Why do we need to do estate planning? Estate planning is all about you, your family, and your estate. It's about taking responsibility to ensure that your estate, everything you own and control, is preserved and used for the benefit of those you love. Estate planning is about determining which assets will remain in your name until the time of death and about which assets will be removed from your name during the course of your lifetime. Why remove assets? There are several reasons. The primary reason would be to save estate taxes. Another reason might be Medicaid or Title XIX planning which is important particularly where long term medical care is expected.
I. Providing for your Spouse, Children, and Dependants
Providing for your family is your first obligation. The most basic tool of estate planning is a Will. Let's talk briefly about the need to execute a will.
What is a will?
A will is a legally executed document that directs how the assets legally owned by your estate will be distributed at the time of your death. If you do not have a Will, does anyone know what happens to your assets? Your assets are distributed under the laws of Intestacy.
Intestacy (No Will) vs. a Will
In Connecticut, if you were to die without a will, and you had children, your spouse would be entitled to the first $100,000.00 of your estate. Anything over $100,000 would be split between the spouse and the children, regardless of the age of the children. Think about that for one second. A sixty year old man dies leaving a wife and a 35 year old son. The wife gets $100,000 then everything else is split with the son. Would the deceased husband want this situation especially if the 35 year old is an executive CEO for a large corporation? Where does this leave the wife? Is she going to be left with enough to support her? Even if the children were younger, does it make sense to leave this money to the estate of minors? The money becomes tied up because the Probate must oversee the children's money. Even in this situation, the wife is still unprotected. A Will would have allowed the husband to divide the estate differently. A Will also enables the deceased to protect minor children.
Guardianship of the Person and Estate of Minors
In a will you name a guardian for your minor children. There are two different types of guardianships: Guardian of the Estate which controls the finances of the minor and Guardian of the Person which controls the personal choices of the minor. Most of the time a single person is chosen; however, there are occasions when you might break up the functions.
II. Trusts as an Estate Planning Tool
Testamentary Trust
A Testamentary Trust is a trust contained in a will. It comes into effect at the time of a person's death. Many people chose to incorporate a testamentary trust with regard to the inheritance being left to children. As previously indicated, if money is inherited by a minor child, the Probate Court is going to oversee the distribution of that money into the minor's estate. This doesn't mean that money won't be spent on the minor, however, it will have to be accounted for to the Probate Court. Once a child reaches the age of 18; however, he is allowed to receive his inheritance outright without the intervention of the Probate Court or any guardians. Many parents have come to the conclusion that the age of 18 and the age of responsible spending are two different things. Accordingly, a testamentary trust might be incorporated into the will which requires that the child not receive the money until the age of 21 or 25, generally allowing for educational expenses.
Inter Vivos or Living Trust
An inter vivos or living trust is a trust which comes into existence during one's lifetime. In other words, you create a trust by giving assets while you are alive to a trustee to hold for your benefit or for the benefit of someone else.
Role of the Trustee
Why would you give assets to a trustee? We already touched upon the fact that there are occasions when assets need to be removed from your name during the course of your life. If your estate is over $1,500,000, you need to remove assets or else you will be taxed by the Federal Government as the exorbitant rate of at least 37%. It goes up from there quite rapidly! Another reason why you might set up a trust during the course of your lifetime is that you might want to give money to someone with certain conditions or requirements on how the money is spent or used by that person. An intervivos trust allows you to do this. In other words it gives a bit of control to the giver of the gift.
Control is the key issue. If the maker of a trust has too much control over the assets of the trust, the Federal Government says the assets have not been effectively removed from the estate. The assets are then brought back into the estate for the purpose of determining the taxes. The tax consequences can be devastating. Accordingly, a balancing act must be performed. The trust maker or settlor can impose some conditions on the use of the trust funds; however, he can't have too much control. A revocable trust, for example, is always included in the settlor's estate. A revocable trust is one which the settlor can undue or pull back at his wish. An irrevocable trust is just that, irrevocable. The settlor has no power to overturn the trust and repossess the assets. Irrevocable trusts are used in estate tax plans in order to fully remove the assets from the estate.
