In 1997 Congress changed the Federal estate tax to allow more people to legally avoid taxes upon death. Since Utah estate tax is based upon the Federal, good estate planning may help you save a good deal of money. The exemption is NOT automatic, you must follow the law to claim the exemption. 1998 exemption is, done correctly, $675,000 per person, so a couple, if they plan correctly could pass a $1,250,000 estate to their heirs with no estate tax). This Estate tax free amount (called the "Unified Estate and Gift Tax Credit") is scheduled to increase to $1 million EACH person by the year 2006. There is also an additional exemption for businesses owed by the deceased: $675,000 in 1998.
     It must be noted that many people worry that discussing this issue will hasten their death. That is a real perception among some older people, as it was quite customary in the past to believe that speaking of certain things would hasten them on. This concept was not only invoked in relationship to death, but also to disease. Older individuals, especially from the East Coast, are still not likely to speak the word "cancer" (instead, they call it the "big C") fearing that they will "catch it" if they pronounce it.
     Another perception is that "I don't have much, so don't need to worry." This is an unfortunate perception, since, in most cases, the less you have the less you can afford to waste (in probate and other costs). Still another is that the person is too young or too old. If the person is older than 18, or married, or has children, or has life insurance, or has a home, or has debts, or has assets, or has death benefits, or pays taxes, then estate planning will help. If a person is homeless and has never worked and has no relatives, then I suppose that estate planning is, for that person, a waste of time.
     Estate planning techniques, however, change with the tax changes, law changes, and the person's own family and asset changes. This frustrates people. They spend time and effort and money to properly set up wills and trusts, then later on find that "things have changed" and they need to redo the documents. This, unfortunately, is necessary and should not be forgotten. If
you knew when you where going to die, then you could, some short months prior (30 months for some rules) arrange your estate properly just once. But most people are not able to predict that happening with sufficient accuracy. So start estate planning now!
    The integration of estate planning with other aspects of your financial life is very critical. Sometimes a person acts on one piece of news without co-ordination with other ideas and this can lead to real problems. In one such case, a woman took her mother to the County Recorder to have mother sign a "Quit Claim Deed" on her home, specifying on it that ALL of the children
would inherit the house. She used "AND" between each of the children' names--all 8 of them. This, at first glance, looked like a good idea as it meant that no one of the children could "make off" with the house at mom's death.   But what it actually did do is set up a requirement for 16 concurrent signatures sometime after mom's death. Why 16? Because in the state of Utah the
spouse has the "Right of Election," and all 8 children were married at the moment of the Quit Claim Deed.
     Perhaps all 16 of these people would totally agree on any action to be taken with the house (NOT VERY LIKELY!), is it a good idea? Not if any lawsuit is placed against any one of the 16 people! In any law  suit that "AND" places this property in jeopardy as a part of the liable assets of the defendant. This was NOT a good method to achieve what the daughter wanted to
accomplish.
   There are ways, however, to do just what she wanted to do AND safeguard taxes. In the method she chose, the inheritors would ALSO be denied the "Stepped-up" tax base since they were not really inheriting the home: the home was, since mom was still living, a "gift" for tax purposes. Mom also needed to report this gift on her income tax for that year (she failed to do so). Mom, as the giver, is the person who must pay the gift tax in the year the gift is made (or elect on the tax forms to use the uniform exclusion amount to cover all or part of the gift). So two serious tax errors were also committed.
   Many older people, upon reading the above situation, will say that the daughter did not error since they personally know of many situations in which the people did exactly what the daughter did--and it was successful. But the new tax laws no longer miss the errors committed in this situation. It has always been the law that real estate transactions, such as this, must be
reported on the income tax forms of that year, but the IRS has not in the past had a way of knowing of the transactions nor a way of forcing compliance. But they do now! Current IRS officials say that they are 4 years behind on their auditing but that these transactions WILL be caught and the penalties will be assessed.
   In estate planning and tax law, the reader must understand that following statutory laws will give you the benefits you desire: they are NOT automatic; you must apply for them just like you apply each year for your income tax relief (ie: personal exemptions, itemized deductions, etc).

 

Wills
    A will leaves directions for an individual's transfer of the interests in property at death.  It can also express other wishes such as: funeral and bill paying arrangements, guardians for minor children, and executors of the estate. The will allows an individual to control who is to receive the assets, how the assets will be administered and who will be the administrator. However, to have the power to do so, it must be probated (approved by the court).
    If you haven't taken the effort to have a will drawn up, rest assured that the state intestacy statutes on probate have created one for you automatically.  It may not be what you want, but typically could have these types of provisions:
 (a) Your spouse may get only a portion, say the first $50,000 of your estate and then 1/2 of the balance. The  rest may go to children or other relatives.
 (b) Your spouse may be required by the probate court to annually report the disposition of minor children's inheritance.
 (c) Your spouse may also have to purchase a yearly "performance bond" to satisfy the court's supervision rules.
 (d) Your children would have the right, at age 18, to receive their full inheritance and do whatever they wish  with it. They may also require your spouse to give an accounting and could sue your spouse for reimbursement.
 (e) Should your spouse re-marry, the new spouse may be entitled to 1/2 of everything. Your spouse may not be able to free up any of that for your children's support  - nor will your children inherit any of it.
 (f) If you have minor children and your spouse also dies, with no specific guardian being named, the court will choose a guardian (even if a complete stranger) if your relatives haven't gotten together and decided on some one.
 (g) No legitimate estate tax savings will be attempted.
 (h) Without children: Your spouse inherits from you. Upon your spouse's subsequent death, all the assets may go to your spouse's relatives, none to your own.
 (i) Probate and other costs will not be minimized, and the court may even charge a stranger to handle your affairs at, of course, a fee.

  The primary purpose of your will is to specify the manner in which your property is to be distributed.  Among other things, a will can also:
  Appoint a guardian for minor children

  Name your "Personal Representative"

  Prescribe whether property is to be transferred in a trust, and the specific terms of the trust 

  Coordinate distribution of the probate property with the other property passing outside of the will:

  Provide for the continued operation or liquidation of a business

  Minimize estate taxes

  Minimize delay and confusion

  Provide charitable gifts

 

    Your will should be reviewed regularly so as to guarantee that your current objectives will be met.  Any of the following events could be a signal to review and revise your will:
  Marriage or divorce

  Birth or adoption

  Death or inheritance

  Move to another state

  Tax and inheritance law changes

  Business ownership changes

  Although there are legal ways to do your own will without the costs of a lawyer, it is highly recommended that you  employ one.  Estate planning can be complex, and an Estate Planning Attorney (a specialist) should be considered.

 

Trusts
 A trust is a special kind of contract designed to own and control property and to avoid probate. Trusts are often used in estate planning for one or more of the following purposes:
 (1) To eliminate the delays, costs and publicity of probating a will. The emotional costs, which are often more distressing, may also be reduced.
 (2) A trust will allow provisions to be made for the care of minor children or grandchildren who are left alone because of the death of their parents.
 (3) A trust may contain provisions to deal with incapacity. Such provisions typically allow for the care of an individual whose capacity has become diminished, without the expense or publicity of a court hearing.
 (4) A trust may enable an individual to provide benefit for someone who survives them but have the assets managed by someone who has particular expertise, in order to protect the assets from being lost or wasted.
 (5)  A trust may allow a "sprinkling" of assets to heirs  rather than a lump sum which may be hard to manage.

 

SOME CONSIDERATIONS:
 - One of the most common uses of trusts is to avoid probate. This can be especially important for older persons because it avoids many of the pit-falls which other methods of probate avoidance create.
 - A trust can also be used to deal with the considerations raised under the topic "wills" above.
 - A trust will usually allow the older person to retain  complete control of the assets, while effectively providing for successors to control the assets after death.

 

Types of Trusts
I.  INTERVIVOS OR "LIVING" TRUSTS- Established during the lifetime of the grantor for the benefit of another. Can be for a limited period of time or can continue after death of the grantor.

    A. Revocable living trust--grantor retains the right to revoke, change terms or regain assets in the trust.
    1.  All income generated by the trust continues to be taxed to the grantor.
    2.  No completed gift made for Federal gift tax purposes.
    3.  Trust corpus (that which was placed in the trust) will be included in grantor's Federal estate at death. Assets are nonprobate and pass  according to trust terms.
    4.  Why a revocable trust?
      a.  Grantor desires management responsibility of assets.
      b.  Grantor wishes to protect against his physical, mental or legal incapacity.
      c.  Assure continuity of management and income flow in the event of death or disability.
      d.  Privacy in handling and administration of assets during life and at death.
      e.  Minimize estate costs and delay.
      f.  Provide for estate administration of out-of-state real estate.

   B.  Irrevocable living trust--grantor cannot revoke, alter, amend or terminate trust and gives up title to  assets transferred to the trust.
    1.  A completed gift is made for Federal tax purposes when assets are transferred.
    2.  Trust principal will not generally be included in grantor's estate for Federal estate tax purposes.

 

II.  TESTAMENTARY TRUSTS
   A.  Established in a will
     1.  Amount to pass into trust is specified in thewill.
     2.  Terms of the trust are specified in the will.
   B.  Revocable until death; unfunded.
   C.  Irrevocable at death.  Funded, provided sufficient probate assets available.
   D.  Why a testamentary trust?
     1.  For children--minors and/or adults.
     2.  For a surviving spouse.
     3.  For support of a parent or other individuals.
     4.  For charity.
   E.  Testamentary trusts pose no income, gift or estate tax issues since the trust is unfunded until after death.

 

Living trusts Benefits
    The following are some of the advantages to a Living Trust over a Testamentary Trust:
   1.  A living trust is a private document not available for public inspection.  A will and testamentary trust becomes a public document upon completion of probate of the decedent's estate.
   2.  If a will is declared invalid for some unforeseen reason and not admitted for probate, a testamentary trust would never come into being and all planning would be to no avail. On the contrary, a living trust is not subject to this uncertainty.
   3.  A living trust can go into effect and function immediately upon death. Whereas a testamentary trust (as part of the will) cannot begin to function until the completion of probate filing of the will which could be a matter of months, or in some cases, years.
   4.  Over the years as estate planning objectives change, property can be added to a living trust during the estate-owner's lifetime. This flexibility is often useful to the estate-owner in accomplishing various estate planning objectives during life as well as for heirs after death. Such flexibility is not possible with a testamentary trust.
   5.  Property in a living trust is not part of the decedent's probate estate and thus is not subject to administration expenses and claims of creditors. Property in a testamentary trust becomes part of the decedent's probate estate and subject to these costs and claims.
   6.  A living trust is not under the supervision of the court, where as a testamentary trust, in some jurisdictions, may be under the continuing supervision of the probate court even requiring periodic accounting to the court. Such accounting also becomes public information and may divulge personal and business details, facts and figures to competitors.

 

An Important Caution:
 Often, people set up a trust, but forget to maintain it. It is critical that assets "belong" to the trust in order for the trust to accomplish it's purpose. When obtaining a trust, be sure that assets are transferred to it.  Annually review asset registrations to make sure your trust has them "in it".

 

Charitable Gifting
    For some, charitable gifting is an answer to problems:
   1)  Lowering income taxes paid and
   2)  Getting a "hard asset" (like real estate) into either a liquid income for themselves or a cash inheritance for their  children.

   The basic idea is to deed over to a qualified charity some appreciated asset (usually, but not always, real estate) and take a tax break for doing so. The charity, in turn, provides a benefit back to the donor which can take one of several forms.
    Most often, the charity buys a life insurance policy on the donor which pays out to the children a tax-free cash payment upon the death of the parent. Another method, when the donor needs income, involves the charity purchasing an annuity for the donor which pays a monthly income to him/her for the remainder of his life.
    In some cases, the donor can deed over assets, say a house, and remain living in it under "life estate."  The asset does not actually come under the control of the charity until the donor passes away. Competent legal assistance should be sought.

 Chapter 11 in Retrospect
1- If you have an estate plan, has it been reviewed in the last 3 to 5 years to determine if it accurately describes the desired distribution of your property?
2- Do you have specific provisions in your estate plan in order to protect and preserve your business?
3- Do you feel you should have a trust?
4- Do you feel you should look into charitable gifting?
    What charity would you consider?