WILLS, TRUSTS, ESTATES & THE TAX ACT
of 2001 FAQ
1.Q. What is a will and who should
have one?
2.Q. What are the advantages of a will?
3. Q. What does a will affect?
4. Q. What property is not distributable
at death under supervision of the probate court?
5. Q. Is the net probate estate the same
as the gross estate of the deceased?
6. Q. How does the gross estate of the
deceased differ?
7. Q. Since the estate (death) tax has
been repealed, why do we have to worry about a will or estate planning?
8. Q. If the estate tax is repealed for
only one year, 2010, what is the situation prior to that?
9. Q. How much can I leave to my spouse
without paying taxes?
10. Q. Why not just leave everything to
my spouse?
11. Q. What is the joint property trap?
12. Q. What is typically done with the
remaining money that does not go into the credit shelter trust?
13. Q. If we each already have a will
which gives to our children the exemption equivalent amount or sets up a credit
shelter trust with the children as the sole beneficiaries, do we need to be
concerned?
14. Q. What are the most important
things for us to do in determining whether we need a will or will substitute?
15. Q. When is a simple will
appropriate?
16. Q. When is a simple will with provisions for guardianship and
a contingent trust appropriate?
17. Q. What is an Living (inter vivos) Trust?
18. Q. Why have a Living Trust?
19. Q. Is a Living Trust always effective?
20. Q. Does a Living Trust avoid estate taxes?
21. Q. What is an irrevocable trust?
22. Q. Why have an irrevocable trust?
23. Q. Is a living trust necessary?
24. Q. Are there any statistics which tell us how many people have
a will as opposed to a trust?
1. Q. What is a will and who should
have one?
A will is your declaration of how you desire your
property to be disposed of after your death.
A will is revocable during your lifetime.
Generally speaking, both you and your spouse should have
a will
2. Q. What are the advantages of a
will?
Among other things, a will can:
- explain how you want your property to be distributed
to your spouse, your children, and others whom you desire to leave it to,
-
identify who will care for
your minor or special needs’ children,
-
avoid estate taxes if
either your estate or your and your spouse’s combined estates are
greater than the exemption amount, and
-
determine the manner by
which you are leaving property to another and thus the amount of control
(or protection) you will exercise either personally or by a third party
over that property after your death.
3. Q. What does a will affect?
A will affects only your net probate estate at your
death.
That is, it affects only the property distributable at
death under supervision of the probate court.
4. Q. What property is not
distributable at death under supervision of the probate court?
Lifetime dispositions of property are ordinarily beyond
the purview of the probate court.
For example, the deceased may have purchased United
States Savings Bonds payable at death to his child who survives him.
Or the deceased while alive may have designated his
spouse as beneficiary of insurance on his life. At his
death, she gets the death benefit.
Or the deceased may have owned the family home with his
wife as tenants by the entirety with the right of survivorship. His share of
the home passes at the deceased’s death to his spouse by operation of law.
Or the deceased during his life could have created a
living (inter vivos) trust. At the deceased’s death, the property in the
trust would be governed by the terms of the trust.
In each case, the property did not pass under the
supervision of the probate court.
5. Q. Is the net probate estate the
same as the gross estate of the deceased?
No.
6. Q. How does the gross estate of the
deceased differ?
Generally speaking the gross estate includes anything:
- the deceased owns,
- used to own but still benefits from, or
- anything which the deceased had unlimited discretion
to dispose of.
Thus, the gross estate of the deceased includes not only
the value of the probate estate of the deceased, but also the value of
property passing to beneficiaries of the deceased by way of will substitutes
and other arrangements which are considered to be transferred at death for tax
purposes.
The gross estate covers transfers by will (the net
probate estate) and transfers by familiar will substitutes, including but not
limited to:
- life insurance payable to the beneficiary;
- property owned as tenants by the entirety with the
right of survivorship (such as the family home);
- bank accounts titled so that at the death of the
owner the account is automatically payable on death to a specified
beneficiary;
- property subject to a living (inter vivos) trust
(over which the grantor retains a benefit or control); and
- savings bonds.
7. Q. Since the estate (death) tax has
been repealed, why do we have to worry about a will or estate planning?
The estate tax is currently only fully repealed for one
year, 2010.
At the end of 2010, unless Congress acts, the pre-2001
Act estate tax rules go back into effect.
Because Congress can change the law at any time, we do
not know how long the current 2001 tax law will remain in effect. What we do
know is that, unless Congress acts, the law repealing the estate tax expires
at the end of 2010.
Because the law, like the sea, is ever changing, the
likelihood of change and the increase, elimination of, and then reinstatement
of the estate tax exemption amount (also called the unified credit) makes tax
planning very difficult.
It requires that you pay attention to any changes that
are made in the law involving estate taxes and that when such changes are
made, either
- you understand what assumptions your will is based on
so that you know whether you need to act or
- you go back to the preparer of your will to make sure
that the assumptions upon which your will was made still hold true.
8. Q. If the estate tax is repealed for
only one year, 2010, what is the situation prior to that?
Simply stated, the exemption amount, that is, the amount
you can pass on tax free to your children or others, is increased until 2010.
The following chart shows how the exemption amount (also called the unified
credit) increases and what happens in 2010 and 2011:
Year Amount of Exemption Equivalent
2002 $ 1,000,000.00
2003 $ 1,000,000.00
2004 $ 1,500,000.00
2005 $ 1,500,000.00
2006 $ 2,000,000.00
2007 $ 2,000,000.00
2008 $ 2,000,000.00
2009 $ 3,500,000.00
2010 Estate tax repealed
2011 $ 675,000 (or some say
$1,000.000.00)
9. Q. How much can I leave to my spouse
without paying taxes?
Since the passage of The Economic Recovery Tax Act of
1981, an unlimited amount.
But the marital deduction does not eliminate the estate
tax, rather it defers it until the death of the surviving spouse.
10. Q. Why not just leave everything
to my spouse?
The traditional answer to this question is the joint
property trap.
11. Q. What is the joint property
trap?
If the combined gross estates of you and your spouse are
more than the exemption amount, then you are subject to the joint property
trap.
If you leave everything to your spouse at your death,
what you may be doing is simply deferring the estate tax until the death of
your spouse, rather than passing property to your children free of tax.
If the surviving spouse’s taxable gross estate is more
than the exemption amount, than upon the death of the surviving spouse, the
sums greater than the exemption amount which are being passed on to your
children or others will be taxed unless the surviving spouse dies in 2010.
Generally speaking, the joint property trap could
traditionally be avoided by the first spouse to die leaving money to a credit
shelter trust or "bypass trust" in an amount equal to or less than
the exemption amount.
This sum would be placed in a trust which could be made
primarily for the benefit of children or could be made for the benefit of the
surviving spouse with certain limitations with the sums remaining going to the
children upon the surviving spouse’s death without estate tax being paid.
Thus upon the death of the surviving spouse the,
children would get free of estate tax, the sum remaining in the trust. Thus
avoiding the joint property trap.
Generally speaking, you can avoid the joint property
trap and increase the money which will be passed on to your heirs, and
decrease the money that will go to the government for taxes, by using a credit
shelter trust or "bypass trust" when the total value of your and
your spouse’s combined estates are more than the exemption amount.
12. Q. What is typically done with the
remaining money that does not go into the credit shelter trust?
To take advantage of the marital deduction, the
remaining money is typically given to the spouse either outright or in a trust
that qualifies for the marital deduction.
13. Q. If we each already have a will
which gives to our children the exemption equivalent amount or sets up a credit
shelter trust with the children as the sole beneficiaries, do we need to be
concerned?
Possibly. Some wills create a credit shelter trust
(based on the exemption amount) that is created for the benefit of the
children of the deceased spouse. It is often funded based on a formula that
sought to pass as much as possible on to the deceased’s children without
having to pay estate taxes.
The credit shelter trust share was typically funded by a
formula using a fraction equal to the maximum amount of the exemption
equivalent (the unified credit is the amount of tax computed on the exemption
equivalent), and the remaining fraction was allocated to the share for the
surviving spouse either by an outright gift or a trust in which the principal
can be invaded for the surviving spouse’s benefit.
With the increase in, elimination of, and then
re-instatement of the exemption equivalent amount, you need to make sure
whether the surviving spouse is a beneficiary under the credit shelter trust,
in what way he or she is a beneficiary, and whether there are sufficient funds
in the surviving spouse’s marital deduction share to take care of his or her
needs.
The increases in the applicable exemption equivalent
amount may create a serious problem if the credit shelter trust share does not
permit the trust to be invaded for the needs of the surviving spouse.
You may need to consider a cap on the amount of the
credit shelter trust to prevent that share from growing to the full size of
the applicable exclusion amount.
The amount of this cap will depend upon your goals, the
needs of the surviving spouse, and whether the surviving spouse is to receive
any of the income and can invade the principal (under an ascertainable
standard) of the credit shelter trust.
The cap on the credit shelter trust can be drafted as a
fractional share of the total residuary estate, or as a specific dollar
amount.
An arbitrary cap on the credit shelter trust share, of
course, may increase the surviving spouse's taxable estate depending upon what
the exemption amount is the year the surviving spouse dies.
This increase could cause the surviving spouse's estate
to be subject to estate taxes, if the combination of the surviving spouse's
separate assets and the enlarged marital share exceed the surviving spouse's
applicable exclusion amount.
Or the credit shelter trust could include as a
beneficiary the surviving spouse and allow her to take out the income or
invade the principal for her own benefit under an ascertainable standard, such
as for the health, education, maintenance, and support of the surviving
spouse.
14. Q. What are the most important
things for us to do in determining whether we need a will or will substitute?
First, you need to review both your and your spouse’s
assets to ensure that you are aware of the possibility of paying estate taxes.
- You need to remember that gross asset property
includes such things as: the death benefit of your life insurance
policies, your pension, and any property over which you hold a power of
appointment.
- As to property owned jointly with your spouse,
one-half of the value of the property is included in the first-to-die’s
gross estate.
- As to property owned jointly with someone other than
a spouse, that portion of the fair market value of the property, based on
the proportion of the amount that you paid as compared to your co-joint
owner, will be in your gross estate. If it can’t be determined who paid
what for the property, the full value of the property is included in your
gross estate.
Second, you need to decide whether you desire to name:
- the trustee of any trust created under the will or
otherwise and
- the guardian of any minor children.
Third, you need to consider the amount of control (or
protection) you desire to have over the property you leave to your spouse and
others. Trusts whether set up by a will or otherwise can provide control and
protection and are very useful in situations
- where there is likely to be a second marriage,
- where the intended beneficiary is infirm or
financially unsophisticated, or
- where the intended beneficiary due to having lived a
sheltered life, age, or potential infirmity might be easy pray for
hucksters or other confidence men.
Fourth, you need to decide how you want your property
distributed.
15. Q. When is a simple will
appropriate?
Generally speaking, a simple will with no trust is
appropriate if
- you have no minor children,
- your and your spouse’s combined estates are not
subject to federal estate taxes (are less than the applicable exclusion
amount), and
- you have little expectancy of substantial
appreciation of estate assets or growth of the estate through other means,
such as gift or inheritance, and will have no beneficiaries with special
needs.
16. Q. When is a simple will with
provisions for guardianship and a contingent trust appropriate?
Generally speaking, a simple with provisions for
guardianship and a contingent trust is appropriate if
- you and your spouse’s combined estates are not
subject to federal estate taxes (are less than the applicable exclusion
amount),
- you have little expectancy of substantial
appreciation of estate assets or growth of the estate through other means,
such as gift or inheritance, and
- you have minor children, or
- you wish to provide for elderly parents or other
relatives who may not be competent to manage finances.
17. Q. What is an Living (inter vivos)
Trust?
A living trust is a trust which is created and exists
while the creator of the trust is still alive.
The other common type of trust is a testamentary trust
which is created by a will and goes into effect only after the person who
makes the will containing the trust dies.
A Living Trust is created by the grantor transferring
property to a trustee for the benefit of the person for whom it is established
(called the donee or beneficiary). The grantor can also be the donee or
beneficiary.
A Living Trust is created by a document which identifies
the trust assets, the person for whom the trust is established, the trustee
(and his or her successors), and the terms that must be observed in managing
and spending the trust assets.
18. Q. Why have a Living Trust?
A revocable living (inter vivos) trust is sometimes used
as a will substitute. It can also be used as a means of addressing property
and income management as you grow older.
A revocable living trust is used to avoid probate taxes
in states that have a high probate tax. Virginia’s probate tax is relatively
inexpensive: ten cents on one hundred dollars.
A revocable living trust is not a means of avoiding
estate taxes.
A revocable living trust is often the foundation of many
individual’s estate plans where estate taxes may be owed. Such a revocable
living trust is typically a tax-neutral trust in which the grantor is treated
as the owner of the assets for income, gift, and estate tax purposes.
The revocable living trust can be
- basically unfunded (awaiting a pour-over from a
will),
- partially funded (specific assets are put into it),
or
- fully funded (all of the grantor’s assets are
placed in it).
A living trust can not fully replace a will because the
trustee, unlike an executor, does not have the authority to stand in the
decedent’s shoes and marshall assets, administer the estate, and distribute
the assets to the decedent’s beneficiaries. Thus, a living trust is
typically used in connection with a pour-over will.
A living trust is sometimes used by wealthy older
Americans as a will substitute or as a means to transfer their assets to their
descendants or for asset protection purposes.
19. Q. Is a Living Trust always
effective?
No. A trust is only effective if it is funded. That
means at lease some of your assets must be transferred into it.
It can be a hassle and an expense (often requiring a
lawyer to prepare deeds) to transfer all of your assets into a living trust.
If you fail to transfer all of your assets into the
trust that are not otherwise subject to a lifetime disposition, you will need
a will unless you are willing to let your probate property that is not in the
trust pass by intestacy.
Intestate property is that property which you have
failed to dispose of by will. Intestate real estate passes under Va. Code §64.1-1.
Intestate personal property passes under Va. Code §64.1-11.
20. Q. Does a Living Trust avoid
estate taxes?
Generally speaking, no; unless you form an irrevocable
living trust over which you do not retain any benefit or control. A living
trusts will be included in your gross estate and subject to estate taxes.
21. Q. What is an irrevocable trust?
Generally speaking, an irrevocable trust is a trust that
cannot be terminated by the person who makes it.
22. Q. Why have an irrevocable trust?
Generally speaking, you would have an irrevocable trust
for tax and asset protection purposes to remove completely your assets from
your estate.
23. Q. Is a living trust necessary?
No. It depends upon your personal circumstances and your
financial situation.
Not only can transfers to trusts affect Medicaid
eligibility, but also they may or may not save money.
Typically, the very wealthy are the primary users of
living trusts, although those with a history of Alzheimers in their families
might want to consider them.
Unfortunately, living trusts are being aggressively
marketed by some people. Some of them misrepresent the costs and burdens of
probate. While in some states the probate tax can be significant, in Virginia
it is only ten cents on a hundred dollars. Thus, you need to be an educated
consumer and comparison shop when considering such trusts.
See, for example, "A Consumer’s Guide to Living
Trusts and Wills" stock #D14535 which you can order by sending an e-mail
to member@aarp.org or look at AARP’s web page at the following address:
http://www.aarp.org/confacts/money/wills-trusts.html.
24. Q. Are there any statistics which
tell us how many people have a will as opposed to a trust?
An AARP poll found that 60% of responding adults age 50+
have a will, while 23% have a trust. However, those with a trust almost always
have a will.
I trust these Questions and Answers have helped clarify
your understanding of Wills, Trusts, Estates, and the Tax Act of 2001. Due to
the rapidly changing nature of the law, information contained in these Questions
and Answers can become outdated. These Questions and Answers are intended solely
for educational and informational purposes. The information contained herein is
general in nature and should not be a substitute for seeking the advice of an
attorney. Please remember that individual circumstances may affect the manner in
which the law applies to each situation. These Questions and Answers are not
provided for use or reliance by you or any third parties and do not purport to
be exhaustive or to render legal advice for your particular situation or any
other specific case. They are meant merely to assist you in sharpening the
questions you might ask of your legal advisor in your particular case. Please
give me a call should you have any questions.
Tom Leggette