Estate Planning
Frequently Asked Questions
- How can I get your free publication called 'Estate Planning with Living Trusts'?
- Is it true that there is a limit to how much I can 'gift' to as many people as I want each year?
- What happens if I give more than the limit to a single person?
- Can I give away money and NOT have it count toward the gift limit amount/year?
- Why should I have a will?
- How much money can I leave to heirs without paying Estate taxes (death tax)?
- I've heard that the IRS gives taxpayers a break on estate taxes for estates above the exclusion amount ($5m in 2011). Since I don't have that much, is there any other reason I should get a Living Trust?
- How does a will "create" a trust? What is a pour-over trust?
- What is the "Unlimited Marital Deduction?"
- What is the "Joint Custody Trap?"
- How can a Revocable Living Trust save my heirs on estate taxes?"
- If I don't control what my heirs receive, then the State will. How can I take control? How can I assign beneficiaries?"
- What is probate? Should probate be avoided?"
- How can probate be avoided?"
- What if I own a house or other property in more than 1 state?"
- What are the advantages of an Advanced Medical Directive, also known as a Living Will?"
- Do I need Long Term Care Insurance?"
- The kids are grown, should I continue to pay for Life Insurance?"
- What happens to my Roth-IRA when I die?"
- What happens to my Traditional and Rollover IRAs when I die?"
- What happens to my taxable brokerage accounts when I die?"
- What happens to my bank accounts and CDs when I die?"
- What happens to my 401k and 403b accounts when I die?"
- What happens to my house when I die?"
- What is T.O.D. and how can it be useful?"
- Where can I go to get Wills, Trusts, Power of Attorney, Advanced Medical Directive drawn up?"
Answer: Just click here: Estate Planning with Living Trusts and fill out the form with your name and contact info and we will send you the publication at NO CHARGE. It's packed full of very important Estate Planning information. Once you read this document you will know all you need to know about Living Trusts.
2. Is it true that there is a limit to how much I can 'gift' to as many people as I want each year?Answer: Yes, there is a limit. In 2011 the limit is $13,000, but Congress typically raises the amount every year or two, so expect this amount to go up in 2012 and beyond. For the latest info on the amount of this limit, give us a call.
3. What happens if I give more than the limit to a single person?Answer: Many people believe that just because there is a limit, that gifting over the limit will mean paying taxes. This is not true. There is no additional tax associated with gifting an amount over the limit. However, if you gift over the limit, the IRS has a form that you need to submit telling them the amount of the gift. Ultimately, if there is a death tax when you pass away, the amount you go over the limit will reduce the amount of your "exclusion" to the death tax. Simple example: in the year of your death, if the death tax is 35% of all amounts of your assets over $5million, and if you had gifted $313,000 to your son and $313,000 to your daughter while you were still alive and in a year when the gift exclusion was 13,000, then you gifted $600k over the limit. Thus at death, your personal death tax exclusion would be diminished from $5m by the amount your gift exceeded the limit, ie. $600k. Therefore, your death tax exclusion would not be $5m, it would be $5m - $600k = $4.4m. The numbers will change annually as set by Congress, so call for updated information.
4. Can I give away money and NOT have it count toward the gift limit amount/year?Answer: These are called "qualified transfers". You can pay tuition directly to an educational institution for anyone's educational benefit. Second, you can pay money directly to a medical provider for the benefit of another person. If your estate is above the "Unified Credit" exclusion and would have to pay estate taxes when you die, you might consider beginning to gift your estate away now, especially if you can directly pay for someone's schooling or medical care. If you don't utilize these qualified transfers now, your estate will simply have to pay more taxes later leaving less money for your heirs.
5. Why should I have a will?Answer: If you would like to control what happens to your assets after you die, rather than letting the State control what happens to those assets, then you should have a will. If you don't have a will, your heirs will have a more difficult time going through the courts to divide up your estate via the Probate process.
6. How much money can I leave to heirs without paying Estate taxes (death tax)?Answer: Your estate will only pay estate taxes if your estate exceeds the exclusion amount granted by Congress in the year of your death. Currently, the exclusion amount in 2011 is $5million. (Congress has been debating the amount of this exclusion and changing it regularly, so make sure to contact us for updated information as the years go by.) So, in 2011, any amount over $5m will pay death tax of 35%. Again, we fully expect congress to play with both the exclusion amount as well as the percentage charged for the tax, so contact us for updated information.
7. I've heard that the IRS gives taxpayers a break on estate taxes for estates above the exclusion amount ($5m in 2011). Since I don't have that much, is there any other reason I should get a Living Trust?Answer: You may not want to simply rely on a will to control your assets after you die. Many people don't know that a will does NOT avoid the court Probate process. A will must be verified by the probate court before it can be enforced. Also, a will only goes into effect AFTER you die. What about concerns later in life such as incapacity? A will does not control assets as long as you live. If you want to control assets while living, even if you are incapacitated, you will need a Living Trust.
8. How does a will "create" a trust? What is a pour-over trust?Answer: After you die, when your will goes into effect, your will can stipulate that your assets should go into a Trust. However, this is not as good as having the Living Trust drawn up ahead of time because a Living Trust goes into effect while you are still "living".
9. What is the "Unlimited Marital Deduction"?Answer: A person can pass unlimited assets to his/her spouse after death with no estate tax. Some people therefore conclude that they should hold all their assets in "joint" custody. This is what creates the "Joint Custody Trap".
10. What is the "Joint Custody Trap"?Answer: Get our free copy of: Estate Planning with Living Trusts to learn more.
11. How can a Revocable Living Trust save my heirs on estate taxes?Answer: Although Congress recently created a new concept called "portability", it is still wise to understand the basics of how a Revokable Living Trust can be designed to double your estate tax exclusion. There is no guarantee that Congress will maintain the concept of portability. If they do away with this concept, then once again, a Revokable Living Trust can double your tax exclusion. So, for a moment, we will ignore portability and explain the tax saving idea of a Revokable Living Trust.
Each person is granted a Unified Credit by Congress. Your Unified Credit will allow you to pass assets to anyone you wish up to the yearly exclusion amount with no estate tax. In 2004, the Unified Credit exclusion was $1.5m. In 2011, the Unified Credit exclusion is $5m. If you have been reading this FAQ, you have already learned that Congress changes these amounts frequently as the debate rages in Congress over whether death taxes are fair, and if so, how much the tax should be.
To illustrate the example, we'll use the 2004 Unified Credit exclusion of $1.5m (remember, this example assumes the absence of portability which may or may-not be granted by Congress in the year of your passing):
The example: In 2004, the $1.5m Unified Credit exclusion allowed you to pass $1.5m of assets to your heir with no death/estate tax. If you were to leave all your assets to your surviving spouse in 2004, you would not be utilizing your Unified Credit exclusion. Subsequently, when your spouse passes, the spouse gets to utilize his/her Unified Credit exclusion of $1.5m. In effect this married couple has bypassed and not used one full Unified Credit exclusion. To fully utilize your Unified Credit for both spouses and double the amount you and your spouse can leave to heirs estate tax free, you each need to setup a Revokable Living Trust.
Here's an example of utilizing your Unified Credits to DOUBLE your tax exclusion and MAXIMIZE the amount the goes to your heirs. We will assume that Joe and Mary are married and their assets are worth $4million in 2004 (roughly $2m each).
| Mary's estate value | |||
| Joe dies in 2004, estate value: | $2,000,000 | $2,000,000 | |
| Joe's trust shelters some assets: | $1,500,000 | Goes into a Trust for Mary to use while living and heirs to receive after Mary dies - estate tax free. | $2,000,000 Note Mary's estate value does not rise by $1.5m because it went into a Trust and not to Mary directly. |
| The rest of the assets utilize Marriage Deduction: | $500,000 | Goes into Mary's name directly | $2,500,000 Mary's estate only rises by the 500,000 that goes into her name directly. |
| Joes Estate Tax bill | $0 | ||
| Mary dies later in 2004, estate value: | $2,500,000 | ||
| Mary's trust shelters another $1.5m | $1,000,000 Mary's estate is now only worth $1.0million since $1.5m is sheltered by her Trust | ||
| Mary's Estate Tax bill: | less than $480,000 | ||
| Net assets which go to beneficiaries due to both Joe and Mary's deaths | $3,520,000 goes to beneficiaries |
Let's do this again without the trusts
| Mary's estate value | |||
| Joe dies in 2004, estate value: | $2,000,000 | $2,000,000 | |
| Joe's has no trust to shelter assets: | $0 | ||
| All Joe's assets utilize Marriage Deduction: | $2,000,000 | Goes into Mary's name directly | $4,000,000 Mary's estate rises by the entire 2,000,000 that goes into her name directly. |
| Joes Estate Tax bill | $0 | ||
| Mary dies later in 2004, estate value: | $4,000,000 | ||
| Mary's has no trust to shelter assets for her heirs | $4,000,000 | ||
| Mary's Taxable Estate | $4m - $1.5m exclusion = $2.5m taxable estate | ||
| Mary's Estate Tax bill: | up to $1,200,000 tax | ||
| Net assets which go to beneficiaries due to both Joe and Mary's deaths | Instead of leaving $3,520,000 to beneficiaries since they had no Trusts, they are only leaving $2,800,000 to beneficiaries and Uncle Sam gets $1,200,000. |
Joe and Mary could have left $720,000 more to their beneficiaries and paid SIGNIFICANTLY less estate taxes simply by planning ahead.
The Estate Tax is sometimes referred to as the "VOLUNTARY" tax because it is totally voluntary. The only people who pay too much are those who CHOOSE to pay too much.
I don't really know anyone who would CHOOSE to pay too much, but I've sure met a lot of people who fail to plan.
12. If I don't control what my heirs receive, then the State will. How can I take control? How can I assign beneficiaries?Answer: The best way to control how your assets will be distributed is to put into place a Living Trust and a Will. The Living Trust will take care of all assets while alive and save you from paying too much Estate Taxes. A will takes care of the remaining non-Trust assets and ensures that they go to your proper heirs.
13. What is probate? Should probate be avoided?Answer: Probate is the court process whereby the court oversees your Will and the distribution of your assets. It should be avoided as much as possible. Probate can easily take from 6 to 9 months which is nothing more than a delay to your heirs. If you die without a Trust, probate can be expensive. Costs can increase if your will is contested. Another reason probate should be avoided is that it is a public proceeding. Some states including California are putting decedent's assets on the internet for all to see. This can be a little scary and can subject your heirs to unscrupulous people intent on defrauding your loved ones.
14. How can probate be avoided?Answer:Probate can be avoided by placing beneficiaries on all your assets. Many people don't know that IRAs bypass Probate because they have beneficiaries. Be careful here. You are mistaken if you think your IRA beneficiaries don't mean much because you have a Will. The point here is that your IRA beneficiaries supersede your will. Trusts do not go through probate either, simply because they have beneficiaries. In fact, many people don't know that you can put beneficiaries on other assets such as your bank accounts so that even those don't go through probate (for more on this see the question regarding T.O.D.).
15. What if I own a house or other property in more than 1 state?Answer: If that is the case, then it is even more important to put assets into a Trust to avoid going through MULTIPLE probates.
16. What are the advantages of an Advanced Medical Directive, also known as a Living Will?Answer:An Advanced Medical Directive is a document in which you specify what types of life saving measures should be administered to you and in what circumstances. If you have planned this far to have a Will and a Trust, then you should definitely have an Advanced Medical Directive so that medical costs can not RUIN the value of your estate leaving nothing for your heirs.
17. Do I need Long Term Care Insurance?Answer: There are many financial advisors who prowl about offering financial "advice" with only one goal in mind – sell them Long Term Care Insurance. Chances are, you've probably been to one of their seminars. These are the guys who advertise with slogans like this: "How to pay no Estate Taxes", or how about this one, "Sell your appreciated assets and pay no Capital Gain taxes". These advisors are out there in droves today. But their main goal, after getting you to come to their seminar, is to get you to buy Long Term Care Insurance. Why? Because their commission is fantastic!! Not because you need it.
So, who does need LTC Insurance? If you are over 65 and your assets are greater than $100,000, and less than $500,000 you might consider it. If your assets are more than $500,000 you can probably self insure. LTC Insurance is designed to pay some portion of your Nursing Home bills should you need to go into a home. But the "real" reason to have LTC Insurance is not to pay for the care, but rather to preserve your nest egg so that you can leave it to your heirs. If your assets are less than $100,000, then LTC Insurance is probably too expensive to be used to preserve your nest egg.
If you have family that is ready, willing, and able to care for you in later years, and a Nursing home is the last place they want you to be, then you may not need LTC Insurance at all.
If you have no heirs, regardless of your assets, you don't need LTC Insurance (but you might want it anyway - see the last paragraph of this article for more information). Why?
Remember, the "real" cause to buy LTC Insurance is not to pay for the Nursing home, but rather to preserve your nest egg. If you have the money to pay for the Nursing home, and you have no one to leave the money to after you die, then there is no need to preserve the nest egg.
The average cost of a Nursing home today is around $190/day. But the average "stay" (for those who enter a home) in a Nursing home is less than 2 years. Salesmen will tell you it is longer in an attempt to scare you, but it is not. So, if you don't have family willing to care for you, and you think you will likely need to stay in a Nursing home for a long time, and your assets fall within the above mentioned range, AND you wish to leave your nest egg to your heirs, then you should consider LTC as an option to help offset the costs of Nursing home care.
There is one other good reason to get LTC Insurance if your assets are small. If you have LTC Insurance, Nursing homes will welcome you. If you don't have LTC Insurance, and you don't have assets to pay for the care, then the Nursing home will only get paid by Medicaid after your assets are depleted. So, having LTC Insurance allows you to choose a nicer home should you need a Nursing facility. Without LTC the nicer homes may turn you away leaving you with fewer choices for your care.
18. The kids are grown, should I continue to pay for Life Insurance?Answer: Maybe not. When you originally bought life insurance, the purpose probably was to provide for your family in case the financial provider passed away. Now that the kids are grown, the only person to provide for is potentially your spouse. So, consider if your spouse would need the insurance. If the kids have grown and moved out, your insurance is probably getting pretty expensive and perhaps you should drop it.
Some older Americans utilize insurance to payoff estate taxes. It can be a reasonable estate planning tool. For example, consider Joe and Mary once again who we first introduced in the question above about "How can a Revocable Living Trust save my heirs on estate taxes?". Even with the Revocable Living Trusts, when Mary passed away, her estate still owed some taxes. Mary might consider purchasing a life insurance policy and placing it into an Irrevocable Trust. The policy would be designed to pay off her estate taxes after she dies and her heirs would inherit ALL her assets. In order to pull this off, Mary would have to be in good health at the time of insurance application. And remember, the insurance will be VERY expensive. But if the tax savings are large enough, then perhaps it's worth it.
19. What happens to my Roth-IRA when I die?Answer: The person who inherits your Roth IRA will begin to take Minimum Required Distributions from the Roth but will pay no income taxes on those distributions. The MRD amount will vary depending on the life expectancy of the person who inherits the Roth.
20. What happens to my Traditional and Rollover IRAs when I die?Answer: The person who inherits your IRA will take Minimum Required Distributions and will pay income tax on those distributions. The MRD amount will vary depending on the life expenctancy of the person who inherits the IRA.
21. What happens to my taxable brokerage accounts when I die?Answer: Brokerage accounts typically go through your Will and through Probate before being passed to your heirs. However, this is avoidable by placing those assets into a Living Trust. Another, less optimal, but still reasonable way to avoid Probate is discussed below regarding T.O.D.
22.What happens to my bank accounts and CDs when I die?Answer: Bank accounts and CDs typically go through your Will and through Probate before being passed to your heirs. This is avoidable by placing your CDs into a Living Trust. The bank accounts can avoid Probate by attaching T.O.D. (see below for more info on T.O.D.)
23. What happens to my 401k and 403b accounts when I die?Answer: These work the same as IRAs. They have beneficiaries attached to them so they do NOT go through your will and don't go through Probate.
24. What happens to my house when I die?Answer: Unless you have put your home in a Revocable Living Trust, your home will go through your will and through probate.
25. What is T.O.D. and how can it be useful?Answer: T.O.D. is an abbreviation for Transfer On Death. This is a mechanism that can be attached to any asset that has a title, such that the asset has beneficiaries and will NOT go through the will and will NOT go through probate. This is very useful for brokerage accounts, bank accounts, and that sort of thing.
26. Where can I go to get Wills, Trusts, Power of Attorney, Advanced Medical Directive drawn up?Answer: Call Warren Financial Service at 610-363-2000, or Contact Us at this link. We would be glad to help you ensure that you MINIMIZE estate taxes and MAXIMIZE the amount of your assets left to your heirs.
Disclaimers: The information presented here is intended to be general in nature. It is not intended to be legal advice and was not written by an attorney. It does not necessarily apply to your specific situation and it was not written specifically to apply to the laws of any particular state. Always seek an attorney for legal advice. Warren Financial Service is not an attorney nor does Warren Financial Service employ an attorney. However, we do have attorneys as partners upon whom we call for legal advice. If you desire the advice of an attorney, we will recommend our partners to you and/or recommend that you seek your own legal council.