Estate Planning

Frequently Asked Questions 

1. How can I get your free publication called "Estate Planning with Living Trusts"?
2. Is it true that I can "gift" up to $11,000 per year to as many people as I want?
3. What happens if I "gift" more than $11,000 per year to a single person?
4. Can I give away money and NOT have it count toward the $11k/year?
5. Why should I have a will?
6. How much money can I give my heirs without paying Estate taxes?
7. I've heard that the IRS gives taxpayers a break on estate taxes for estates less than 1 or 2 million - Since I don't have that much, is there any other reason I should get a Living Trust?
8. How does a will "create" a trust?  What is a pour-over trust?
9. What is the "Unlimited Marital Deduction"?
10. What is the "Joint Custody Trap"?
11. How can a Revocable Living Trust save my heirs on estate taxes?
12. If I don't control what my heirs receive, then the State will.  How can I take control?  How can I assign beneficiaries?
13. What is probate?  Should probate be avoided?
14. How can probate be avoided?
15. What if I own a house or other property in more than 1 state?
16. What are the advantages of an Advanced Medical Directive, also known as a Living Will?
17. Do I need Long Term Care Insurance?
18. The kids are grown, should I continue to pay for Life Insurance?
19. What happens to my Roth-IRA when I die?
20. What happens to my Traditional and Rollover IRAs when I die?
21. What happens to my taxable brokerage accounts when I die?
22. What happens to my bank accounts and CDs when I die?
23. What happens to my 401k and 403b accounts when I die?
24. What happens to my house when I die?
25. What is T.O.D. and how can it be useful?
26. Where can I go to get Wills, Trusts, Power of Attorney, Advanced Medical Directive drawn up?

1.  I heard from a friend that I could get your free publication called "Understanding Living Trusts".  How can I get it?

Answer: Just click here: Estate Planning with Living Trusts and fill out the form with your name and address 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 I can "gift" up to $11,000 per year to as many people as I want?

Answer: Yes, it's true.  In fact, you and your spouse can each give away up to $11,000/year to as many people as you want.  For example, if you are married and have 5 grandkids, you can give away up to $110,000/year.  That is calculated as follows: $11k/year/person x 5 people x 2 husband & wife.  The gifts will decrease your estate and possibly save your heirs from paying estate taxes.  There is NO IRS reporting on these gifts.

3.  What happens if I "gift" more than $11,000 per year to a single person?

Answer: You will need to file a gift tax return to the IRS.  However, you will pay ZERO taxes!  Most people don't realize that they can freely give away much more than $11k/year to a person and still pay NO taxes.  The IRS simply keeps track of how much you give away above the $11k/year (to an individual) and reduces your estate tax exemption.

4.  Can I give away money and NOT have it count toward the $11k/year?

Answer:  YES!  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.

Answer: If you would 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 give my heirs without paying Estate taxes?

Answer:

As you can see from the above table, the tax on your estate is getting less each year until there is no estate tax in 2010.  However, in 2011, the tax rate SOARS and the exclusion PLUNGES.

Also, there is a very BIG benefit which begins to disappear in 2010.  It's called "stepped up basis".  The "basis" is the amount you paid for an asset.  For example say you paid $200,000 for your home in 1984.  Therefore, $200,000 is your cost basis.  However, say you die this year and your heirs would like to sell your home which is now worth $500,000.  The gain on the house is $500k (value today)  - $200k (original cost basis) = $300k (gain).  Your heirs do not have to pay tax on the gain from the "original cost basis".  Instead they pay tax on the gain of the house using a "stepped up tax basis".  The stepped up basis is the value of the home at the time of your death.  So, your heirs would have a gain of $500k (stepped up basis)  - $500k (value today) = $0 (gain) and therefore pay no tax.

You can expect the government to change these laws before 2010.

Do you think your assets are too small to worry about trusts?  Perhaps you are forgetting about life insurance proceeds.  Many people have $500k to $1m in life insurance.  And with home prices soaring in recent years, it's not unusual that your home is worth $300-$700k today.

Read the next question/answer.  Even if your assets are too small to worry today, there are still some VERY good reasons to create a Living Trust to shelter your assets.

7.  I've heard that the IRS gives taxpayers a break on estate taxes for estates less than 1 or 2 million - Since I don't have that much, is there any other reason I should get a Living Trust?

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?

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"?

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"?

If you title all your assets in joint custody, then you have simultaneously created a situation where estate tax will be postponed until the death of the second spouse, but also may have created a situation where your spouse will pay MUCH more estate taxes when he/she dies than necessary.  Read the next question about how you can utilize a Living Trust to DOUBLE your estate tax exclusion.

If you are married, a Revocable Living Trust created for each spouse can DOUBLE your estate tax exclusion.  This can only be done as long as both spouses are living so don't delay.  The IRS allows every person to leave all their assets to their spouse with no estate tax.  However, in doing so, you are opting to skip your right to your Unified Credit.  Each person gets a Unified Credit which will allow that person to pass assets to anyone they wish up to the yearly exclusion amount with no estate tax.  In 2004 the Unified Credit will allow a person to leave up to $1.5million estate tax free to his/her heirs.  But when you leave all your assets to your spouse (utilizing the marital deduction), you don't get to utilize the Unified Credit.  When the spouse subsequently dies, the spouse gets to utilize his/her Unified Credit ONLY.  So, you bypassed one full credit that was due to the first spouse to pass away.

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 Revocable 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).

 Let's do this again WITHOUT the Trusts

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?

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?

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?

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?

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?

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?

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 $150/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?

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  Living Trust save 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?

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?

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?

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?

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?

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?

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?

T.O.D. is an abbreviation for Transfer On Death.  This is a mechanism that can be attached to any assets 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?

Call Warren Financial Service at 610-363-2000, or send email: Warren Financial Service.  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.