The Estate Planning Process begins with some basic questions that must be answered:
These questions are answered on related estate planning pages on this site. First, in order to answer these questions, you need to understand the basic planning techniques listed below.
Annual Gifts – Annual gifts of $15,000 per donor per donee are a cornerstone of estate planning. Any year in which a donor fails to fully utilize the gifting exemption the ability to use that year’s gifts closes.
Applicable Federal Rate (AFR) – The interest rate to be used in computing factors for life estates, terms for years and remainder interests in property.
By Pass Trust – Also known as “A/B” Trust, or “Credit Shelter” Trust. Designed to use the unified credits of both spouses. It used to be focused on estate tax savings but is now more focused on how much control to give to the surviving spouse and how much of the predeceased spouse’s assets should go to their own children after the second spouse dies.
Charitable Remainder Trust (CRT) – The Grantor gifts an asset, usually one with a low basis, to a trust. The grantor receives an income tax deduction for the charitable contribution and a lifetime income which is generated from the asset. Upon the grantor’s death the remainder passes to charity. This is often coupled with an insurance trust.
Disclaimer Trust – A trust designed for the young couple who does not yet have assets needed to fund a by pass trust, but likely will in the future. Gives the surviving spouse the option to “disclaim” an amount of money which will then fund the by pass trust. A disclaimer generally must be exercised within 9 months of death.
Durable Power of Attorney for Financial Affairs – A written document which one person (principal) uses to empower another person attorney in fact) to act on his behalf. Being “durable” allows the power to survive any incapacitation of the principal. Many people make a “springing durable power of attorney,” which does not take effect until the incapacitation of the principal.
Durable Power of Attorney for Health Care – A written document which one person (the principal) uses to empower another person (the agent) to act on her behalf, in making health care decisions, should the principal become incapacitated. Decisions the agent is typically empowered to make include what life sustaining measures are to be used, consent for surgical operations, admission to a nursing home, and care in the event of senility or other disability.
Estate Taxes – A tax on the transfer of wealth to successive generations. The brackets top out at 40%, and get to that point relatively quickly. The use of a person’s unified credit, avoids estate tax for the first $11,000,000 of assets under today’s laws. Estate taxes are usually due within 9 months of death. Estate taxes are unified with the Federal Gift Tax.
Family Limited Partnership (FLP) – A partnership of family members with a general partner and one or more limited partners. Formed to transfer wealth and/or income to a younger generation through the limited partnership interests, but to retain control of the assets in the older generation through the general partnership interest.
Five and Five Power – Usually the non-exercise (or lapse) of a power of appointment is considered to be a release of the power and hence, a taxable gift. However, to the extent that the property which could have been appointed does not exceed the greater of $5,000 or 5% of the total value of the assets subject to the power, the lapse will not be a taxable transfer.
Generation Skipping Transfer Tax – The IRS got tired of people leaving assets to their grandchildren, rather than their children, and reducing the amount of estate taxes. So, in 1976, Congress developed this tax on transfers that attempt to skip a generation. The tax is a 55% tax IN ADDITION to the Federal Estate and Gift tax!
Generation Skipping Transfer Tax Exemption – Each donor is allowed to gift one million dollars during their lifetime to beneficiaries who are two or more generations younger than the donor, without the extra burden of the Generation Skipping Transfer Tax.
Gift Taxes – . A tax on the transfer of wealth during a person’s lifetime. The rates are exactly the same as for the Federal Estate Tax.
Grantor Retained Annuity Trust (GRAT) – Grantor places an income producing asset into an irrevocable trust, but retains the right to a fixed annuity return for an income until the trust terminates in a fixed number of years. At the end of the term of years, the property passes to the remainder beneficiaries, in most cases the children. The present value of the amount passing to remainder persons is taxable for gift tax purposes, but this tax is a small fraction of the value they will eventually receive.
Grantor Retained Income Trust – Often funded with a personal residence, and thus often referred to as, a Qualified Personal Residence Trust (QPRT). A GRIT is an irrevocable trust into which a client places a personal residence, but retains the right to use the residence until the trust terminates in a fixed number of years. At the end of the term of years, the property passes to the remainder beneficiaries, in most cases the children.
Grantor Retained UniTrust (GRUT) – Grantor places an income producing asset into an irrevocable trust, but retains the right to income from the trust, based on a percentage of the Unitrust value each year, until the trust terminates in a fixed number of years. At the end of the term of years, the property passes to the remainder beneficiaries, in most cases the children.
Installment Sale – A client sells an asset in return for periodic payments over a fixed term, usually to spread the taxable gain.
Inter vivos Trust – A trust created between living people. Compare to a testamentary trust.
Intestacy – The process of dying without a will, trust or estate plan in place. Can be costly, time consuming and can have your estate plan distributed in a fashion that was not what you intended.
Intrafamily Loan – Loans may be made between family members, but must charge certain interest rates.
Intrafamily Sale – A parent or grandparent may sell a child or grandchild an asset, thereby removing the asset and future appreciation from the estate of the parent or grandparent.
Irrevocable Life Insurance Trust (ILIT) – By placing insurance in a properly designed ILIT, the death benefit will not be subject to income, estate, gift or penalty tax on the death of the insured. The entire death benefit passes to the heirs. For a large number of people, the proper use of life insurance is the most efficient way to distribute their wealth.
Life Estate – The right to income, or use of an asset, for the lifetime of the beneficiary.
Limited Liability Company (LLC) – An alternative to other business forms that combines the most favorable characteristics of a partnership and a corporation.
Living Will – When an adult’s death is imminent and irreversible, the law of most states allow that person to determine whether or not life sustaining procedures should be used to prolong his life. A living will allows a person to make these decisions before incapacity.
Minority Interest Discount – When a gift or sale involves less than a controlling interest in a corporation, partnership or other entity. Discounts can range from 5-50% and more, depending on the nature of the property being gifted or sold.
Pour Over Will – A simple will designed to pick up any assets not placed in the trust before death, so that all of a deceased person’s assets flow as intended.
Power of Appointment – Allows an estate owner to transfer to another person the power to decide at some future time the ultimate beneficiary of his or her estate. There are both “special” powers and “general” powers, with differing legal significance.
Private Annuity – A client sells an asset in return for a promise of periodic payments of principal and interest (an annuity). Typically created for the life of the seller.
Private Foundation – An organization which is operated privately for the advancement of charitable or educational purposes. Strict rules surround the deductibility of taxes as well as the general activities of these organizations.
Probate – The court proceedings in which the court helps monitor the distribution of a deceased person’s estate. Probate fees, which range from 1-8% begin for all California estates over $166,250 in gross assets. Can be avoided by a properly executed and funded living trust.
Qualified Domestic Trust (Q-DOT) – If the surviving spouse is not a US citizen, the marital deduction will not be allowed unless the assets pass to a Q-DOT which meets certain requirements.
Qualified Terminable Property Trust (Q-TIP) – Allows first spouse to die more control over who will eventually receive her assets after the surviving spouse dies, while still deferring the death taxes.
Rabbi Trusts – Arises in the deferred compensation arena. Assets transferred to the Rabbi Trust are still available to the general creditors of the company, but not for other company uses.
Revocable Living Trust – Although it has absolutely no tax advantages, it is a fundamental part of most estate plans. Allows great flexibility, privacy and avoids the high cost of probate.
Rule Against Perpetuities – A complicated rule, which many lawyers do not fully understand. The purpose is to keep a family’s wealth from being frozen in a trust beyond a certain period of years.
Section 303 – Allows a corporation to redeem a portion of the deceased shareholder’s stock without it being considered a dividend.
Section 6166 – Federal estate taxes are usually due within 9 months of death. A 6166 election allows an estate with a closely held business worth 35% of the gross adjusted estate to extend payments over 14 years.
Secular Trusts – Arises in the deferred compensation arena. Unlike a Rabbi Trust, the funds are not available to the company’s creditors or management, thus assuring the executive that the funds will be available when needed.
Self Canceling Installment Note (SCIN) – A client sells an asset in exchange for an installment note with a term not longer than the seller’s life expectancy, and the note automatically provides for cancellation of any unpaid balance at the death of the seller.
Spendthrift Trust – A trust that provides a fund for the maintenance of a beneficiary, which by its terms shelters the beneficiary’s interest from the beneficiary’s own lack of self control, incapacity, and the claims of the beneficiary’s creditors.
Testamentary Trust – Can be most any type of trust created at death, by your will. Typically includes By Pass Trusts and Q-Tip Trusts.
Unified Credit – Allows a person to give $11,000,000 either during life or at death as of today 1/1/2020. Many feel it makes sense to utilize the unified credit during life, as you then remove the future appreciation on that amount from the taxable estate.
Unlimited Marital Deduction – Property transferred from one spouse to another during life or at death generally qualifies for full gift and estate tax deduction thus avoiding any transfer tax.
Zeroed GRAT – An arrangement in which the value of the GRAT payments exactly equals the value of the property transferred. Only the appreciation on the property is removed from the donor’s estate, since the donor receives back 100% of the value she puts into the trust.