Estate Planning for the Business Owner/ Basics (and some new developments in the law of estate taxes for 2014)

1. WHAT IS AN ESTATE PLAN?

There are probably as many answers to this question as there are lawyers in the area of practice along with financial planners and Cpa’s in the area of practice.

In a nutshell an Estate Plan, is an earnest attempt by a single person, married couple and or family, to arrange one’s financial affairs such that there is no question when one passes away as to whom one’s property will pass and how and when the various assets will be distributed. In couple planning, generally, planning for distributions to other than the surviving spouse, are deferred until the second death. Thus, supporting the coined wording of ‘second to die’.

In this day and age generally an Estate Plan involves not only the execution of a Last Will and Testament but most likely a number of other testamentary written documents (i.e. come into play upon your death) including an Intervivos Trust (also known as a Living Trust); Health Care Powers of Attorney; General Durable Powers of Attorney, Physician’s Directives, Assignments of Property and other misc. documents which facilitate the transfer of assets either prior to death i.e. intervivos (Living) trust, or post death trust planning called testamentary trusts. There are many other documents that can be crafted to deal with unique estate planning issues but the aforementioned categories covers the general package of documents that are included in most comprehensive Estate Planning Portfolios.

2. WHO SHOULD HAVE AN ESTATE PLAN?

Most anyone with assets in excess of $100,000 should have an estate plan. Frankly even for a very small estates, one should have a ‘plan’ which might be without a Living Trust, but include a Last Will and Testament, (as well as other documents listed previously) which documents allow you to provide for a guardian (for children under the age of 18) as well as set forth a plan of distribution for your assets.

In this fashion your desires will be spelled out no matter how minimal your assets might be. Otherwise, the disposition of your assets on death will generally be dictated by the Laws of Intestate Succession (passing away without a Will-and thus a state law dictates how ‘your assets’ will be distributed and to whom) and those results can often be counter intuitive to what the person passing away really wanted to occur.

For instance , generally, in a so called ‘standard family’ one marriage and two children , a Will generally provides that whomever is the surviving parent will receive the family assets, and the Will spells out who the guardian for the children would be in the event there is no natural parent alive and able to do so.

If one has no Will then the decision is left to the Intestacy Laws, which laws, in the facts set forth above, would provide for the family assets to be divided as follows: 1/3 to the surviving spouse, and 1/3 to each of the children. Of course if the children are under the age of 18 then the surviving parent would be the guardian of the child’s assets and their person, but one can see that this intestacy law approach could result in some very undesirable results for the surviving family.

These type of events and results are exactly what the persons can avoid by having a proper Estate Plan which is accompanied by a Living Trust and or Will and other Estate Portfolio agreements.

3. WHAT IS A WILL?

A legal writing that essentially sets forth how the testator, i.e. the one creating the Will wants to dispose of his/her property upon his/her death; the Will also establishes who is the person of trust, called the executor under a Will, that will guide the estate through probate, and too, if there are minor children the Will document generally establishes who the persons would be, if no natural guardian survives, that would be the guardian of the children’s person and estate.

4. WHAT IS A TRUST?

It’s easiest to think of a Living Trust as a Will Substitute- i.e. a document which serves in place of a Will. One of the great benefits of using the Living Trust vs a Will is that a Living Trust helps the decedent (the person who died-and his/her family) leave his/her property to his/her selected persons without the costs, fees, and general annoyances of the Probate Process.

By way of an example, the statutory attorneys fees on a gross estate of 1M or more can be in excess of 25k. This figure does not include court costs and other potential costs such as Probate Referee’s and the like ( which would be in addition to the referenced fee). Generally speaking if you can avoid probate then by all means, other than in very exceptional circumstances you should avoid it.

Thus, a Will is a good first step as it allows the person to give many different directions but one still has to proceed through the expensive probate process. So, the best of choices will generally be to use a Living Trust which will allow the persons to give direction and at the same time (if properly prepared and executed) avoid the probate expense process and expenses.

5. Why have Trust vs a Will?

Today, after the most recent Tax Act changes in 2013, the most important reason to have a Living Trust is to avoid the large probate expenses which include attorneys fees, court costs and fees, the amount of which is referenced above and is as previously discussed above.

In addition, the Trust allows for an orderly disposition of your assets pursuant to a plan set forth in the trust instrument (similar to a Will) ; and to possibly protect the assets from certain creditor attacks and to possibly depending upon the circumstances avoid Estate Tax. (Federal Estate Tax).

6. ARE THERE DIFFERENT TYPES OF LIVING TRUSTS?

The answer is yes, there are a number of variations that can be used in the Estate Plan. Differing trusts can provide for different timing in distributions; coverage of multiple different children from different marriages and myriad other unique circumstances.

7. If you have a Trust and are married do you need an A/B trust as of 2014?

Up until 2013- when parties who were married created a trust, many times in order to take maximum advantage of the Federal Estate Tax Exemption husband and wives created a by pass trust (A/B trust) which essentially divided the estate upon the first death into two roughly even portions in order to take maximum advantage of the two individual estate tax exemptions, one for husband and one for wife.

Now, the two exemptions for Husband and Wife are ‘portable’ and thus can be used cumulatively without having to divide the trust pursuant to the A/B Trust paperwork and restrictions.

DO THERE STILL REMAIN REASONS WHY ONE WOULD WANT TO DIVIDE ASSETS OF HUSBAND AND WIFE ON THE FIRST DEATH AS BETWEEN HUSBAND AND WIFE?

When there are more than one marriage along with children from both marriages; or where is a large difference in ages of the spouses, or in other extenuating circumstances the parties might still want to utilize a Living Trust arrangement similar to an A/B type trust arrangement, but with different electing provisions.

8. DO I NEED TO CHANGE MY A/B TRUST UNDER THE NEW LAWS?

What is generally being recommended in estates that are under 10.6 M is for there to be an amendment to the trust document whereby the trust will not automatically divide into two separate subdivisions on the first death, unless there is a ‘disclaimer’ elected (must be within six months of the date of death- and too, a Form 706 Estate Tax Return must be filed on the first death as well). If the disclaimer is elected by the surviving spouse, a portion of the property that was to go to the surviving spouse would be ‘disclaimed’, and then re directed into the B trust( thus resulting in a division of the assets as directed upon the first death). On the other hand if the disclaimer is not elected then in that event there will be a ‘single’ pot trust and no division of the assets with all of the attendant niceties and restrictions will occur.

9. WHATEVER HAPPENED TO THE ANNUAL GIFT TAX EXCLUSION?
Another aspect of the recently (in effect for 2014) enacted legislation is to have the $14,000, annual gift tax exemption remain in effect.

Ok, well, we can only allot a certain amount of verbiage to these presentations , and as the casual reader might or might not know, there are seminars on each one of these subjects, which seminars often cover several days of programs reviewing all of the issues and sub-issues that Estate Planning Professionals have to examine as they help people construct their Estate Plan. Our article herein only lightly touches upon some of the basic concepts and issues one encounters when trying to construct an Estate Plan.

Thus, the above article simply sets out to familiarize the reader with some very basic concepts and some very basic changes in the law that impact the area of Estate Planning. Hopefully the reader will now have some very basic tools which will enable him/her to proceed to prepare for the implementation of an Estate Plan. Best of luck.

By | 2014-08-26T15:32:11+00:00 August 26th, 2014|