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Estate Planning Simplified

Law Office of

RICHARD M. BASKETTAttorney - CPA

Suite 234210 North Higgins Avenue

Missoula, Montana 59802-4497(406) 5459-1110

www.baskettlaw.com

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Some Estate Planning Tools

Pre-Death• Living (Revocable) Trust• Irrevocable Trust• Gifts• Durable General Power of

Attorney• Durable Health Care Power

of Attorney• Living Will• Guardianship• Conservatorship

At & After Death• Probate

– Will

• Non-Probate– Living (Revocable) Trust– Joint Property– Beneficiary Designations

• Life Insurance• Retirement Plan• TOD Account (Stocks)• POD Account (Bank Accts)• Beneficiary Deed

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Common Terms

• Will• Trust– Inter Vivos Trusts• Living (Revocable) Trust• Irrevocable Trust

– Life Insurance Trust

– Testamentary Trusts

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How They Compare

Will• Not effective until death• Governs Probate assets• Personal Representative

controls the estate

Living Trust• Can be used while alive and

to control disposition of assets after death

• Governs assets held in the trust

• Trustee controls the trust

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Elements of a Trust

• Trustor / Settlor / Grantor– The person who creates a

trust

• Trustee– Owns legal title to assets in

trust– Administers trust in

accordance with trust instrument for benefit of the beneficiaries

• Beneficiary– Receives the benefit of the

trust

Trustee

Trustor

Beneficiary

$

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Different Uses for Different Trusts• Living Trust

– Will substitute– Same person is usually Trustor, Trustee & Beneficiary– Avoids probate as to those assets in the trust– May or may not have tax planning use– May or may not continue after death

• Irrevocable Trust– Usually, tax planning use, such as lifetime gifts to minors or to hold life insurance policy– Very restrictive as to any benefit that can be provided for person setting it up (Trustor)

• Testamentary Trust– Created under Will, so does not avoid probate– Not in effect while Testator is alive– Used for tax planning (e.g., bypass trust) or for asset management (e.g., minor

children)

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Common Terms (Cont’d)

• Power of Attorney– Principal– Agent

• Living Will– Comfort One– Advance Directive

• Testate– Die with a valid Will

• Testator / Testatrix• Intestate

– Die without a valid Will

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Common Terms (Cont’d)

• Personal Representative (Executor)• Trustor / Settlor / Grantor– Used interchangeably

• Trustee• Beneficiary• Principal• Agent

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Common Terms (Cont’d)

• Gift– Lifetime

• Devise– Formerly: Real Estate– Now: Everything

• Bequest– Cash or other personal property

• Estate Tax• Inheritance Tax• Gift Tax

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Common Terms (Cont’d)

• Probate– Court-controlled process of distributing an estate

• Probate Assets– Pass through the hands of the Personal Representative

• Non-Probate Assets– Pass directly to the beneficiary

• Estate– Taxable Estate– Probate Estate

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The “Estate”

Probate Estate• Assets that pass through the

hands of the Personal Representative and are subject to control by the probate court

• Does not include non-probate assets

Taxable Estate• Probate Assets +

Nonprobate Assets – Liabilities

• If less than $3.5 Million, no estate tax

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Probate

• Submit Will, if any, to Court• Appoint Personal Representative (Letters)• Collect assets• Publish notice to creditors and pay debts• File decedent’s final income tax return• File any necessary estate/inheritance tax returns• Account for administration of estate• Distribute to Devisees

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What the Will Controls

• Assets that do not pass by non-probate means• The Will does not override non-probate

transfers• Will is effective upon your death– Can be amended, revoked or replaced any time

prior to your death as long as you have testamentary capacity

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What the Will can do

• Pass probate assets• Create testamentary trusts– Often, for tax planning purposes– Also to provide for asset management

• Name Personal Representative• Name Trustee of Testamentary Trusts• Name Guardian

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Elective Share

• A surviving spouse has a right to elect against a Will and receive the value of the elective-share percentage of the “augmented estate,” determined by the length of time the spouse and the decedent were married to each other – The elective-share percentage ranges from 3%

after 1 year of marriage to 50% after 15 years

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Testamentary Trusts

• Created under the terms of a Will– So, not created until your death

• Tax Planning Uses– Trust can be created to hold assets for surviving

spouse, but which will not count as part of surviving spouse’s estate for tax purposes

• Asset Management Uses– Beneficiary may not be capable of managing

assets (e.g., minor children)

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Dying Without a Will (Intestacy)

• The state provides a “Will” for you• Probate assets pass in manner prescribed by

intestacy statute– In general, to surviving spouse, and then to

children– Beware: Convoluted rules when decedent has

children other than with spouse• Still, only probate assets are governed by

intestacy statute; non-probate assets are not

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Intestacy Examples (Montana)

• Example 1: Husband and Wife have had three children during their marriage. Upon Husband’s death, Wife and all (or any) of the children are still living. His entire estate will pass to Wife.

• Example 2: Same facts as Example 1, and now Wife dies. Her intestate estate passes in equal shares to the three children.

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Intestacy Examples (Montana)

• Example 3: Husband and Wife have no children. Husband’s mother is still alive when Husband dies. – Wife takes the first $200,000 plus ¾ of the balance

of Husband’s intestate estate. – Husband’s mother takes ¼ of Husband’s intestate

estate in excess of $200,000. – However, had any descendant of Husband survived

him, Husband’s mother would not have taken any share.

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Intestacy Examples (Montana)

• Example 4: Wife had a child born of her first marriage. She married a second time, during which marriage she died, survived by her second husband and her child.– The second husband takes the first $100,000 plus

one-half of the balance of Wife’s intestate estate. – The child takes the other ½ of the intestate estate

in excess of $100,000.

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Intestacy Examples (Montana)

• Example 5: Wife had a child with Husband during their marriage and Husband has a child from a prior marriage. Wife is survived by Husband, her child and her step-child.– Husband takes the first $150,000 plus ½ of the

balance of Wife’s intestate estate.– Wife’s child takes the other ½ of the intestate

estate in excess of $150,000.– The step-child takes nothing.

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Non-Probate Tools: Living (Revocable) Trusts

• Management of assets owned by the trust– While you are alive (distinguish Wills)– After you are dead (similar to Wills)

• Tax planning (same as Wills)• Avoid probate– Assets in the trust– Especially useful when assets in multiple states

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Non-Probate Tools:Life Insurance

• Beneficiary Designation• Insurance company pays directly to the

beneficiary, not the Personal Representative (unless the Estate is the beneficiary)

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Non-Probate Tools:Retirement Plans

• Beneficiary Designation• Again, paid directly to named beneficiary, so

non-probate

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Non-Probate Tools:Joint Tenancy

• Passes automatically on death to surviving joint tenant

• “A & B as joint tenants” or “A & B as joint tenants (and not as tenants in common)”

• Different tax treatment if joint tenants are married than if not

• Contrast Tenancy in Common

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Joint Tenancy vs. Tenancy in Common

Joint Tenancy• Each co-tenant has

undivided interest in the entire property

• Deceased co-tenant’s interest passes automatically at death to surviving co-tenant(s)

Tenancy in Common• Each co-tenant has

undivided interest in the entire property

• Deceased co-tenant’s interest passes through probate estate in manner directed by Will (or intestacy statute)

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Joint Tenancy Pros & Cons

Advantages• Simple• Avoids probate• Especially useful for

husband and wife

Disadvantages• May frustrate tax planning (in

Will or Living Trust)• May lose stepped up basis• May pass to unintended

beneficiary• Potential claims of creditors of

other joint tenant• May have right to draw out

account• May require consent of other

joint tenant to transfer or encumber

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Non-Probate Tools:POD Accounts

• Similar to joint tenancy in that asset passes to named beneficiary at your death without probate (need beneficiary designation)

• But, beneficiary has no ownership interest in account prior to your death

• Change beneficiary at any time• “POD” means payable on death• Bank accounts only

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Non-Probate Tools:TOD Accounts

• Same as POD Accounts, but applies to security accounts held at stock brokers

• “TOD” means transfer on death• Need to fill out a beneficiary designation

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Non-Probate Tools:Beneficiary Deeds

• New: Available in Montana as of 10/1/2007• Operate similarly to POD and TOD Accounts:– Designate a beneficiary– Beneficiary has no ownership interest in property

until your death– Upon your death, your interest transfers

automatically to beneficiary without probate• Subject to Joint Tenancy

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Drawbacks to Beneficiary Designations

• Each institution has its own form– Life insurance company– Bank (POD Account)– Stock broker (TOD Account)– Retirement Plan

• Each form may differ in what happens if a beneficiary does not survive

• Each time you want to change your beneficiaries, requires filling out multiple designation forms

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Drawbacks to Beneficiary Designations (Cont’d)

• Example: You have designated your children, A, B & C, as TOD beneficiaries in equal shares of your account at a stock brokerage. A has 2 children; B has 3 children, and C has no children– If A does not survive you, does A’s share pass to A’s 2

children, or is it divided between B & C?– If neither A nor B nor C survive you, would you like their

children to receive equal shares (1/5 each) or would you want A’s children to get 1/6 each and B’s to get 1/9 each?

– If shares pass to anyone who is young, would you want them to receive their share outright, or should it be managed by a trustee or custodian?

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Drawbacks to Beneficiary Designations (Cont’d)

• Each beneficiary designation form may have different results as to these issues.

• It is up to you to coordinate all the beneficiary designation forms to carry out your intentions

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Drawbacks to Living Trusts

• Inconvenience: If you “fund” (i.e., transfer assets into) your living trust while you are alive, from then on you need to deal with those assets as trustee, rather than in your individual capacity

• Probate: If the purpose of the trust is to avoid probate, but at the date of your death not all your assets are in the trust, a probate may be required anyway

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Simplifying Matters

• The goal is to find a way to– Keep things simple during your lifetime by

avoiding the necessity of dealing with your own assets through a living trust

– Achieve the benefit of avoiding probate• Note: For some individuals, especially professionals,

going through a probate provides significant benefits

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The Solution

• Create a living trust, but do not fund it– Certain exceptions to this rule

• Use beneficiary designations to name your trust as beneficiary, with transfers to take place at time of your death but outside of probate

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Benefits of the Unfunded Living Trust

• Avoids the “Drawbacks to Beneficiary Designations”– The trust sets forth what happens when a beneficiary

does not survive you– The trust can be amended from time to time, without

having to go back to amend multiple beneficiary designation forms

– The Trust can provide for asset management for beneficiaries who are too young or for any other reason unable to manage finances

• There is no need to fund the trust while you are alive

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The Unfunded Living Trust

• Designate the Trust as the beneficiary where possible– Beneficiary of TOD Account– Beneficiary of POD Account– Beneficiary of Beneficiary Deed– Beneficiary of Life Insurance– Beneficiary of Retirement Plan• Caution: Often the surviving spouse is the preferred

designated beneficiary of a retirement plan

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The Unfunded Living Trust

• Transfer assets into the Trust when necessary– Tangible personal property• Personal and household effects• Automobile titles

– Stock in closely held corporations (not held at stock brokerage) where permitted• Beware of any agreements restricting transfer

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You Still Need a Will

• Even with an unfunded living (revocable) trust, you still need a Will, in case you leave probate assets

• The Will is where a guardian is nominated if you have any minor children

• But the Will is very simple, when used in conjunction with a Living trust

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Tax Considerations

• No federal estate tax on estates under $5 Million– Scheduled to drop to $1 Million exemption in 2013– Probably will not change as scheduled– If stays at $5 Million, most can plan their estates

without taxes as a concern• No Montana inheritance tax

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Tax Considerations (Cont’d)

• Gift tax on gifts over $13,000 / year / person– $26,000 / year /person for a married couple– Lifetime exemption of $1 Million• Cuts into $3.5 Million Estate Tax exemption

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Some Other Tools

• Durable General Power of Attorney• Durable Health Care Power of Attorney• Living Will• Guardianship• Conservatorship

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Durable General Power of Attorney

• Designates an agent who is authorized to act on your behalf

• The agent is to act in your best interests• The agent does not supplant your authority, cannot

override you• The agent can, however, do many things that would

otherwise require appointment of a guardian– Sign your income tax return– Have access to your bank account– Buy and sell assets in your name– Transfer assets into your living trust

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Durable General Power of Attorney

• “Durable” if it has language that provides it is to continue even if you become incompetent

• Can choose whether it is effective immediately, or only once you become incompetent– Advantages and disadvantages to both, but generally

recommend making it effective immediately• Power of Attorney terminates upon your death;

effective only while you are alive

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Durable Health Care Power of Attorney

• Same idea as Durable General Power of Attorney, but limited to medical decisions

• If you are unable to consent to medical procedure or treatment, someone can be named to give consent and make decisions on your behalf

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Living Will

• Limited to the decision whether life support should be provided when:– You have a terminal condition– Without life support, your death would be imminent

• Usually provides that life support can be withdrawn, but can provide that life support is to be continued

• Can name agent to make this decision, or leave it to the doctors

• Define “life support”

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Guardianship

• You are no longer competent to handle your own affairs

• You lose control to the guardian (vs. agent)• Requires court hearing as to competency, so

lawyers, doctors, witnesses• If established, requires periodic accounting to

the court

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Conservatorship

• Similar to Guardianship, except conservator is responsible for management of your finances, while guardian is responsible for your person

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Questions