Legal Terms Used in Estate Planning

Advance Directive for Health Care

Advanced Planning

Certificate of Trust

Funding of Living Trusts
Irrevocable Life Insurance Trust (ILIT)


Living Trusts (joint, married)

Living Trusts (married, but sep. trusts)

Living Trusts (single)

 

Living Trust or Will-Which works best for you?

Personal Representative

Power of Attorney

Pour-Over-Will

ProbateTaxes

Will

Estate Planning Tutorial


Advance Directive for Health Care is the document that determines who you want to be your agent for health care. This document also contains your wishes concerning whether you want Life Support and Tube Feeding. It only goes into effect if you become incompetent.

Advanced Planning is available from OLC for single or married  individuals who have assets in excess of $1,000,000. i

Advanced Planning is also available for individuals and married couples who have greater-than-average needs in Estate Planning. Some examples include second marriages with planning to ensure that children from the first marriage are adequately provided for, provision for children or spouses who are under a disability, and transfer of businesses to the next generation.

Pricing varies based on the complexity of the situation.

Certificate of Trust is the document used to identify who made the Living Trust, who the Trustees are, what powers the Trustees have, what kind of Trust it is and when it came into existence. Sometimes banks, insurance companies, and title companies require you to prove to them that you have a Living Trust and what its terms are. Using the Certificate of Trust you can comply with these requests without disclosing the entire Living Trust Agreement. This protects your privacy.

Funding of Living Trusts is the process of transferring assets into your Living Trust. Unless an asset is owned by your Living Trust probate of that asset may be necessary. How an asset is transferred into the Living Trust depends on how the asset is titled. Some asset transfer will require the help of an attorney, i.e., deeds to real estate, assignment of partnership interests. However, you can change title to many other assets yourself. These assets include bank and brokerage accounts, life insurance, and automobiles. OLC will prepare deeds to transfer real estate for $150 per deed. OLC will also provide you with written instructions on how you can transfer assets.

Irrevocable Live Insurance Trust (ILIT) is a trust that owns your life insurance policy. You establish an ILIT if you don’t want to own the policy yourself. The trust pays the policy premiums and passes along the death benefit to your designated beneficiaries when you die. Why would you want a trust own your life insurance policy? Because if you keep the policy in your own name, the death benefit (that’s the amount the policy pays to your beneficiaries when you die) will be counted as an asset of your taxable estate — and may be subject to federal estate taxes.  “What?” you might ask. “Aren’t life insurance benefits always tax-free?” Actually, a death benefit is only income free. When you die, your beneficiaries won’t have to pay any income tax on your death benefit. But your death benefit could still be eaten away by estate taxes (unless the death benefit goes solely to your spouse — assets always pass between spouses estate-tax-free).

On the other hand, if your life insurance policy is owned by an ILIT:

  • The death benefit won’t be subject to estate taxes.
  • The value of the policy won’t bump your estate up to a taxable level if your estate isn’t there without the policy.
  • You can decrease your taxable estate by gifting money to the ILIT.
  • Because the ILIT won’t pass through probate, its provisions are confidential.

If your estate (including your life insurance policy) is at a taxable level, an ILIT might be for you. Not only could you decrease your taxable estate by making gifts to the ILIT, but your heirs could use the money from the death benefit to pay off estate taxes.

If your estate (including your life insurance) is worth more than $5 million, it’s subject to federal estate taxes.

Because the legal and tax regulations surrounding ILITs are so strict, you should have a knowledgeable estate-planning lawyer set up an ILIT. A financial consultant can also give you information on irrevocable trusts and help you figure out a smart, complete estate strategy — one that’s tailor-made for you and your family.

Once you set up an ILIT and put a life insurance policy into it (either by transferring an existing policy into it or having the ILIT trustee open one), you’ll need to fund the ILIT. Here are some tips:

  • Give annual gifts. Each year, make a gift to the trust that equals your life insurance policy’s annual premium (so the trust can then pay the premium). You can apply your gift tax exemption to this amount.
  • Don’t be late. Make this gift at least 30 days before the annual premium is due so the trust can make the payment on time and the policy doesn’t lapse.

When you die, the trust will receive your life insurance death benefit and then pay it to your designated beneficiaries.

An irrevocable trust is exactly as it sounds — irrevocable. You determine the terms of the trust when you set it up (picking which beneficiaries will receive your death benefit and so on), but you can’t change it after that.

Before you dash out to set one up, be aware that these things happen with an ILIT:

  • Your beneficiaries won’t budge. If you change your mind about who you want to receive your death benefit,
    you’re out of luck. The most you can do is stop making premium gifts to the trust so the policy lapses.
  • The money is out of your hands. Since you have no control over the trust, you won’t be able to borrow money from your policy or cash it out.
  • You’ll need to give it time. If you die within three years of putting a life insurance policy into an ILIT, the death benefit will be considered part of your taxable estate.
  • Transfers are taxable. The transfer of an existing life insurance policy to an ILIT is considered a taxable gift (although you could apply your gift tax credit if you haven’t already used it up). If the policy is  term, the gift value is the current year’s premium. With a permanent policy, the gift value is the policy’s cash value when you transfer it.

Of course, “irrevocable” also has a plus side. If any of your beneficiaries are unhappy with their inheritance, they won’t be able to challenge the ILIT or have it revoked.

Now that you understand the issues, do you think an ILIT is right for you? Be sure to consult your tax adviser before making any final decisions. A financial consultant can also help you understand ILITs — and help you create a smart, complete strategy for your unique estate.

Living Trust (Joint Trust) for an Married Couple is a contract that allows you to control your property while you are alive and to set out who will inherit your property when you die. In that sense it is like a will in that it says who gets what. However, a Living Trust also sets out who will take care of you and your assets if you were to become incompetent before you die. In that sense it is different than a will because a will only comes into play when you die. When properly funded the Living trust does not require Probate, with all of Probate’s inconvenience, publicity, and expense. As the person setting up the Living Trust you are the Trustor. You are also the initial Trustee, that is the person who runs the trust. You are also the Beneficiary, the person for whose benefit the trust is established.

Living Trusts (2 Individual Trusts) for a Married Couple is a contract that allows you to control your property while you are alive and to set out who will inherit your property when you die. It that sense it is like a will in that it says who gets what. However, a Living Trust also sets out who will take care of you and your assets if you were to become incompetent before you die. It that sense it is different than a will because a will only comes into play when you die. When properly funded the Living trust does not require Probate, with all of Probate’s inconvenience, publicity, and expense. As the person setting up the Living Trust you are the Trustor. You are also the initial Trustee, that is the person who runs the trust. You are also the Beneficiary, the person for whose benefit the trust is established.

Living Trust (Individual Trust) for an Unmarried Person is a contract you make with yourself that allows you to control your property while you are alive and to set out who will inherit your property when you die. It that sense it is like a will in that it says who gets what. However, a Living Trust also sets out who will take care of you and your assets if you were to become incompetent before you die. It that sense it is different than a will because a will only comes into play when you die. When properly funded the Living trust does not require Probate, with all of Probate’s inconvenience, publicity, and expense. As the person setting up the Living Trust you are the Trustor. You are also the initial Trustee, that is the person who runs the trust. You are also the Beneficiary, the person for whose benefit the trust is established.
You name Successor Trustees to take over the management of the Living Trust if you become incompetent or at your death.

Living Trust or Will – Which Works Best For You

 


 

This chart may help you decide…

Living Trust Plan

Will Plan

Probate
Avoidance

No Probate

Usually Probate is
necessary.

Cost at
Death

Less Cost at
Death since there is usually no Attorney Fee and no Personal
Representative Fee.

More Cost at Death since.
The Attorney Fee is based on time spent and starts at about $5,000 and
can be much more depending on the complexity of the estate. The
Personal Representative charges a percentage of the estate as the fee.

Time to
Distribute Property at Death

Usually quickly
distributed to your heirs. Takes longer if you owe federal Estate Tax
.

Minimum delay
is 4 months often more because of Probate

Privacy

Completely
private.

Your affairs
are open to public inspection since the Probate process is a public
court proceeding

Provide
for Incapacity

Living Trust
has a built-in Conservatorship feature which allows your Co-Trustee or
Successor Trustee to take care of your business affairs if you become
incapacitated.. You also have a Power of Attorney.

Using a Power
of Attorney you give someone else the power to handle your business
affairs if you become incapacitated. Somewhat more limited ability
than with a Living Trust.

Cost to Set Up

$2500-$3,500

$700

Tax Saving

If you have federal
Estate Tax liability and are married it is beneficial to have a Living Trust.

Personal Representative is the person you name in your Will to wind up your affairs. In some states this person is called the Executor. Just naming someone in your Will as your Personal Representative does not make them the Personal Representative. The person you name has to get a piece of paper from the Probate Court called Letters Testamentary before he becomes the official Personal Representative. He or she has to see an attorney to draw up papers to be filed in Court. This process starts Probate.

Power of Attorney is the document that empowers an individual other than yourself to act as your agent to handle all financial assets not held in a trust. A Power of Attorney is considered “Durable” when it continues to
be valid even if you become incompetent.

Pour-Over Will is the same as a Will, except it is used with a Living Trust rather than as a stand-alone document. It will only be used if you fail to fully fund your Living Trust. The Pour-Over will provides that if
you die owning anything that is outside you
Living Trust you leave it to your Living Trust. Property outside your Living Trust is subject to Probate so it’s important to fully fund your Living Trust.

Probate is a Court process used to transfer your assets after you die. It is a fully public process and performs five functions: 1) gathers the assets; 2) identifies the creditors; 3) pays the creditors including the attorney and the IRS; 4) determines heirs; and 5) finally pays the heirs. In Oregon it is not uncommon for attorney’s fees to run about $5,000 and up. The Personal Representative is also allowed to charge a fee which is a percentage of the Estate. Probate takes a minimum of four months and usually takes much longer to complete depending on the complexity of the Estate. What triggers Probate is often the requirement by a bank or a title company that the Personal Representative named in the Will get proof from the Court (Letters Testamentary) that the Personal Representative really has the authority to act instead of the deceased person. For instance, your Personal Representative is trying to sell your home. The title company requires him to get an official paper from the Court. That means your Personal Representative has to contact an attorney. That starts the meter running and it doesn’t stop running until months later when the Probate Court finally discharges your Personal Representative from any further responsibility.


Estate and Gift Tax-Rules …

 


 

Gift and Estate Tax. The federal government imposes a percentage tax when you give away your assets while you are alive (Gift Tax) and when you give away your assets when you die (Estate Tax). Oregon also imposes a tax which is different from the federal tax.

$13,000 Annual Gifts. Each year you can give $11,000 to as many people as you like and the government does not tax those transfers.

$5,000,000 Federal Gift Tax Exemption. If you make a gift in any given year that is more than $11,000 to a single person you have to file a Gift Tax return and you may owe gift tax. If the total amount of gifts you have made in your lifetime (not counting the $11,000 gifts) is less than $5,000,000 you do not owe a gift tax even though you have to file a gift tax return. If when you file the Gift Tax return you have given more than $5,000,000 during your lifetime you owe Gift Tax.

All Assets Counted for the Estate Tax. When you die you have to add up everything you own to see if your estate is large enough that you owe Estate Tax. This includes life insurance proceeds even if they are paid to someone other than your Estate.

Amount You Can Own Before Paying Estate Tax. Currently the federal amount is $5 million. The Oregon exclusion is $1 million.

Stepped Up Basis. When you calculate your profit when you sell something your basis is what you subtract from the sales price to determine your profit. Here is an example. You bought a rental house for $75,000 in 1980 and over the years have taken a total of $25,000 in depreciation. Your basis is $50,000. When you sell it in 2001 for $130,000 you have a $100,000 gain (sales price of $150,000 less basis of $50,000. You have to pay capital gains tax on the profit. If you give the rental to your son during your life he takes the rental with your basis. However, under current law (until 2010) if he inherits the rental from you, his basis is “stepped up” , i.e., up from your basis to the fair market value at the date of your death. This is a great deal for him. Say that it’s worth
$150,000 at your death. If he sells it right away he doesn’t have any profit (and no tax) because his basis is $150,000.

Marital Deduction. No matter how big your estate is, if you leave everything to your spouse, you will not owe Estate Tax. Your estate gets a deduction in computing the Estate Tax which is unlimited in amount. If Bill Gates leaves $45,000,000,000 to his wife Linda, he gets a $45,000,000,000 deduction and 40% of $45,000,000,000 is zero.

Credit Shelter Trusts.

Oregon Legal Center’s Plans which either create a joint trust or which create a separate Living Trust for the husband and a separate Living Trust for the wife are designed to take advantage of the amount each spouse can pass free of federal Estate Tax (the unified credit). The separate trusts contain a special provision (QTIP) which allows State of Oregon Estate Tax which might be owed upon the death of the first spouse to be deferred until the death of the second to die spouse.

Here is how it works. Most married couples’ estate plan provides that the surviving spouse owns everything. The assets are titled so that the survivor becomes the sole owner and the will or living trust provides that the surviving spouse inherits from the deceased spouse. For example, John and Mary own their house jointly with right of survivorship. Their wills provide that if the spouse survives the deceased spouse leaves their entire estate to the surviving spouse. Let’s say they own together $8,000,000. John dies first. Mary becomes the sole owner of $8,000,000. Mary dies in 2008. The first $5,000,000 is excluded from the federal Estate Tax. She is taxed on the additional
$3,000,000.

The same result applies with respect to the Oregon Estate Tax which has an exclusion amount of only $1 million.

Here is how the OLC plan works to reduce tax. John sets up a Living Trust and Mary sets up a Living Trust. They divide their property and transfer one-half to John’s Living Trust and one-half to Mary’s Living Trust. At death their is no probate since Living Trusts are utilized. Each Living Trust provides that upon death of the first spouse that a credit shelter trust is funded up to the maximum amount allowed by federal estate tax law. The surviving spouse is the trustee of the Credit Shelter Trust. Although the Credit Shelter spouse is controlled by and for the benefit of the surviving spouse, it is excluded from the surviving spouse’s estate. The Credit Shelter trust terminates when the surviving spouse dies. The trustee makes a QTIP election and the amount over the State of Oregon maximum is put into a QTIP trust which qualifies for the marital deduction. Oregon Estate Tax is deferred until the death of the second-to-die spouse.

 

Will is a document in which you set out who will inherit your property when you die. You name a person to wind up your affairs after you die. That person is called the Personal Representative. Depending on the type of property you own when you die, your estate may have to go through Probate.