The Fundamental Estate Plan: Taking Charge of Your Future

• Identify Your Beneficiaries And Fiduciaries
• Minimizing Estate Taxes

Estate planning is the comprehensive process of planning for the conservation and transfer of an individual's assets during lifetime and at death. The primary goal at Huck Bouma, P.C. is to reduce the expense, delay and family trauma which could occur in the event of incapacity or death. Our fundamental objectives of estate planning are to provide for the distribution of assets: (1) in accordance with the your wishes; (2) at the lowest possible federal and state estate tax; and (3) at the lowest administrative cost. In order to carry out your basic objectives, we generally recommend the creation of a "Pour-over Will," a "Revocable Living Trust." a "Power of Attorney for Property," and a "Power of Attorney for Health Care". The Revocable Living Trust provides for management of your assets in the event of incapacity and upon your death. In addition, the trust provides for the administration of your assets according to your wishes, efficiently, privately, and without court proceedings. The Pour-over Will provides that the decedent's property owned at death pours-over to the Revocable Living Trust to be administered and distributed in accordance with the terms of the Revocable Living Trust.

I. WHAT HAPPENS IF I DO NOT HAVE A WILL OR TRUST?

If an individual dies without a will or has not created other will-substitute documents, the State of Illinois and other states have enacted statutes that determine, among other things:

• The executor of your estate.
• The recipient of the excess of the value of the assets of your estate after the payment of debts, claims and taxes.
• The guardians of the person and estate of any minor children.

If an individual who dies without a will is married at death, the State of Illinois provides that one-half (1/2) of the value of the assets of the decedent passes to the surviving spouse, if any, while the remaining one-half (1/2) passes in equal shares to the children of the decedent, if any.

II. WHAT IS A REVOCABLE LIVING TRUST?

A Revocable Living Trust is established by a "grantor" during lifetime. The Revocable Living

Trust may be amended or revoked at any time prior to death and allows a trustee who is usually the grantor to manage and distribute trust assets for the benefit of the grantor during his or her life-time.

A. How a Revocable Living Trust Operates.

A Revocable Living Trust will not materially change how you handle your financial affairs. If you name yourself as the initial trustee, you will have absolute and unfettered control over your assets just as you do now. You can amend or revoke the trust at any time. In addition, you can name the trust as beneficiary of your life insurance policies and retirement plans (if advisable from a tax planning perspective). This permits those proceeds to be distributed to or held for the benefit of the named beneficiaries in the manner provided under your Revocable Living Trust. The dispositive provisions of your estate plan are contained in the trust, rather than in your will. Your "Pour-over Will" thus becomes a relatively brief document that simply "pours-over" into your trust any assets that are owned by you individually (and not by the trust) at your death. Upon your death, the successor trustee (usually your spouse) then distributes or holds the trust assets pursuant to the terms of the trust agreement. A Revocable Living Trust is drafted to reflect your family's unique needs and goals. Your Revocable Living Trust can even accommodate special assets such as closely held business interest, provide for the special needs of specific family members, or provide a framework for building wealth over successive generations.

B. Advantages of a Revocable Living Trust.

Revocable Living Trusts have several principal advantages over other estate planning techniques:

• Avoids probate proceedings at death.
• Guarantees privacy, in that your trust agreement is not "public" information.
• Provides significant planning opportunities that are not available when property is held in joint tenancy.
• Requires less formality than a will in its execution and in the creation of subsequent amendments.
• Permits use of one or more trusted individuals or a corporate fiduciary as trustee to assist in managing investments and record keeping.
• Provides a vehicle for consolidation all your assets during lifetime and at death.
• May provide asset protection for beneficiaries.
• Avoids ancillary probate in other states for out-of-state real estate.

III. INCORPORATING TAX PLANNING INTO YOUR ESTATE PLAN

THE ESTATE TAX IS STRICTLY A VOLUNTARY TAX

A. Ownership of Property

Ownership of property is crucial to the estate planning process. The Internal Revenue Code imposes the federal estate tax upon the value of all property owned by the decedent. The decedent's ownership is determined under state law owner-ship principles.

Some common examples of property included in a decedent's taxable estate are:

• Cash and cash equivalents (i.e., CD's, T-Bills, money market funds).
• Personal property
• Real property
• Stocks and bonds
• Business interests
• Joint tenancy property
• Life insurance proceeds in which the decedent has any "incident of ownership"
• Annuities
• Pension and profit sharing plans
• Powers of appointment

Most of us have acquired property in joint tenancy with our spouse. Joint tenancy is a "Will substitute" which is beneficial when the estate is not subject to federal estate taxes and as long as neither joint tenant becomes disabled. However, when the gross estate exceeds the Applicable Exemption Amount (see table below), even for married couples, the estate tax potentially becomes applicable. Moreover, the possibility of disability increases with age so that joint tenancy may have unintended adverse income, estate tax, and management consequences.

IF A MARRIED COUPLE HOLDS ALL OR A PORTION OF THEIR PROPERTY IN JOINT TENANCY, THEY NOT ONLY CREATE POTENTIAL ADVERSE INCOME TAX CON-SEQUENCES TO THE SURVIVING TENANT, BUT ALSO EACH SPOUSE DOES NOT UTI-LIZE ANY OF THEIR AVAILABLE APPLICA-BLE EXEMPTION.

B. What are the Estate Tax Rates?

UNIFIED CREDIT AND "APPLICABLE EXEMPTION EQUIVALENT"

The 1997 Taxpayer Relief Act increases the original $600,000 exemption (and therefore, the unified credit) over a phase-in period, to $1,000,000 by the year 2006.

FOR GROSS ESTATES IN EXCESS OF THE APPLICABLE EXEMPTION AMOUNT THE ESTATE TAX RATES BEGIN AT A MINIMUM OF 37%.

C. Estate Tax Solution - Utilizing the Marital Deduction

THE MOST SIGNIFICANT PLANNING AREA OF FEDERAL ESTATE AND GIFT TAXATION IS THE "MARITAL DEDUCTION."

The marital deduction provides a tax deduction against the adjusted gross estate for property "passing" to a surviving spouse. A spouse may transfer his or her entire estate to the surviving spouse free of estate taxation. There are generally two types of Marital Trusts.

1. General Power of Appointment Marital Trust.

When this trust is used as a recipient of property, the surviving spouse has the power to change he entire distribution of the trust property. Use of this power allows the spouse to adjust for changes in family circumstances.

2. Qualified Terminable Interest Property ("QTIP") Marital Trust.

The QTIP trust has several significant advantages over the general power of appointment marital trust. A decedent can control the disposition of the trust completely after the surviving spouse's death or give the surviving spouse a limited power to change the disposition of the trust property.

Moreover, the QTIP trust is useful in second marriage situations where the decedent wishes: (1) to obtain the marital deduction; (2) to insure adequate income for the second spouse, if such spouse survives; and (3) to insure that the trust principal will go to the decedent's descendants, perhaps children of a first marriage. The QTIP trust prevents a surviving spouse who remarries from appointing the marital trust to his or her second spouse and/or children from another marriage.

D. Estate Tax Solution - Family Trust

We recommend creating an estate plan that utilizes both the unlimited marital deduction (through the creation of one of the two Marital Trusts discussed above) and the applicable exemption amount available to every individual in such a way that minimizes estate taxes and pro-vides the necessary support for the surviving spouse.

Example #1

H and W have a combined gross estate worth $1,000,000. Depending on their estate plan, the federal estate tax liability could be as follows:

Example #2

H and W have a combined gross estate worth $1,500,00. H dies in 1999. W dies in 2001 and the combined estate is still $1,500,000:

Example #3

Same as Example #2 above, except that W lives for another 10 years after H dies and, the original $1,500,000 grows to $3,000,000:

Thus, appreciation after the death of the first spouse increases the estate tax savings when you utilize the Family Trust.

Top of Page