The process of ensuring that a client’s financial life is in order often includes making arrangements for how the estate will be settled upon the client’s death. Many people falsely think estate planning is important only if they have a net worth in excess of the current federal or state exemption. The exemption, however, addresses only the estate taxes that could be due. Estate planning is much broader; it encompasses understanding how your estate will be settled after you pass away and creating the various documents to ensure that processes will take place according to your wishes. As the first step in gathering key information, GCD has developed a Survivor(s) Information Listing, which summarizes ALL financial and non-financial information about you (and your spouse) so your survivors can easily find the information needed to help settle your estate.
Significant issues to consider, in addition to striving to minimize estate tax payable upon either your death or the death of your spouse, include the following:
The estate settlement process takes the capital you've built during your lifetime and distributes it to the people you want to enjoy it. There are many ways your property could be distributed when you die. These methods are very important because the way your assets are distributed affects how and when others receive their share of your estate.
Under normal circumstances, estate planning requires drawing up several key documents. GCD will work alongside your own attorney, or with one of our alliance partners specializing in this area. We can help to address these estate documents when preparing your GCD Financial Life Planner (FLP) or as a separate task.
A list of frequently needed documents and important estate planning topics follows, as a brief guide.
This written document outlines the details of what is to happen upon your death. It provides instructions relating to guardians for children, disposition of property, executors, burial information, and other topics.
A living trust enables you to hold ownership of your assets during your lifetime and manage the distribution of those assets upon your death. Because a living trust can minimize estate taxes and provide protection from probate, consider having this document created regardless of your level of assets.
This legal document sets out your wishes for health care if you become injured or too ill to make those decisions yourself and gives the named individual authority to make those decisions on your behalf.
A legal document that provides the person you appoint the legal right to manage your property, if you are incapacitated.
Choosing the proper beneficiaries for your tax deferred (i.e. IRA, 401k, etc.) and non tax deferred assets is an important decision to make. Although these can be changed at any time you are alive, there are certain designations that can be made to help alleviate issues should your heir(s) predecease you and you just never get around to making the change. The two main designations are as follows:
Per StirpesThis means that if any of your beneficiaries aren't living at the time of your death, their share of the estate will pass to their descendants. For example, say that you designate in your will or trust that your assets should go to your children per stirpes. If you have two children, they would receive an equal share. If, however, one of your children predeceases you, their share would then be divided equally between or among their children. Your other child would still receive their half. By choosing to distribute your property per stirpes, you don’t have to revise your will any time one of your descendants passes away unless you wish to change the pattern of distribution you originally designated. If per stirpes is chosen, and a child does NOT have any children, then the designation defaults to per capita, in which their share would go to the other named heirs.
Per CapitaThese distributions can only go to the named beneficiaries. They don't pass on to the next generation. As with a per stirpes distribution, every living member of a group you’ve identified, such as your children, would receive an equal share of your property. However, if one of them predeceases you, the property is then divided between or among those who are still living rather than that person’s share going to their children.
Most people prefer the per stirpes option over per capita but you should consider your own desired outcome when making this decision. If complex, discuss with your estate planning attorney. Click here for an online article with good examples.
In addition to choosing between per stirpes and per capita, most estate attorneys encourage you to consider if choosing your living trust as your tax deferred account beneficiary (instead of a named heir) makes sense for you.
Typically if you are:
Property you own alone is distributed through probate. Probate is a court supervised process in which your personal representative — or executor — gathers all your property, pays outstanding debts and claims, and distributes the remaining assets. Who receives the leftover property? That depends on whether or not you have a valid will. If you do not have a will, your state's intestacy laws determine who gets your property and when they receive it.
The major drawback to intestacy is that the estate's distribution plan will probably not direct your property to those you want to receive it. Intestacy can be described as one size fits all and because you cannot mold the state laws to meet your needs, intestacy has some important disadvantages:
Probate has additional disadvantages:
You can avoid probate in three ways: through certain property ownership such as jointly owned property; through a contractual arrangement like a Transfer on Death (TOD) that is paid to a named beneficiary; OR through a trust such as a revocable living trust. For Illinois residents: all individual assets not titled properly, in excess of $100,000, will have to go through probate.
Adding a TOD to your accounts can keep your estate planning intact while keeping your beneficiaries out of court. For families that don’t currently have a will or trust, your family is likely headed to probate court upon the death of the person with an individually owned account without a TOD named. In Illinois, for instance, if you have individually owned assets without a TOD, in excess of $100,000, they must go through probate. Even estates with wills will likely need to go through probate, which can burden your loved ones and create hostility between family members. In most cases, a TOD can even be added to a jointly owned account to prevent probate upon the survivor of the joint account.
You can also control the distribution of your property by creating trusts which manage your assets and distribute them at times you designate. A separate legal entity, a trust is created by a legal document — the trust agreement — which is drafted by an attorney and signed by you.
This agreement transfers certain assets to your trustee who holds and manages them as you direct in the agreement. At a specific time, or upon the happening of an event, the trustee distributes the assets to the beneficiaries you have named in the agreement. Trusts are created for a variety of reasons: to save income and/or estate taxes, to avoid probate, to provide professional management of assets, and to delay the distribution of assets until the beneficiaries can effectively manage the assets themselves. The trustee must handle the assets in accordance with your directions, as spelled out in the trust agreement, and must use their best judgment to protect the beneficiaries' interests.
You can create a trust while you are alive or at your death, through your will. There are a variety of trusts available to meet your needs. Some trusts cannot be changed once they've been created. Others can be changed while you are still alive — a popular trust today used by many to avoid probate is the revocable living trust. At your death, such trusts become fixed and the assets in them are removed from the probate process. In this way, you can retain privacy and efficiency in finalizing your affairs.
The federal estate tax is levied on property owned at death, before being transferred to heirs. For many people, this is the largest single expense of dying. Recent changes in the federal estate tax laws allow many Americans to avoid this tax. The law allows each person to transfer a certain amount of property — the exemption amount — estate tax-free. The federal estate tax system has a separate tax saving feature: regardless of the exemption, you do not have to pay federal estate tax on property left to your spouse (if your spouse is a U.S. citizen). This so- called "unlimited marital deduction" allows you to postpone the estate tax until your spouse's death. The remaining assets over the spouse’s exemption amount will be taxed at that time.
You can save a great deal of taxes if you take advantage of these two tax breaks. Recent tax law changes now allow a surviving spouse to elect to use their recently deceased spouse’s exemption without having a trust set up (a trust is just a document, not an actual account). This portion of the law, which is referred to as “portability” of the estate tax exemption, allows the couple to take advantage of each exemption allowed per person for a total of twice the current limits. If the second to die spouse dies with less than this doubled amount this will have worked out great. If he/she dies with more than that, then estate taxes could be due. Many states also have separate state death taxes for which state taxes could be due even though no federal taxes are due. In Illinois, the estate tax exemption is $4 million per person.
However, unlike the federal law, there is no portability of the exemption. So, if the first to die spouse leaves all of his/her property to his/her spouse, the surviving spouse could have a larger exemption for federal estate tax purposes, but only a $4 million exemption for purposes of the Illinois estate tax. The first spouse’s $4 million exemption for Illinois will not have been used, and the Illinois exemption does not become $8 million for the surviving spouse. Proper planning should be done to fully utilize all estate tax exemptions, federal and state, and without regard to which spouse dies first. Ask us to determine whether these estate taxes apply to you, and how you should plan accordingly.
An irrevocable life insurance trust is a type of living trust that allows life insurance to pass to heirs without estate taxes and provides protection of money paid to young heirs. When thinking about the size of your estate, make sure to consider all investments - both retirement and non-retirement, residence(s), and any life insurance in which you are the owner. Realize that the value of these items increases over time and that if you are properly insured but have not planned adequately, reaching the estate limits at some time in the future may not be as difficult as you think.
An irrevocable life insurance trust could be a useful estate planning tool. Beyond considering the estate limits, think about whether or not your beneficiaries will have the mental and emotional capability to handle the life insurance proceeds at the time they collect (consider the worst here). A trust can be set up to provide support for a child, grandchild or a relative with special needs.
Created by GCD, this document summarizes ALL financial and non-financial information about you and your spouse (if any) so your survivors can easily find the information they need to help settle your estate.
We can address these documents when preparing your GCD Financial Life Planner (FLP) or as a separate task. You can work with GCD alongside your attorney or choose to work with one GCD’s alliances specializing in this area.