Estate Planning

A sound estate plan will help you make certain your family will get as much of your estate as is legally possible. Here are some of the more significant ways estate planning can facilitate your wishes.

Minimizes Estate Taxes

The federal government levies a substantial tax against the value of your estate. Just as important, that tax is due and payable before any property can be transferred to your beneficiaries. With a well-conceived estate plan, much - or even all - of this tax can be legally avoided.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (2001 Tax Act) gradually reduces estate taxes by increasing the amount that is exempt from these taxes over several years (from $1 Million in 2002 to $3.5 Million in 2009), and reducing the top rate over several years (from 55 percent in 2001 to 45 percent in 2007 through 2009). While estate taxes are repealed for persons dying during 2010, in 2011 the estate tax returns as if the provisions and amendments of the 2001 Tax Act had never been enacted. Because of the uncertainty of permanent estate tax repeal and when you die, you need to be more concerned than ever about sound estate planning.

Provides Liquidity to Pay Estate Taxes

If your estate consists primarily of real estate, a business or other non-liquid assets, your heirs could end up cash poor - and being forced to sell assets in order to pay taxes. Estate planning can solve this problem.

Protects Your Family Income

How will members of your family support themselves after you're gone? A sound estate plan can make certain they will be taken care of.

Provides Professional Asset Management.

An estate plan can arrange for professional management of your assets on your family's behalf.

Controls Distribution of Your Estate.

Will your assets be distributed the way you want them to? Your estate plan will make sure your wishes are met.

Forming an Estate Planning Team

Estate planning is a team effort. In involves the talents and efforts of a number of professionals - people you respect and trust.

Financial Advisor

Because of the unique features and tax advantages of life insurance, your financial advisor is a key member of your estate planning team.


Responsible for making sure that your intentions are carried out in legally enforceable documents.


Most familiar with the extent and value of your assets.

Bank/Trust Officer.

If trusts are a part of your estate plan, the bank/trust officer may be responsible for managing it and may be selected as executor or trustee of your estate.

The chart below illustrates the federal estate tax and generation-skipping transfer tax exclusion amounts, and top tax rates.

The High Cost of Success: Federal Transfer Taxes

Calendar YearEstate Tax Exclusion & GST Tax ExemptionTop Estate, Gift & GST Tax Rate
2007$2 Million45%
2008$2 Million45%
2009$3.5 Million45%
2010repealed*35% (gift tax only)*
2011$1 Million**55%

* Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (the Act), estate and generation-skipping transfer taxes will be repealed in 2010. While the Act repeals the estate and generation-skipping transfer taxes in 2010, the gift tax remains in effort. The top gift tax rate in 2010 will equal the top income tax rate for that year. Due to the "sunset provisions" of the Act, the 2001 estate and gift tax structure will be reinstated in 2011 unless Congress acts before then to extend the provisions of the Act.

** In 2011, the GST tax exemption will be indexed for inflation. In addition, the Estate Tax Exclusion is scheduled to be $1 Million in 2011 under the 2001 estate tax structure.

There are effective methods for reducing the estate and gift tax burden. They vary in complexity and require sound advice from qualified legal and tax counsel. Listed below are some options which may have relevance to your situation:

Basic Estate Planning Techniques

WillA legal instrument through which an individual disposes of his/her property at death.A valid Will is a cornerstone of any estate plan.The individual can maximize use of the unlimited marital deduction and the applicable exclusion amount.Ensures property is disposed per individual's wishes; allows individual to stipulate guardian for minor children.Property passing through a Will is subject to probate fees.
Durable Power of AttorneyA legal instrument granting power to another party to act on the individual's behalf.Like the Will, the durable power is a basic of all estate plans, and particularly important with elderly and disabled clients.If specifically authorized in the instrument, the person given power of attorney can make gifts and reduce the principal's estate.Allows the principal to designate who will act on his/her behalf without probate court intervention should he/she become incapacitated.Must adhere to laws of particular jurisdiction.
Life InsuranceA contract that provides cash at the death of the insured; the contract may also provide for cash accumulation during the life of the insuredLife insurance is an integral part of estate planning at all stages of the individual's life cycle.If correctly purchased and owned, death benefits will pass to the beneficiary free of income taxes and without taxation to the decedent's estate.Life insurance can provide: family income in the event of premature death of the individual and/or spouse; cash accumulation to provide for children's education and/or supplemental retirement income; and liquidity to pay estate taxes.Balancing premium payments against other financial obligations affecting current cash flow.
Qualified DisclaimerA refusal to accept gift or bequest by intended recipient.Used where donee/beneficiary of property prefers that someone else receives the property.Property is treated as if it never passed to original donee/beneficiary.Facilitates postmortem planning.Disclaimer must be an unqualified refusal in writing received by the donor within nine months; the beneficiary must not accept the property; property must pass to either the decedent's spouse or someone other than the person disclaiming; person disclaiming cannot direct disposition.

Advanced Estate Planning Techniques Utilizing Trusts

Revocable Living TrustA trust is a fiduciary arrangement created by the grantor where legal title to property given by the grantor is held and the property managed by a trustee for the benefit of a beneficiary. A revocable trust can be revoked, amended, or terminated and the property recovered by grantor.Useful in conjunction with durable power of attorney and a Pour-Over Will (providing that all other assets "pour over" into the trust at death).No tax advantage to the grantor since the grantor will be taxed on the income and the assets will be included in the grantor's taxable estate at death.Efficient receptacle for holding assets during lifetime so that assets are funneled to marital deduction or bypass trusts at death; provides for management of property should grantor be incapacitated; probate costs and publicity are avoided by using a trust versus a Will alone.No major concerns since trust can be changed or terminated.
Irrevocable Insurance TrustA trust which cannot be changed or terminated by the grantor; the trust purchases life insurance using funds gifted to the trust by the grantor; at the grantor's death the death benefits pass to the trust's beneficiaries.Estates with liquidity problems.Substantially reduces grantor's estate through annual gifts thus reducing estate taxes; death proceeds are received by beneficiaries income tax and estate tax-free.Estate liquidity enhanced; expenses and publicity of probate are avoided.Grantor loses control of property in trust.
Marital Deduction & By Pass TrustsOften referred to as A-B trusts, these trusts are established to minimize estate taxes. The bypass trust takes maximum advantage of the applicable exclusion amount and the marital deduction trust maximizes use of the marital deduction.These are basic estate planning tools useful in estates where the joint assets of the spouses exceed the value of their total unified credit.Minimizes estate taxes by: allowing both spouses to take advantage of the unified credit; and by fully utilizing the unlimited marital deduction (thus deferring taxes until the estate passes to the children/family).Professional management of assets by the trustee after the death of the first spouse.Some loss of control of the assets by the surviving spouse.
Charitable Remainder TrustAn irrevocable trust providing current income payments to the grantor followed by payment of the remainder to a charity.Useful where grantor wants to make a charitable gift but also wants income; appropriate where grantor wants increased income from appreciated property without selling and incurring capital gains; applicable where estate tax avoidance and current income tax deduction are goals.The grantor is entitled to a current income tax charitable deduction; the trust can sell highly appreciated property without incurring capital gains; the property gifted to the trust is removed from the taxable estate.Increased current income; ability to make gift to favored charity.Grantor must be willing to relinquish control of the asset.
Charitable Lead Trust (CLT)An irrevocable trust providing current income payments to a charity followed by payment of the remainder interest to a non-charitable beneficiary.Grantor wants to benefit charity currently while keeping property in the family; grantor wants current income tax deductions but is willing to report trust income later; grantor facing substantial estate taxes and wants to transfer property to children at minimal gift/estate tax cost; grantor with rapidly appreciating property wants to remove future appreciation from estate at minimal gift tax cost.Can provide significant income tax deduction; testamentary CLT can provide significant estate tax deduction for the charitable interest; enables grantor to transfer substantial wealth to children or grandchildren at minimum gift/estate tax cost.Provides current income stream to grantor's favorite charity; property remains in family.Grantor is taxed on the trust's income.
Grantor Retained Annuity Trust (GRAT)An irrevocable trust into which the grantor places income-producing property but retains the right to a fixed annuity for a specified term of years after which the property passes to the children/family.Used to freeze the estate (restrict taxable estate to its current value) to reduce estate taxes; often used to transfer stocks or real estate on a favorable gift tax basis.Appreciation of assets escapes estate taxes; assets can be transferred to the next generation at a substantial discount; income from the trust often taxed at lower rate.Provides current income stream to grantor.The grantor sacrifices control over the property; if grantor dies during the retained interest period, the property is included in his/her estate.
Grantor Retained Unitrust (GRUT)An irrevocable trust into which the grantor places income-producing property but retains the right to a fixed percentage of the property for a specified term of years after which the property passes to the children/
Same as GRAT.Same as GRAT.Same as GRAT.Same as GRAT.
Qualified Residence Trust (QPRT)A trust that holds the grantor's primary or vacation home; the grantor retains the right to reside in the home for a term of years; thereafter, the house is transferred to the beneficiaries.Used where grantor wants to reduce estate taxes while also residing in home.Reduction of estate taxes; gift tax is reduced by the value of the interest retained by the grantor to reside in the house.QPRT's are exempted from the anti-estate freeze rules.Tax savings are only realized if grantor lives beyond the term of years that the residence is retained.
Estate FreezeMethods designed to restrict taxable estate to its current value (see FLP, GRAT, GRUT, SCIN for examples).Used to transfer highly appreciating property to heirs.Reduces estate/gift taxes.Property owner retains some control over property but shifts appreciation in property to heirs.Estate freeze law must be satisfied to gain tax advantages.
Power of AppointmentA property right allowing the recipient to control who will receive the property.Appropriate in "wait and see" situations where donor of property wants decision to ultimately transfer property to future date.The power of appointment is not taxed in the estate of the holder of the power provided the power is drafted correctly.Provides flexibility to shift property according to changing needs/
Donor has no control over ultimate disposition of the property by the holder of the power of appointment.
2503(c) TrustsTrusts utilized to gift property to a minor.Appropriate where grantor wants to control the use of the trust property until the beneficiary reaches adulthood.Reduces estate taxes of grantor; shifts taxable income to minor (subject to kiddie tax limitations).Gives grantor peace of mind knowing that assets will be properly managed for the benefit of the minor beneficiary.Grantor loses personal control of assets and minor has access at age 21.
Living Will or Health Care DirectiveA legal document expressing an individual's wishes concerning life support procedures should the individual be terminally ill.The living will is an important component of all estate plans.None.The living will allows the individual to control his or her destiny.The format of the living will document must comply with state law.
GiftsA gratuitous transfer of property during the donor's lifetime.Most appropriate for transferring assets that will significantly appreciate.Donor can gift up to value of annual gift tax exclusion to each donee per year free of gift tax; reduces size of taxable estate.Removes appreciation of asset from taxable estate.Donor's loss of control over property.
Generation Skipping Dynasty TrustsTransfer of property to a person(s) two or more generations below the donor.Used when donor wants to pass property to grandchildren/great grandchildren.Subject to Generation Skipping Transfer Tax unless some permissible exemption/ exclusion applies.Can provide creditor protection for beneficiaries for generations.Donor's loss of control over property.
Family Limited Partnerships (FLP) and Limited Liability Companies (LLC)An association of family members to carry on a business for profit; normally the parents are the general partners who operate the organization and assume full liability; they convey limited partnership interests to other family members. With LLCs, members can manage the LLC without exposure to full liability.Used to pass property to family members at discounted values.Reduction in estate taxes since property appreciation transferred from senior generation's taxable estate and discounts may reduce the value of gifts to family member(s); reduction in income taxes if limited partner-donees are in lower tax bracket.Management and control of family assets remain vested in senior family members.Unlimited liability of general partners if a partnership is used; expense of establishing an FLP or LLC.
Charitable Private FoundationGift to favorite charity or charities through a family foundation.Useful when donor wants to benefit charity while also gaining income and transfer tax advantages.Donor receives income tax deduction up to 30% of adjusted gross income; gift reduces taxable estate.Donor's satisfaction in benefiting charity via family foundation legacy.Charitable gift reduces estate passing to donor's heirs.
Installment Sale & Self-Canceling Installment Notes (SCIN)Sales methods whereby the purchaser pays for property over a period of time.Useful for freezing value of highly appreciating property; used when purchaser cannot afford full purchase price at time of purchase.Any capital gains on a sale can be recognized gradually by seller; can reduce estate tax by shifting appreciation in property to heirs; any balance remaining on SCIN at death of seller is canceled and not subject to estate tax (but remaining gain is taxable income to estate).Provides flexibility to the seller in either spreading out recognition of capital gain or immediately recognizing; gives buyer flexibility of spreading out payments.With installment sale, any installments due at death of seller are included in the seller's estate.
Private AnnuityA method of selling property where the buyer makes payments to the seller for the period of seller's life.Used to freeze estate of seller.Seller's capital gains are spread over years; taxable estate is reduced.Same as installment sale.Buyer bears risk of seller living beyond his/her life expectancy in which case annuity payments must continue until seller's death.