceeding can result in the payment of needless attorney’s fees, executor fees and court costs and substantially delay the distribution of your assets.

3) Direct the disposition of your property. Through a trust, you can designate who is to receive your property and how. With young or challenged beneficiaries, it is often necessary to direct that property be held in trust with supporting distributions for life or until the beneficiary is of sufficient age such as 25 or 30.

4) Nominate guardians for minor children. A guardian should be nominated under your Will to ensure that your minor children will be cared for by the person you choose.

5) Plan for your potential incapacity. Through a Power of Attorney for property and a Health Care Directive, you can designate the person(s) you want to take care of you physically, make your health decisions and manage your property during life, should you be unable to do so.

What documents are typically done for an estate plan?

1) Will,which directs where your assets are to be distributed upon death (However, it cannot control IRAs, 401ks, Life Insurance proceeds or assets in a Trust);

2) Trust, which can be either a Living Trust, which is revocable and created during life, or Testamentary Trust which is created by your will and takes effect upon death;

3) Community Property Agreement,allows a married couple to confirm which property is community property or / or separate property;

4) Advanced Health Care Directive and Power of Attorney for Health Care,which allows a person to appoint an agent to make health care decisions and indicate whether they want life sustaining treatment;

5) Durable Power of Attorney for Property Management, which allows an agent to make financial decisions and to manage any property not contained in a Trust; and

6) Life Insurance and possibly a Life Insurance Trust, which can be crucial for smaller and / or illiquid estates where there are depend children and / or spouses.

Will my estate have to pay taxes after I die?

It depends. The federal government imposes an estate tax at your death only if your property is worth more than the “applicable exclusion amount”. As of January 1, 2014, the inflation adjusted basic exemption amount is $5,340,000 for each person. Assets in excess of this exemption amount will be taxed at 40%.

What if I leave property to my spouse?

While property left outright to a U.S. citizen spouse is totally exempt from tax, this is not always advantageous and can actually cause an increase in tax. Leaving property outright to a spouse, rather than in a trust, could result in increased estate tax. Although there is currently a “portability” provision in the law to help minimize this result, using a Bypass Trust to leave property to a spouse is still the best planning option for a number of reasons. This concept is discussed further in answer to the question below.

What is the purpose of a Living Trust and how does it work? 

A Living Trust is designed to meet four primary goals: (1) to minimize estate taxes for a married couple, by ensuring that both spouse’s applicable exclusion amounts are utilized; (2) to ensure that your beneficiaries receive the property in the manner you desire, i.e. the property can be given outright or apportioned over the years based on need or age; (3) to provide lifetime management of the property, which is especially important should you become unable to manage the property, and (4) to avoid the time and expense of Probate (discussed below).

In order for a Living Trust to do its job, assets must be transferred to the trustee of the trust. This is known as “funding” the trust, which ensures that the property will be controlled by the trust and no court probate will be required on death.

For married couples, the most common estate plan involves a trust which provides that upon the death of the first spouse two separate sub-trusts are created. Usually both spouses, called the “settlors” of the Trust, name themselves as joint trustees and continue to manage the property as usual. When one spouse dies, the Trust is administered by dividing the trust property into two separate Trusts, often titled the Survivor’s Trust and the Bypass Trust. The property that is placed in the Bypass Trust is sheltered by the deceased spouse’s applicable exclusion amount, which is currently set at $5,340,000 for 2014. The assets in the Bypass Trust will not be taxed upon the death of the second spouse. While the Bypass Trust will ultimately pass to the first spouses’ beneficiaries, the surviving spouse can be granted complete control and access (or limited control and access depending on your wishes). When the second spouse dies, all property can either go to the beneficiaries outright or it can be held in trust under whatever terms the spouses deem appropriate.

What is “portability”?

Congress has made the estate tax exemption portable between spouses. This aspect of the law, which is now permanent, allows a surviving spouse to use his or her spouse’s unused exemption. An estate tax return does have to be filed though to claim this exemption even though one would not otherwise be required. But this law allows one to avoid creating a Bypass Trust just to use the deceased spouse’s exemption. Although there are a number of reasons why a Bypass Trust is still the best planning method, the Portable exemption can help make your estate plan a little less complicated.

Why is a Bypass Trust still a good planning device?

A Bypass Trust still has the following advantages:

  • Asset Protection. Depending on how the trust is drafted, assets placed in the Bypass Trust may avoid the creditors of the surviving spouse.
  • Asset Appreciation. Assets placed in the Bypass Trust may increase in value with the appreciation avoiding estate tax at the second death. Although the surviving spouse’s $5 million exclusion is adjusted for inflation annually, the exemption amount you receive from your deceased spouse is not increased for inflation. The Bypass Trust provides appreciation protection, which is not available if the property is left to the surviving spouse outright.
  • Remarriage. Using a Bypass Trust provides remarriage protection. The assets placed in the Bypass Trust usually cannot be passed to a subsequent spouse of the surviving spouse.

Can I just give all my property away before I die and avoid estate taxes?

No. The government long ago anticipated this. The Federal Estate and Gift Tax is under a unified system. This means that the government will assess the same tax whether the transfer of property is by gift made during life or at death. If a person gives away more than $14,000 per year to any one person or non-charitable institution, the federal gift tax” will be due, which applies at the same rate as the estate tax. However, before a tax has to actually be paid, you can use your applicable exemption amount to give away $5,340,000 without paying a tax.

I have heard that people save on estate taxes by making gifts. How?

Each person has an annual gift tax exclusion of $14,000 (this amount is adjusted annually for inflation). This means that each person can give $14,000 to each beneficiary each year. Substantial estate tax savings can be achieved by making use of this $14,000 annual gift tax exclusion and starting early. If you give away $14,000 a year for four years, you have removed $56,000 from your taxable estate. Each member of a couple has a separate $14,000 exclusion, so a couple can give $28,000 a year to a child free of gift tax. If you have a few children, or other people you want to make gifts to (such as your sons- or daughters-in-law), you can use this method to significantly reduce the size of your taxable estate over the years. Many people prefer to make this gift to a special trust, called a “Crummey Trust”, so that they can manage the property and control their children’s access. In addition to this $14,000 annual exclusion, a person can give any amount of money for education and / or medical expenses, provided the funds are paid directly to the educational or medical provider.

Are there other estate planning techniques for larger estate? 

Yes. There are many advanced estate planning techniques which can be used during your lifetime or at death. These techniques are especially appropriate for estates that cannot be sheltered by the current applicable exemption amount. In addition to minimizing taxes, these various techniques can protect particular assets from creditors, and ensure that the beneficiaries receive the property in a structured manner where you or a trustee can control access. These advanced techniques include:

1) Irrevocable Life Insurance Trust can allow a surviving spouse and other beneficiaries to receive the entire proceeds of life insurance without any estate taxes;

2) Crummey Trustcan receive gifts of cash or property ($14,000 can be given each year to each beneficiary tax free), which the donor can control for the benefit of the beneficiaries (most often children or grandchildren of the donor);

3) Qualified Personal Residence Trust (known as a “QPRT”) allows a gift of a residence or vacation home to be made over time with a gift tax savings of anywhere from 50% to 80%;

4) Family Limited Partnership & Limited Liability Company (“FLP” or “LLC”) allow family members to retain control over assets and make yearly gifts of a percentage of the LLC or FLP, which can result in substantial tax savings.

When should an estate plan be reviewed?

If you already have an estate plan, it should not be considered permanent. Conditions, as well as your desires, may change. Estate plans should be reviewed every 3-5 years and certain important life changes may require immediate review, such as:

Children becoming mature adults (age 25, 30 or 35);
Birth, death, marriage, divorce or disability of you or a beneficiary;
Large increase or decrease in the net worth of you or a beneficiary;
Substantial change in the type of your assets;
Purchase or sale of a business; and
Change of residence to another state.

It is time to review your estate plan. If you don’t yet have an estate plan, it’s time to get it done. Your death or incapacity will be emotionally traumatic for your family; don’t make it legally difficult as well. Contact one of our estate planning attorneys, Stuart G. Schmidt or David J. Lee, to assist in the creation, review and/or update of your estate plan. Our job as your attorneys is to make this process easy and painless and, most importantly, put a proper plan in place. Call us today at (408) 356-3000 or send us an email at

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