Planning an Estate

Every stage of life has its own financial needs and concerns. The life events on this page can help you target the key financial strategies and issues that are likely to be most important to you in this stage of your life.

Wills: The Cornerstone of Your Estate Plan

Wills: The Cornerstone of Your Estate Plan

If you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you’re young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them. Although a will doesn’t have to be drafted by an attorney to be valid, seeking an attorney’s help can ensure that your will accomplishes what you intend.

Wills avoid intestacy

Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This “intestate’s will” distributes your property, in general terms, to your closest blood relatives in proportions dictated by law. However, the state’s distribution may not be what you would have wanted. Intestacy also has other disadvantages, which include the possibility that your estate will owe more taxes than it would if you had created a valid will.

Wills distribute property according to your wishes

Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose. There are some limits, however, on how you can distribute property using a will. For instance, your spouse may have certain rights with respect to your property, regardless of the provisions of your will.

Gifts through your will take the form of specific bequests (e.g., an heirloom, jewelry, furniture, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what’s left after your other gifts.

Wills allow you to nominate a guardian for your minor children

In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children’s assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.

Wills allow you to nominate an executor

A will allows you to designate a person as your executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries. Like naming a guardian, the probate court has final approval but will usually approve whomever you nominate.

Wills specify how to pay estate taxes and other expenses

The way in which estate taxes and other expenses are divided among your heirs is generally determined by state law unless you direct otherwise in your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.

Wills can create a testamentary trust

You can create a trust in your will, known as a testamentary trust, that comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the distributions should be made, and when the trust terminates. This can be especially important if you have a spouse or minor children who are unable to manage assets or property themselves.

Wills can fund a living trust

A living trust is a trust that you create during your lifetime. If you have a living trust, your will can transfer any assets that were not transferred to the trust while you were alive. This is known as a pourover will because the will “pours over” your estate to your living trust.

Wills can help minimize taxes

Your will gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.

Assets disposed of through a will are subject to probate

Probate is the court-supervised process of administering and proving a will. Probate can be expensive and time consuming, and probate records are available to the public. Several factors can affect the length of probate, including the size and complexity of the estate, challenges to the will or its provisions, creditor claims against the estate, state probate laws, the state court system, and tax issues. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate. Generally, real estate is probated in the state in which it is located, and personal property is probated in the state in which you are domiciled (i.e., reside) at the time of your death.

Will provisions can be challenged in court

Although it doesn’t happen often, the validity of your will can be challenged, usually by an unhappy beneficiary or a disinherited heir. Some common claims include:

  • You lacked testamentary capacity when you signed the will
  • You were unduly influenced by another individual when you drew up the will
  • The will was forged or was otherwise improperly executed
  • The will was revoked

Understanding Probate

Understanding Probate

When you die, you leave behind your estate. Your estate consists of your assets — all of your money, real estate, and worldly belongings. Your estate also includes your debts, expenses, and unpaid taxes. After you die, somebody must take charge of your estate and settle your affairs. This person will take your estate through probate, a court-supervised process that winds up your financial affairs after your death. The proceedings take place in the state where you were living at the time of your death. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate.

How does probate start?

If your estate is subject to probate, someone (usually a family member) begins the process by filing an application for the probate of your will. The application is known as a petition. The petitioner brings it to the probate court along with your will. Usually, the petitioner will file an application for the appointment of an executor at the same time. The court first rules on the validity of the will. Assuming that the will meets all of your state’s legal requirements, the court will then rule on the application for an executor. If the executor meets your state’s requirements and is otherwise fit to serve, the court generally approves the application.

What’s an executor?

The executor is the person whom you choose to handle the settlement of your estate. Typically, the executor is a spouse or a close family member, but you may want to name a professional executor, such as a bank or attorney. You’ll want to choose someone whom you trust will be able to carry out your wishes as stated in the will. The executor has a fiduciary duty — that is, a heightened responsibility to be honest, impartial, and financially responsible. Now, this doesn’t mean that your executor has to be an attorney or tax wizard, but merely has the common sense to know when to ask for specialized advice.

Your executor’s duties may include:

  • Finding and collecting your assets, including outstanding debts owed to you
  • Inventorying and appraising your assets
  • Giving notice to your creditors (e.g., credit card companies, banks, retail stores)
  • Filing an estate tax return and paying estate taxes, if any
  • Paying any debts or other taxes
  • Distributing your assets according to your will and the law
  • Providing a detailed report of how the estate was settled to the court and all interested parties

The probate court supervises and oversees the entire process. Some states allow a less formal process if the estate is small and there are no complicated issues to resolve. In those states allowing informal probate, the court may be involved only indirectly. This may speed up the probate process, which can take years.

What if you don’t name an executor?

If you don’t name an executor in your will, or if the executor can’t serve for some reason, the court will appoint an administrator to settle your estate according to the terms of your will. If you die without a will, the court will also appoint an administrator to settle your estate. This administrator will follow a special set of laws, known as intestacy laws, that are made for such situations.

Is all of your property subject to probate?

Although most assets in your estate may pass through the probate process, other assets may not. It often depends on the type of asset or how an asset is titled. For example, many married couples own their residence jointly with rights of survivorship. Property owned in this manner bypasses probate entirely and passes by “operation of law.” That is, at death, the property passes directly to the joint owner regardless of the terms of the will and without going through probate. Other assets that may bypass probate include:

  • Investments and bank accounts set up to pass automatically to a named person at death (payable on death)
  • Life insurance policies with a named beneficiary (someone other than the estate)
  • Retirement plans with a named beneficiary
  • Other property owned jointly with rights of survivorship

Life Insurance and Estate Planning

Life Insurance and Estate Planning

Life insurance has come a long way since the days when it was known as burial insurance and used mainly to pay for funeral expenses. Today, life insurance is a crucial part of many estate plans. You can use it to leave much-needed income to your survivors, provide for your children’s education, pay off your mortgage, and simplify the transfer of assets. Life insurance can also be used to replace wealth lost due to the expenses and taxes that may follow your death, and to make gifts to charity at relatively little cost to you.

To illustrate how life insurance can help you plan your estate wisely, let’s compare what happened upon the death of two friends: Frank, who bought life insurance, and Dave, who did not. (Please note that these illustrations are hypothetical.)

Life insurance can protect your survivors financially by replacing your lost income

Frank bought life insurance to help ensure that his survivors wouldn’t suffer financially when he died. When Frank died and his paycheck stopped coming in, his family had enough money to maintain their lifestyle and live comfortably for years to come.

And since Frank’s life insurance proceeds were available very quickly, his family had cash to meet their short-term financial needs. Life insurance proceeds left to a named beneficiary don’t pass through the process of probate, so Frank’s family didn’t have to wait until his estate was settled to get the money they needed to pay bills.

But Dave didn’t buy life insurance, so his family wasn’t so lucky. Even though Dave left his assets to his family in his will, those assets couldn’t be distributed until after the probate of his estate was complete. Since probate typically takes six months or longer, Dave’s survivors had none of the financial flexibility that a life insurance policy would have provided in the difficult time following his death.

Life insurance can replace wealth that is lost due to expenses and taxes

Frank planned ahead and bought enough life insurance to cover the potential costs of settling his estate, including taxes, fees, and other debts that his estate would have to pay. By comparison, these expenses took a big bite out of Dave’s estate, which had to sell valuable assets to pay the taxes and expenses that arose as a result of his death.

Life insurance lets you give to charity, while your estate enjoys an estate tax deduction

Using life insurance, Frank was able to leave a substantial gift to his favorite charity. Since gifts to charity are estate tax deductible, this gift was not subject to estate taxes when he died. Dave always dreamed of leaving money to his alma mater, but his family couldn’t afford to give any money away when he died.

Life insurance won’t increase estate taxes — if you plan ahead

Before buying life insurance, Frank talked to his attorney about the potential tax consequences. Frank’s attorney told him that if his estate was large enough, it could be subject to federal and state estate taxes, depending on the applicable law at the time of his death. Frank and his attorney put a plan in place that would allow Frank’s survivors to use his life insurance policy to help pay for some of the potential estate taxes that might be owed at his death.

Be like Frank, not like Dave

Throughout his life, Dave worked hard to support his family. Frank did, too, but went one step further — he bought life insurance to protect his family after his death. Here’s how you can be like Frank:

  • Use life insurance to ensure that your family has access to cash to help them meet both their short-term and long-term financial needs
  • Plan ahead — buy enough life insurance to cover the potential costs of settling your estate and to ensure that the assets you leave to your survivors aren’t less than you intended
  • Consider using life insurance to give to charity
  • Consult an experienced attorney about income and estate tax consequences before purchasing life insurance

Bypassing Probate

Bypassing Probate

You may have heard about the horrors of probate, but in truth, probate has gotten an undeservedly bad reputation, especially in recent years. If you bypass probate, your estate will go to your beneficiaries without any court proceeding, and you may save a certain amount of time and expenses. However, there is usually little reason for most people to avoid probate today. States continue to revise their probate laws, making them more consumer friendly, particularly for small estates. For most modestly sized estates, the probate process now costs little. In fact, there are some good reasons to distribute your property by will. Decisions are binding and have legal finality once your will is probated. Creditors who fail to file claims against your estate within a specific amount of time — usually six months after receiving notice — are out of luck.

However, some major drawbacks to probate do exist, including the time it can take. The process averages six to nine months to complete but may take up to two years or more for some complex estates, tying up the assets that your family may need immediately. Also, for a larger estate, the cost may be as high as 5 percent of the estate’s value.

If you feel that the size and complexity of your estate warrant exploring alternatives to probate, you may want to consider one or more of the following:

Transfer your assets to a revocable living trust

A trust is like a basket that holds your assets. A revocable living trust (also known as an inter vivos trust) is flexible enough to include almost any asset that you own. While you are living, you can act as the trustee and can add or remove property as you see fit. You can also terminate or amend the trust at any time. When you die, your successor trustee distributes the trust assets to the trust beneficiaries, according to the trust agreement. Trusts require a significant amount of paperwork, are costly to create and maintain, and usually require a lawyer to draw up the trust documents. Also, a revocable living trust does not shield your estate from your creditors, creditors of your estate, or estate taxes.

Own property as joint tenancy with rights of survivorship

Assets owned as joint tenancy with rights of survivorship pass automatically to the surviving joint owner(s) at your death. To establish joint ownership, you may need to record new real estate deeds, titles for your car or boat, stock and bond certificates, statements of account for mutual funds, registration cards for your bank accounts, and other assets. This costs little and usually does not require a lawyer. Some drawbacks are that the joint owner has immediate access to your property, and your joint owner’s creditors may reach the jointly held property.

Designate beneficiaries

Assets pass outside of probate if you establish payable-on-death provisions for your savings accounts and CDs. Ask your agent to set up transfer-on-death provisions for brokerage accounts containing stocks, bonds, or mutual funds. Your retirement accounts, such as profit-sharing plans, 401(k)s, and IRAs can also pass along to designated beneficiaries. Finally, life insurance death proceeds will avoid probate, provided you name a beneficiary other than your estate.

Make lifetime gifts

Another way to avoid probate is to simply give away your property to your beneficiaries while you are living. Carefully planned gifting can also free those assets from gift and estate taxes. The following are usually nontaxable gifts:

  • Gifts to your spouse
  • Gifts to qualified charities
  • Gifts totaling $15,000 (in 2018) or less per person, per year ($30,000 in 2018 if you and your spouse can split the gifts)
  • Tuition payments on behalf of an individual directly to an educational institution
  • Medical care expenses paid directly to the provider on behalf of an individual

Other ways to bypass or minimize probate

If your estate is small enough to meet state guidelines, your beneficiaries can simply claim your assets by presenting a notarized affidavit. About half of the states set a limit of $10,000 to $20,000 of the qualified estate value; most of the other states allow as much as $100,000. You can generally deduct estate expenses from your qualified estate value, such as taxes, debts, loans, or family allowance payments, plus the value of any other assets that pass outside probate (e.g., a home jointly owned with a spouse). Real estate is usually disqualified from claims by affidavit. Therefore, your estate may qualify even if it is fairly large. Expect the process to take 30 to 45 days. Another method is for your executor to file for summary, or simplified probate. This streamlined process is generally a paper filing only, requiring no attorney. States vary widely regarding the allowable size of an estate for simplified probate.

Asset Protection in Estate Planning

Asset Protection in Estate Planning

You’re beginning to accumulate substantial wealth, but you worry about protecting it from future potential creditors. Whether your concern is for your personal assets or your business, various tools exist to keep your property safe from tax collectors, accident victims, health-care providers, credit card issuers, business creditors, and creditors of others.

To insulate your property from such claims, you’ll have to evaluate each tool in terms of your own situation. You may decide that insurance and a Declaration of Homestead may be sufficient protection for your home because your exposure to a claim is low. For high exposure, you may want to create a business entity or an offshore trust to shield your assets. Remember, no asset protection tool is guaranteed to work, and you may have to adjust your asset protection strategies as your situation or the laws change.

Liability insurance is your first and best line of defense

Liability insurance is at the top of any plan for asset protection. You should consider purchasing or increasing umbrella coverage on your homeowners policy. For business-related liability, purchase or increase your liability coverage under your business insurance policy. Generally, the cost of the premiums for this type of coverage is minimal compared to what you might be required to pay under a court judgment should you ever be sued.

A Declaration of Homestead protects the family residence

Your primary residence may be your most significant asset. State law determines the creditor and judgment protection afforded a residence by way of a Declaration of Homestead, which varies greatly from state to state. For example, a state may provide a complete exemption for a residence (i.e., its entire value), a limited exemption (e.g., up to $100,000), or an exemption under certain circumstances (e.g., a judgment for medical bills). A Declaration of Homestead is easy to file. You pay a small fee, fill out a simple form, and file it at the registry where your deed is recorded.

Dividing assets between spouses can limit exposure to potential liability

Perhaps you work in an occupation or business that exposes you to greater potential liability than your spouse’s job does. If so, it may be a good idea to divide assets between you so that you keep only the income and assets from your job, while your spouse takes sole ownership of your investments and other valuable assets. Generally, your creditors can reach only those assets that are in your name.

Business entities can provide two types of protection — shielding your personal assets from your business creditors and shielding business assets from your personal creditors

Consider using a corporation, limited partnership, or limited liability company (LLC) to operate the business. Such business entities shield the personal assets of the shareholders, limited partners, or LLC members from liabilities that arise from the business. The liability of these owners will be limited to the assets of the business.

Conversely, corporations, limited partnerships, and LLCs provide some protection from the personal creditors of a shareholder, limited partner, or member. In a corporation, a creditor of an individual owner is able to place a lien on, and eventually acquire, the shares of the debtor/shareholder, but would not have any rights greater than the rights conferred by the shares. In limited partnerships or LLCs, under most state laws, a creditor of a partner or member is entitled to obtain only a charging order with respect to the partner or member’s interest. The charging order gives the creditor the right to receive any distributions with respect to the interest. In all respects, the creditor is treated as a mere assignee and is not entitled to exercise any voting rights or other rights that the partner or member possessed.

Certain trusts can preserve trust assets from claims

People have used trusts to protect their assets for generations. The key to using a trust as an asset protection tool is that the trust must be irrevocable and become the owner of your property. Once given away, these assets are no longer yours and are not available to satisfy claims against you. To properly establish an asset protection trust, you must not keep any interest in the trust assets or control over the trust.

Trusts can also protect trust assets from potential creditors of the beneficiaries of the trust. The extent to which a beneficiary’s creditors can reach trust property depends on how much access the beneficiary has to the trust property. The more access the beneficiary has to the trust property, the more access the beneficiary’s creditors will have. Thus, the terms of the trust are critical.

There are many types of asset protection trusts, each having its own benefits and drawbacks. These trusts include:

  • Spendthrift trusts
  • Discretionary trusts
  • Support trusts
  • Personal trusts
  • Self-settled trusts

Since certain claims can pierce domestic protective trusts (e.g., claims by a spouse or child for support and state or federal claims), you can bolster your protection by placing the trust in a foreign jurisdiction. Offshore or foreign trusts are established under, or made subject to, the laws of another country (e.g., the Bahamas, the Cayman Islands, Bermuda, Belize, Jersey, Liechtenstein, and the Cook Islands) that does not generally honor judgments made in the United States.

A word about fraudulent transfers

The court will ignore transfers to an asset protection trust if:

  • A creditor’s claim arose before you made the transfer
  • You made the transfer with the intent to defraud a creditor
  • You incurred debts without a reasonable expectation of paying them

Life Insurance Basics

Life Insurance Basics

Life insurance is an agreement between you (the policy owner) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die.

The many uses of life insuranceOne of the most common reasons for buying life insurance is to replace the loss of income that would occur in the event of your death. When you die and your paychecks stop, your family may be left with limited resources. Proceeds from a life insurance policy make cash available to support your family almost immediately upon your death. Life insurance is also commonly used to pay any debts that you may leave behind. Life insurance can be used to pay off mortgages, car loans, and credit card debts, leaving other remaining assets intact for your family. Life insurance proceeds can also be used to pay for final expenses and estate taxes. Finally, life insurance can create an estate for your heirs.

How much life insurance do you need?Your life insurance needs will depend on a number of factors, including whether you’re married, the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you’re young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases.

There are plenty of tools to help you determine how much coverage you should have. Your best resource may be a financial professional. At the most basic level, the amount of life insurance coverage that you need corresponds directly to your answers to these questions:

  • What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?
  • How much of your salary is devoted to current expenses and future needs?
  • How long would your dependents need support if you were to die tomorrow?
  • How much money would you want to leave for special situations upon your death, such as funding your children’s education, gifts to charities, or an inheritance for your children?

Since your needs will change over time, you’ll need to continually re-evaluate your need for coverage.

How much life insurance can you afford?How do you balance the cost of insurance coverage with the amount of coverage that your family needs? Just as several variables determine the amount of coverage that you need, many factors determine the cost of coverage. The type of policy that you choose, the amount of coverage, your age, and your health all play a part. The amount of coverage you can afford is tied to your current and expected future financial situation, as well. A financial professional or insurance agent can be invaluable in helping you select the right insurance plan.

What’s in a life insurance contract?A life insurance contract is made up of legal provisions, your application (which identifies who you are and your medical declarations), and a policy specifications page that describes the policy you have selected, including any options and riders that you have purchased in return for an additional premium.

Provisions describe the conditions, rights, and obligations of the parties to the contract (e.g., the grace period for payment of premiums, suicide and incontestability clauses).

The policy specifications page describes the amount to be paid upon your death and the amount of premiums required to keep the policy in effect. Also stated are any riders and options added to the standard policy. Some riders include the waiver of premium rider, which allows you to skip premium payments during periods of disability; the guaranteed insurability rider, which permits you to raise the amount of your insurance without a further medical exam; and accidental death benefits.

The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.

Types of life insurance policiesThe two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods.

Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy in force. Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policyowner discontinue the policy, this reserve, known as the cash value, is returned to the policyowner. Permanent life insurance can be further broken down into the following basic categories:

  • Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed. Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer.
  • Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value will grow at a declared interest rate, which may vary over time.
  • Index universal life: This is a form of universal life insurance with excess interest credited to cash values. But, unlike universal life insurance, the amount of interest credited is tied to the performance of an equity index, such as the S&P 500.
  • Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. The policyowner selects the subaccounts in which the cash value should be invested.
  • Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value goes up or down based on the performance of investments in the subaccounts.

Note:Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

Your beneficiariesYou must name a primary beneficiary to receive the proceeds of your insurance policy. You may name a contingent beneficiary to receive the proceeds if your primary beneficiary dies before the insured. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. You should carefully consider the ramifications of your beneficiary designations to ensure that your wishes are carried out as you intend.

Generally, you can change your beneficiary at any time. Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company. If you have named someone as an irrevocable (permanent) beneficiary, however, you will need that person’s permission to adjust any of the policy’s provisions.

Where can you buy life insurance?You can often get insurance coverage from your employer (i.e., through a group life insurance plan offered by your employer) or through an association to which you belong (which may also offer group life insurance). You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company.

Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. Ratings services, such as A. M. Best, Moody’s, and Standard & Poor’s, evaluate an insurer’s financial strength. The company offering you coverage should provide you with this information.

Types of Life Insurance Policies

Types of Life Insurance Policies

You know that you need life insurance. However, with the wide variety of insurance policies available, you may find choosing the right one difficult. It’s really not as confusing as it seems, however, once you understand the basic types of life insurance policies.

Term life insurance

With a term policy, you get “pure” life insurance coverage. Term insurance provides a death benefit for only a specific period of time. If you die during the coverage period, your beneficiary (the person you named to collect the insurance proceeds) receives the death benefit (the face amount of the policy). If you live past the term period, your coverage ends, and you get nothing back.

Term insurance is available for periods ranging from 1 year to 30 years or more. You may be able to renew the policy for a new term without regard to your health, but at a higher rate. Your premium goes toward administrative expenses, company profit, and a reserve account that pays claims to those who die during the term period. As you get older, the chance that you will die increases. To cover this increasing risk, your premiums will likewise rise at regular intervals. For this reason, premiums that were quite inexpensive at the time you initially purchased your term policy will become much more expensive as you get older. Most term insurance also has a conversion feature that allows you to switch your coverage to some type of permanent insurance without answering health questions.

Traditional whole life insurance–guaranteed premiums

Whole life insurance is a type of permanent insurance or cash value insurance. Unlike term insurance, which provides coverage for a particular period of time, permanent insurance provides coverage for your entire life. When you make premium payments, you pay more than is needed to pay for the current costs of insurance coverage and expenses. The excess payment is credited to a cash value account. This cash value account allows the insurance company to charge a level, guaranteed premium* and to provide a death benefit and cash value throughout the life of the policy.

As you make payments, the cash value account grows. With traditional whole life insurance, the cash value account is guaranteed* and held in the insurance company’s general portfolio–you don’t get to choose how the cash value account is invested. However, the cash value can potentially grow beyond its guaranteed amount through the payment of dividends (profits earned by a “mutual” insurer). The cash value grows tax deferred and can either be used as collateral to borrow from the insurance company or be directly accessed through a partial or complete surrender of the policy. It is important to note, however, that a policy loan or partial surrender will reduce the policy’s death benefit, and a complete surrender will terminate coverage altogether.

If you live to the policy’s maturity date, the policy will “endow,” and the insurance company will pay the accumulated cash value (equal at maturity to the death benefit) to you.

Universal life–openness and flexibility

Universal life is another type of permanent life insurance with a death benefit and a cash value account. Like whole life insurance, the cash value is held in the insurance company’s general portfolio–you don’t get to choose how the account is invested. Unlike traditional whole life, universal life insurance allows you flexibility in making premium payments.

A universal life insurance policy will generally provide very broad premium guidelines (i.e., minimum and maximum premium payments), but within these guidelines you can choose how much and when you pay premiums. Reducing or increasing premiums will impact the growth of the cash value component and possibly the death benefit. You are also free to change the policy’s death benefit directly (again, within the limits set out by the policy) as your financial circumstances change. Be aware, however, that if you want to raise the amount of coverage, you’ll need to go through the insurability process again, probably including a new medical exam, and your premiums will increase.

Universal life policies reveal all aspects of the policy’s cost structure, including the cost of insurance (the portion set aside to pay claims) and expenses. This information is not always available with other types of policies. Another feature of universal life is the option to add the cash value to the face amount when the death benefit is paid. For example, say you die when you have $200,000 of cash value within your $1 million policy. If you chose the enhanced benefit option, your beneficiary receives $1.2 million. Keep in mind, however, that nothing is free–the increased benefit is reflected in premium calculations.

Index universal life is a type of universal llife insurance. Index universal life insurance credits interest based on the performance of an equity index, such as the S&P 500.

Variable life–you make the investment decisions

Like other types of permanent life insurance, variable life insurance has a cash value account. A variable life insurance policy, however, allows you to choose how your cash value account is invested. A variable life policy generally contains several investment options, known as subaccounts, that are professionally managed to pursue a stated investment objective. Choices can range from a fixed interest subaccount to a highly volatile international growth subaccount. Variable life insurance policies require a fixed annual premium for the life of the policy and may provide a minimum guaranteed death benefit*. If the cash value account exceeds a certain amount, the death benefit will increase.

Variable universal life–the ultimate in flexibility

Variable universal life combines all of the options and flexibility of universal life with the investment choices of a variable policy. It is a true hybrid product, and you make most of the policy decisions. You decide how often and how much your premium payments are to be, within guidelines. With most variable universal life policies, you get no guaranteed minimum cash value or death benefit. Your premium payments in excess of administrative costs and the cost of insurance are invested in the variable subaccounts that you choose.

As with both variable and universal life insurance, your policy may lapse if the cash value account falls below a certain level. Low-interest loans can be taken against your cash value account, and cash withdrawals are available. However, keep in mind that your policy’s face amount is reduced by the amount of a policy withdrawal, and withdrawals may be taxable. You have the option of choosing a fixed or enhanced death benefit. Today, most variable universal life policies offer a rider that guarantees the death benefit at a certain level regardless of the performance of the subaccounts, provided that a stated minimum premium is paid for a predetermined number of years*.

Note:Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

*Any guarantees associated with payment of death benefits, income options, or rates of return are subject to the claims-paying ability of the insurer.

Joint or survivorship life for you and your spouse

Some married couples choose to buy insurance together within the same policy. These policies take the form of either a joint first-to-die or a joint second-to-die (survivorship) design. With first-to-die, the death benefit is paid at the death of the spouse who dies first. With second-to-die, no death benefit is paid until both spouses are deceased. Second-to-die policies are commonly used in estate planning to create a pool of funds to pay estate taxes and other expenses due at the death of the second spouse. Joint and survivorship policies are generally available under any type of permanent life insurance. Other than the fact that two people are insured under one policy, the policy characteristics remain the same.

Table of Federal Transfer Tax Rates and Exemption Limits

Federal Gift and Estate Tax
Year Applicable Exclusion Amount Highest Tax Rate
2009 $1 million for gift tax purposes
$3.5 million for estate tax purposes
2010* $1 million for gift tax purposes
$5 million or $0 for estate tax purposes
35% or 0%
2011 $5 million plus DSUEA** 35%
2012 $5,120,000 plus DSUEA** 35%
2013 $5,250,000 plus DSUEA** 40%
2014 $5,340,000 plus DSUEA** 40%
2015 $5,430,000 plus DSUEA** 40%
2016 $5,450,000 plus DSUEA** 40%
2017 $5,490,000 plus DSUEA** 40%
Federal Generation-Skipping Transfer (GST) Tax
Year Exemption Highest Tax Rate
2009 $3.5 million 45%
2010* $5 million 0%
2011 $5 million 35%
2012 $5,120,000 35%
2013 $5,250,000 40%
2014 $5,340,000 40%
2015 $5,430,000 40%
2016 $5,450,000 40%
2017 $5,490,000 40%

* In 2010, the exemption for gift tax purposes is $1 million, but the exemption for estate tax purposes is $5 million. An estate of a person who died in 2010 can elect out of the estate tax. If it does so, estate property will receive a carryover or modified carryover basis, and not a step up in basis. In 2010, the GST tax exemption is $5 million, but the GST tax rate is 0%.

** Prior to 2011, each taxpayer was entitled to use only the exemption allotted to him or her, and any unused exemption amount would be lost. In 2011 and later years, portability of the gift and estate tax exemption between spouses allows the executor of the first deceased spouse’s estate to transfer any unused exemption amount (DSUEA) to the surviving spouse. This “portability” allows the second spouse to die to dispose of up to $10,980,000 worth of assets, estate tax free.

Common Incapacity Documents

Durable Power of Attorney for Health Care (DPAHC)/Health-Care Proxy
Advantages Disadvantages
  • Is flexible–allows your representative to act on your behalf and make medical decisions based on current circumstances
  • Generally, your representative can make any decision you would be allowed to make
  • Generally can be used any time you become incompetent
  • Not practical in an emergency–your representative must be present to act on your behalf
  • Not permitted in some states
Living Will
Advantages Disadvantages
  • Allows you to convey decisions regarding your medical care without relying on any one person to carry out your wishes
  • Generally can be used only if you are terminally ill or injured, or in a persistent vegetative state
  • Generally used only to make decisions regarding life-sustaining treatments
  • Emergency medical personnel generally cannot withhold emergency care based on a living will
  • Not permitted in some states
Do Not Resuscitate (DNR) Order
Advantages Disadvantages
  • Allows you to decline CPR if your heart or breathing fails
  • Effective in an emergency–your doctor should note an in-hospital DNR order on your chart. Out-of-hospital DNR orders take various forms, depending on the laws of your state. ID bracelets, MedicAlert ® necklaces, and wallet cards are some methods of noting DNR status.
  • Some states allow DNR orders only for hospitalized patients–others do not restrict eligibility
  • Only used to decline CPR in case of cardiac or respiratory arrest
  • Not permitted in some states
Durable Power of Attorney (DPOA)
Advantages Disadvantages
  • You control who acts and what they can do with your property
  • Low cost to implement
  • Decreases the chance of court intervention
  • Some states do not permit a “springing” DPOA (i.e., a DPOA that is effective only after you have become incapacitated)

The Best Property to Give to Charity

Giving to charity is not only personally satisfying, the IRS (and possibly your state) also rewards you with generous tax breaks.

  • Current income tax deduction if you itemize, subject to certain percentage limitations for any one year
  • Tax benefit received reduces the cost of the donation (e.g., a $100 donation from someone in a 30 percent tax bracket has a net cost of $70)
  • Reduces or eliminates capital gains tax if appreciated property is given
  • No transfer (gift and estate) taxes imposed
  • Removes any future appreciation of the donated property from your taxable estate
Highly appreciated or rapidly appreciating property*

Such as:

  • Intangible personal and real property (e.g., stock or real estate)
  • Tangible personal property (e.g., art, jewelry)

  • Easy to give–the type of donation most charities like best
  • Be sure to get a receipt or keep a bank record, regardless of the amount
Income-producing property* 

Such as:

  • Artwork (if given by the artist)
  • Inventory
  • Section 306 stock (stock acquired in a nontaxable corporate transaction)
Tangible personal property* 

Such as:

  • Cars
  • Jewelry
  • Paintings
Remainder interests in property

Lets you use the property, or income from the property, until a later date. Gift and estate tax deductions are not allowed unless a trust is used. You may only take the income tax deduction in the year that the gift is actually conveyed.

* You may need to have certain types of property appraised.

Estate Planning Pyramid

Estate Planning Pyramid

Steps to Estate Planning Success

The World of Estate Planning

A successful estate plan is shaped by goals. Key estate planning goals are minimizing taxes, avoiding probate, retaining control over property, protecting assets, and protecting against incapacity. These goals are represented in the outer rings of the illustration. There are a number of devices that can be employed to accomplish these goals; among them are gifts, wills, trusts (living or irrevocable), joint ownership arrangements, and beneficiary designations. These devices are represented within the world’s core (the pie-shaped pieces). This tool has been designed to easily match goals with devices that can achieve those goals.

Advantages of Trusts

Why you might consider discussing trusts with your attorney

  • Trusts may be used to minimize estate taxes for married individuals with substantial assets.
  • Trusts provide management assistance for your heirs.*
  • Contingent trusts for minors (which take effect in the event that both parents die) may be used to avoid the costs of having a court-appointed guardian to manage your children’s assets.
  • Properly funded trusts avoid many of the administrative costs of probate (e.g., attorney fees, document filing fees).
  • Generally, revocable living trusts will keep the distribution of your estate private.
What is a trust?

A trust is a legal entity that is created for the purpose of transferring property to a trustee for the benefit of a third person (beneficiary). The trustee manages the property for the beneficiary according to the terms specified in the trust document.

  • Trusts can be used to dispense income to intermediate beneficiaries (e.g., children, elderly parents) before final property distribution.
  • Trusts can ensure that assets go to your intended beneficiaries. For example, if you have children from a prior marriage you can make sure that they, as well as a current spouse, are provided for.
  • Trusts can minimize income taxes by allowing the shifting of income among beneficiaries.
  • Properly structured irrevocable life insurance trusts can provide liquidity for estate settlement needs while removing the policy proceeds from estate taxation at the death of the insured.

*This is particularly important for minors and incapacitated adults who may need support, maintenance, and/or education over a long period of time, or for adults who have difficulty managing money.


 A/B Trust Diagram: $22,400,000 Estate

The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and estate tax basic exclusion amount to about $11,200,000 in 2018. After 2025, the exclusion is scheduled to revert to its pre-2018 level, being cut by about one-half.

Prior to 2011, each taxpayer was entitled to use only the exclusion allotted to him or her, and any unused exclusion amount would be lost. A married couple could ensure they fully used their respective exclusion amounts by implementing an estate plan that split a spouse’s estate into a marital portion (Trust A) and credit shelter portion (Trust B), as illustrated.

In 2011 and later years, portability of the applicable exclusion amount between spouses may reduce the need for A/B trust planning, because it allows the executor of the first deceased spouse’s estate to transfer any unused exclusion amount to the surviving spouse (along with the surviving spouse’s own exclusion). This “portability” allows the second spouse to die to dispose of $22,400,000 worth of assets, estate tax free, without the need of planning. However, even with portability, there may be other tax and nontax reasons to implement an A/B trust, including:

  • Sheltering the difference between the inflation and appreciation from estate tax
  • Spendthrift and creditor protection
  • Ability of the first spouse to die to control assets after death

Estate Shrinkage

Estate Shrinkage

How a Charitable Remainder Trust Works

How a Charitable Remainder Trust Works

How a Charitable Lead Trust Works

How a Charitable Lead Trust Works

How a Grantor Retained Income Trust (GRIT) Works

How a Grantor Retained Income Trust (GRIT) Works

Rolling GRATs

Rolling GRATs

What is the difference between a living will and a living trust?

These two very important estate planning devices are quite different from each other but serve similar purposes. A living will lets you manage your health-care decisions in case you become incapacitated. A living trust lets you manage your property in case you become incapacitated.

A living will is not actually a will at all. It is a legal document that becomes effective if you become so ill or injured that you can’t make responsible health-care decisions for yourself. It lets you approve or decline certain types of medical care in advance, even if you die as a result.

A living will is allowed only in some states. If you don’t live in one of those states, you may be able to accomplish the same goal using a durable power of attorney for health care, health-care proxy, or Do Not Resuscitate order.

By comparison, a living trust is just what it says. It is a revocable trust you create while you are living. You transfer property to the trust, and the trust then “owns” it. You name yourself as trustee and someone else as a successor trustee. You manage the property in the trust unless you become incapacitated (or until you die), in which case your successor trustee automatically steps in to continue managing the property for you.

What is probate and why would I want to avoid it?

Probate is the court process of proving a decedent’s will and/or supervising the administration of a decedent’s estate. This process takes place in the probate court, which is a special court designed for this function. State law governs the proceedings in the probate court, so they vary from state to state. Generally, however, probate proceedings are initiated when someone petitions the court. If there is a will, the petitioner must first prove that the will is valid. The court then watches over the executor while he or she settles the estate. If there is no valid will, the court appoints an administrator to settle the estate.

Why would you want to avoid probate? Because for some estates, it may be a time-consuming, costly, and public procedure.

The entire process can take as little as three months or as much as two years (or longer if there is litigation). During this time, assets cannot be distributed to your heirs. These assets may lose value during this time, or your family may suffer because they cannot reach the funds they need for their support.

Probate costs may consist of court costs, publication costs for legal notices, attorney fees, executor fees, bond premiums, and appraisal fees. The total cost for probating an estate can range from $250 to $10,000 (or more if there is litigation). Because probate costs are paid for by your estate, this money does not go to your heirs.

Finally, probate is a public process that makes your will a public document, open to anyone who wants to see it. Your private affairs are no longer private.

On the other hand, there are good reasons for an executor to use the probate system. Probate may make sense in the following situations:

  • When the will is confusing, especially if there is a question about who is to pay the taxes
  • When it can’t be determined which will should be probated
  • When the estate is insolvent
  • When there is disagreement among the beneficiaries or they impede the process in some way

What will happen if I die without a will?

Some people leave instructions about who gets what property in a legal document known as a will. If you do not have a will, you leave no legal instructions about how your property is to be distributed to your heirs.

The state then steps in and dictates how your property will be distributed. The state does this by following laws known as intestacy laws. Each of the states has adopted its own intestacy laws, so the pattern of distribution varies from state to state. However, a typical pattern may be that half of the property goes to the spouse, and the other half is split equally among the children.

The major disadvantage of this is that your property may not be distributed according to your wishes.

There are other drawbacks to this situation, as well. Instructions about other special matters, such as who will settle the estate or who will take care of minor children, are also left in a will. If you do not have a will, these matters will also be determined by the state. Although the state will do what it thinks is in the best interest of your family, its actions may not be consistent with what you would have wanted.

Does property owned jointly avoid probate?

It depends. Generally, there are four forms of joint ownership. In legal terms, they are known as (1) joint tenancy with rights of survivorship, (2) tenancy in common, (3) tenancy by the entirety, and (4) community property. Ordinarily, interests in property held as joint tenancy with rights of survivorship, tenancy by the entirety, and community property held under joint tenancy avoid probate. An interest in property held as tenancy in common passes by will and thus does not avoid probate.

Two or more people can hold property as joint tenants with rights of survivorship or tenants in common. Only married couples can hold property as tenants by the entirety, and only married couples who live in community property states can own property as community property.

Although an interest in property held as tenancy in common must pass through probate, it is also freely transferable to anyone. Conversely, interests in property held as joint tenancy with rights of survivorship, tenancy by the entirety, or community property held under joint tenancy pass automatically to the remaining owner(s).

Isn’t estate planning only for the rich?

In a word, no. Estate planning allows you or anyone to implement certain tools now to ensure that your concerns and goals are fulfilled after you die. Your objective may be to simply make sure that your loved ones are provided for. Or you may have more complex goals, such as avoiding probate or reducing estate taxes.

Estate planning can be as simple as implementing a will (the cornerstone of any estate plan) and purchasing life insurance, or as complicated as executing trusts and exploring other sophisticated tax and estate planning techniques. Therefore, estate planning is important whether you are wealthy or whether you have only a small estate. In fact, estate planning may be more important if you have a smaller estate because final expenses will have a greater impact on your estate. Wasting even a single asset may cause your loved ones to suffer from lack of financial resources.

You may also want to plan your estate if you have special circumstances such as any of the following:

  • You have minor children or children with special needs
  • Your spouse is uncomfortable with or incapable of handling financial matters
  • You have property in more than one state
  • You have special property, such as artwork or collectibles

How can I minimize taxes on my estate?

This question may seem simple, but the answer is not so easy. In fact, there are experts who make their living answering just this question.

Estate tax liability depends on the year in which you die and the value of your estate when you die (see the following chart).

Year of Death Value of Estate on which Estate Tax May Be Imposed (estates in excess of the applicable exclusion amount)
2016 $5,450,000 plus any deceased spousal unused exclusion amount
2017 $5,490,000 plus any deceased spousal unused exclusion amount
2018 $11,200,000* plus any deceased spousal unused exclusion amount
*2018 amount may be adjusted by the IRS. After 2025, the amount is scheduled to be cut by about one-half.

Thus, you can minimize estate tax by reducing the value of your estate until it is below the applicable exclusion amount. There are many ways you can accomplish this. The best way(s) for you may not be the best ways for others and vice versa. (Note: We’re discussing only federal estate tax here. Your estate may also be subject to state death taxes. See a tax attorney for more information about state death taxes.)

One way is to make lifetime gifts. Be aware, however, that certain lifetime gifts may trigger gift tax. Gifts that do not trigger gift tax include the following:

  • Gifts made to U.S. citizen spouses and certain charities
  • Gifts of $152,000 or less made to non-U.S. citizen spouses (in 2018)
  • Certain payments made for tuition or medical expenses on the behalf of others
  • Gifts up to the annual gift tax exclusion amount of $15,000 (current figure; this figure is indexed for inflation, so it may change in future years)
  • Gifts made that fall under the applicable exclusion amount (Note: Any portion of the applicable exclusion amount used for lifetime gifts effectively reduces the applicable exclusion amount that will be available for estate tax purposes.)

See a tax attorney for more information about federal and state gifts taxes.

Another common technique to minimize estate taxes is to transfer assets to an irrevocable trust. Such a transfer may be subject to gift tax on the value of the assets at the time of the transfer, but the assets, plus any future appreciation, are removed from your gross estate. There are many types of irrevocable trusts, each created for a specific purpose. Be aware, however, that as the name implies, an irrevocable trust cannot be revoked or amended.

This is just a brief glimpse of some of the techniques used to minimize estate taxes. For more information, or to discuss how these techniques might apply to your own situation, you should consult a qualified tax attorney.

I want my son to have my valuable collection of baseball cards when I die. How do I make sure he gets it?

The only way you can be absolutely certain that a specific individual gets a specific asset is to give it them before you die.

If you don’t choose that option however, you can make your wishes known in many ways: verbal instructions, written instructions, audio or video recordings, or labelling your instructions right on the objects themselves. However, those methods are not legally binding and might result in challenges or disputes. The best way is to make a specific bequest in your will or an addendum that is incorporated into your will.

Can I disinherit relatives I don’t like?

Disinheritance is intentionally depriving someone who would otherwise be a rightful heir from receiving your estate. Typically, your heirs include your spouse, your descendants, and possibly other relatives. Although you may feel you have a good reason for disinheritance, be aware that a majority of non-community-property states provide statutory protection for spouses. That is, most states provide that if a spouse is disinherited under the decedent’s will, he or she may elect to take under the state intestacy laws instead. These laws vary from state to state but generally entitle the spouse to receive from one-third to one-half of the decedent’s estate.

Although only one state provides similar protection for the children of a decedent, simply leaving a child out of the will may not succeed in disinheriting that child. In the absence of any mention in the will, the child can either argue that this was an oversight on the part of the parent or contest the will on other grounds. Moreover, courts are often reluctant, in the absence of evidence to the contrary, to rule against the disinherited child. Therefore, if a child is disinherited, it is best to mention him or her in the will, even if only for a token amount.

Do I need an attorney to prepare my will?

Legally, no. Practically speaking, yes. A will does not need to be prepared by an attorney for it to be legally effective. A will that you draft yourself, or even a preprinted will form purchased in an office supply store, will be legally effective if you are of legal age in your state (i.e., 18), are mentally competent, and execute the will properly. This means the will must be acknowledged and signed by you in front of witnesses. The required number and age of the witnesses varies from state to state, though two witnesses who are at least age 18 is typical. In addition, the witnesses should not be anyone who will benefit under your will. Some states also require that a will must be notarized to be legally effective.

However, most people feel uncomfortable with a do-it-yourself will. They generally have some questions that should be addressed by an experienced estate planning attorney. In addition, some people have more than just basic concerns or are in complex situations where drafting the will properly is vital. Legal assistance can help ensure that your intentions are clearly communicated and no questions exist at the time of your death. You should also seriously consider professional assistance if your personal situation includes concerns such as:

  • You have minor children, children from a prior marriage, or a beneficiary with special needs
  • You own significant assets and are concerned about minimizing estate taxes at your death
  • You want to achieve certain goals, such as controlling the management and distribution of your property after your death
  • You have heirs you wish to disinherit, or there is a chance your will may be contested after your death

Who should I name as guardian of my children in case my spouse and I should die at the same time?


This is an extremely important question. After all, what can be more important than choosing a surrogate parent for your minor children? This process takes careful consideration and may be emotionally difficult, so you’ll want to take your time. The best guardian may not be the obvious choice.

You generally name a guardian in your will. Of course, spouses typically name each other as guardian first and then name an alternate guardian or guardians in case the spouse cannot serve for any reason, including death. Some parents nominate one guardian or guardians to care for the children and a different guardian to care for the children’s assets and finances. All of this is perfectly permissible. The court will have final approval but generally gives your selection the highest regard.

Who is the right guardian for your children? It’s customary for people to name parents, siblings, or best friends. You should select a responsible person with good character who shares your values and has the time and willingness to take on the job. When choosing a guardian, some of the things you may want to consider are:

  • Who loves and cares about your children?
  • Who do your children love and respect?
  • Who do you trust?
  • Who is financially and emotionally able to take on the responsibility?
  • Who is willing to take on the responsibility?

Be sure to talk with any prospective guardian before you nominate that person. Impress upon him or her the gravity of your request. Discuss your wishes regarding how you want your children to be raised (e.g., you want them to have a religious upbringing, or you want them to go to college) and what financial resources will be available (e.g., you have life insurance). Give the potential guardian plenty of time to think over your request carefully.

Who should I name as trustee?

A trustee is an institution or person who is the legal owner of the property held by the trust and who is responsible for using the trust property for the benefit of the trust beneficiaries according to the terms of the trust document. The trustee can be held personally liable if those duties are breached.

You may select one trustee or multiple trustees, depending on your needs. Who you name as trustee will depend on the type of trust you establish and your individual needs and goals.

Generally, you want the trustee to be capable of administering the trust according to the terms of the trust document. In addition to the willingness to serve as trustee, the person or institution selected may need to have investment experience and good record-keeping abilities. You may also want a trustee who relates well with the beneficiaries and is sensitive and flexible regarding their changing needs.

Sometimes, the creators of trusts, known as grantors, like to name themselves as trustee. However, there are two situations where this is inadvisable:

  • Where the grantor is also the sole beneficiary of the trust
  • Where an irrevocable trust has been created for the primary purpose of minimizing income and estate taxes

What is a living trust?

A living trust is a popular estate planning tool that lets you (1) retain control over the trust property while you are alive, (2) avoid guardianship in case you become incapacitated and can no longer handle your own financial affairs, and (3) pass trust property outside of probate when you die.

Legally, a living trust is a separate entity that you create while you are living to “own” property, such as a house, boat, jewelry, or mutual funds. The trust is revocable, which means that you can make changes to it, or even end it, at any time. For example, you may want to remove certain property from the trust or change the beneficiaries. Or you may decide not to use the trust anymore because it no longer meets your needs. A living trust gives you the flexibility to do any of these things.

However, you do pay a price for this flexibility. A living trust does not avoid estate or income taxes, nor does it protect your assets from potential creditors.

A big advantage of the living trust is that it allows a successor trustee to automatically take your place and manage the trust assets if you become incapacitated. For example, you have an accident and are in a coma for six months. Your successor trustee can take your place and manage the trust while you are unable to do so. That way, your affairs continue as usual, and you should suffer no financial setback.

In addition, assets in the living trust do not pass through your will when you die. Instead, the assets in the trust are distributed by the trustee according to the terms you establish in the trust. Also, the assets in the trust are not part of your probate estate. This may get them into the hands of your beneficiaries faster or, if you desire, provide that the assets be held until the beneficiaries meet certain criteria or attain a certain age. Finally, since the trust is not subject to probate, the terms of the trust are private.

What is the difference between a power of attorney and a durable power of attorney?

A power of attorney is a legal document that authorizes someone to act for you. You name someone known as an agent or attorney-in-fact (though the person need not be an attorney) who steps into your shoes, legally speaking. You can authorize your agent to do such things as sign checks and tax returns, enter into contracts, buy or sell real estate, deposit or withdraw funds, run a business, or anything else you do for yourself.

A power of attorney can be broad or limited. Since the power-of-attorney document is tailored for its specific purpose, your agent cannot act outside the scope designated in the document. For example, you may own a home in another state that you want to sell. Instead of traveling to that state to complete all the necessary paperwork, you can authorize someone already in that state to do this for you. When the transactions to sell the home are complete, the agency relationship ends, and the agent no longer holds any power.

A regular power of attorney ends when its purpose is fulfilled or at your incapacity or death.

A durable power of attorney serves the same function as a power of attorney. However, as its name implies, the agency relationship remains effective even if you become incapacitated. This makes the durable power of attorney an important estate planning tool. If incapacity should strike you, your agent can maintain your financial affairs until you are again able to do so, without any need for court involvement. That way, your family’s needs continue to be provided for, and the risk of financial loss is reduced. A durable power of attorney ends at your death.

What is an advance directive for health care, and will it help me avoid court involvement during incapacity?

At some point in your life, perhaps as a result of illness, accident, or advanced age, you may lack the mental capacity to make or communicate responsible decisions about your own health care. Without directions to the contrary, medical professionals are generally compelled to make every effort to save and maintain your life. Depending on your attitude toward various medical treatments and your views on the quality of life, you may want to take steps now to control your future health-care decisions. You can do so by adopting one or more advance directives for health care. If you do not adopt such a directive for health care, a family member may have to petition the court for the authority to make those decisions for you.

There are three types of advance directives for health care. Each serves a different function, as described briefly below. Be aware that not all are allowed in every state. Check with your state to find out which one(s) you can consider.

  • Living will: A living will lets you decline certain types of medical care, even if you will die as a result. Generally, a living will can be used only to decline medical treatment that “serves only to postpone the moment of death.”
  • Durable power of attorney for health care, or health-care proxy: A durable power of attorney for health care, or health-care proxy, lets you appoint a representative to make medical decisions on your behalf. It becomes effective only when you’ve become incapacitated. You decide how much power your representative will have.
  • Do Not Resuscitate order (DNR): A DNR is your doctor’s order that tells all other medical personnel not to perform CPR if you go into cardiac arrest. There are two types of DNRs. One is used while you are hospitalized. The other is used while you are outside the hospital.

What is a life insurance trust and why should I consider establishing one?

A life insurance trust is a trust that has the power to purchase life insurance policies on the person who establishes the trust (the grantor), the grantor’s spouse, or the trust beneficiaries. The trust owns the life insurance policy and collects the death proceeds when the insured dies. The trustee then distributes the death benefits to the trust beneficiaries according to the terms included in the trust document. The trust document will identify who the trust beneficiaries are, how and when trust beneficiaries may receive distributions from the trust, and how the money in the trust may be invested.

Your life insurance trust may be revocable, meaning that you may make changes or revoke it, or irrevocable, meaning that you may not revoke, alter, or amend the trust once it has been established. The type you choose depends on your individual needs.

Life insurance trusts may be established for a variety of estate planning purposes, including:

  • To provide security for your family after your death while providing control over how the death proceeds are invested or distributed to your beneficiaries
  • To provide liquidity to your estate to pay debts and obligations, such as estate taxes

However, if the trust is revocable, if you are the trustee, or if the trust is required to use the death proceeds from the life insurance to pay your estate taxes and debts, the entire death benefit may be included in your taxable estate. The resulting taxes can significantly reduce the amount of the death proceeds available for your family. For many, keeping the death benefit out of their taxable estate is a key advantage of establishing a life insurance trust.

I just made a gift. Do I have to file a gift tax return?

A federal gift tax return must be filed if any gifts you made during the calendar year were other than:

  • Gifts to your U.S. citizen spouse
  • Gifts to a political organization for its own use
  • Gifts to qualified charities, if no other interest has been transferred for less than adequate consideration or for other than a charitable use
  • Gifts totaling $15,000 (in 2018, $14,000 in 2017) or less to any one individual, unless you and your spouse are “gift-splitting”
  • Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual

However, you may want to file a gift tax return in certain circumstances even if the rules do not require it. For example, you should consider filing whenever you sell hard-to-value assets, such as real estate or stock in a family business, to a relative. This is because the IRS can claim that transactions between family members were actually gifts in disguise. Disclosing such transactions on a gift tax return means that the IRS has only three years to challenge the value.

If you file a federal gift tax return, you must use Form 709 and file by April 15 of the year following the year in which the gift was made.

The federal gift tax rules are complex. If you believe you have made gifts that might be subject to gift tax, you should consult an experienced tax specialist. Check with your state about its own rules regarding gifts, too.

Do I have to accept a bequest I don’t want?

No, you don’t. A bequest is a gift left to you in a decedent’s will. You may not want the gift for a variety of reasons. For example, it may be a burden on you, or it may result in adverse tax consequences for you. Whatever your reason for not wanting the bequest, you can refuse it by disclaiming it. The bequest then goes to the recipient who is next in line under the will. But if you just say “No, thanks” to the bequest, you may be seen by the IRS as making a gift to the next recipient! This could cause federal and state gift tax consequences to you. To avoid these consequences, you must refuse the bequest by making a valid disclaimer.

You must satisfy the following requirements for a disclaimer to be valid for federal gift tax purposes:

  • Your refusal must be irrevocable and unqualified.
  • The refusal must be in writing and signed.
  • The disclaimer must be received by the decedent’s personal representative no later than nine months from the date of the decedent’s death.
  • You must disclaim before receiving any benefit or interest in the bequest.
  • The disclaimed bequest must pass to the next recipient without any direction from you.
  • The disclaimer must be valid under state law. Check with your state to determine the requirements for a valid disclaimer.

What makes up my taxable estate?

Your gross estate for federal estate tax purposes includes:

  • All property that you own at death (e.g., real estate, investments, business interests, personal property, mortgages held by you)
  • Property you have given away while retaining a lifetime interest in the income from the property, the use and enjoyment of the property, or the right to determine who ultimately receives the property
  • Gifts that don’t take effect until you die
  • Property that you own jointly with another person except to the extent the other party contributed to the purchase price of the property
  • Property over which you possess a general power to appoint the property to yourself or others
  • Life insurance policies owned by you or in which you retained the right to change the beneficiary, cancel the policy, or make policy loans
  • Your one-half interest in community property
  • Annuities, pensions, and profit-sharing plans

From your total gross estate, your estate may take deductions for funeral expenses, administration expenses (e.g., executor’s fees, court costs, attorney’s fees, appraiser’s fees), certain debts and income taxes, state death taxes paid, and property left to your U.S. citizen spouse or to qualified charities.

The net amount may be subject to estate taxes. However, the amount of taxes payable on your taxable estate may be reduced by the unified credit and a credit for foreign death taxes.

What is a family limited partnership, and will it help reduce estate taxes?

A family limited partnership (FLP) is a partnership created and governed by state law and generally comprises two or more family members. As a limited partnership, there are two classes of ownership: the general partner(s) and the limited partner(s). The general partner(s) has control over the day-to-day operations of the business and is personally responsible for the debts that the partnership incurs. The limited partner(s) is not involved in the operation of the business. Also, the liability of the limited partner(s) for partnership debts is limited to the amount of capital contributed.

An FLP can be a powerful estate planning tool that may (1) help reduce income and transfer taxes, (2) allow you to transfer an ownership interest to other family members while letting you keep control of the business, (3) help ensure continued family ownership of the business, and (4) provide liability protection for the limited partner(s).

An FLP is often formed by a member(s) of the senior generation who transfers existing business and income-producing assets to the partnership in exchange for both general and limited partnership interests. Some or all of the limited partnership interests are then gifted to the junior generation. The general partner(s) need not own a majority of the partnership interests. In fact, the general partner(s) can own only 1 or 2 percent of the partnership, with the remaining interests owned by the limited partner(s).

There are several advantages to organizing your business as an FLP:

  • Limited partnership interests that are gifted to other family members are generally valued at less than the full fair market value of the underlying assets. That is, reasonable discounts to the value of the limited partnership interests are permitted for lack of marketability and lack of control. This means that by gifting the assets via a limited partnership interest instead of an outright transfer of the business assets themselves, you may be saving gift and estate taxes.
  • At death, only the value of your ownership interest in the partnership will be included in your gross estate.
  • The use of the partnership entity allows you to shift some of the business income and future appreciation of the business assets to other members of your family.
  • You maintain management control of the business while transferring limited ownership of the business to family members.
  • Restrictions within the partnership agreement limiting the transfer of the partnership interests may help ensure continuous family ownership of the business.

The death benefit from insurance on my life will be paid to an irrevocable life insurance trust (ILIT). What if those funds are needed to pay my estate taxes?

Life insurance death proceeds paid to a valid ILIT may escape estate taxation in your estate as long as the trust owns the policy and you haven’t retained any incidents of ownership in the policy, such as the right to change the beneficiary. Typically, the terms of the ILIT provide that the insurance proceeds be distributed from the trust to your beneficiaries in accordance with your wishes, which are spelled out in the trust document.

Generally, life insurance is purchased within a trust to provide for your family while ensuring that the death benefit is not reduced by estate taxes. Unfortunately, to keep the death benefit from being included in your estate, you cannot require the trustee to use the proceeds to meet estate settlement costs. However, your estate may run into liquidity problems and need to have access to the cash in the ILIT to avoid having to sell assets in the estate.

There are two ways to solve this dilemma. One is to include a provision in the ILIT that permits (but does not direct) the trustee to buy estate assets. The other is to give the trustee permission (but not instructions) to loan the estate some of the proceeds.

If these techniques are used, the estate will have access to the funds it needs to meet its obligations without causing the assets in the ILIT to be included in your taxable estate.

What is the applicable exclusion amount?

The applicable exclusion amount effectively exempts a certain amount from the federal gift and estate tax. In other words, if you are a U.S. citizen or resident, you will be able to leave a certain amount of your property free from this tax.

Here is the current table:

Estates of those who die during: The applicable exclusion amount is:
2016 $5,450,000 plus any deceased spousal unused exclusion amount
2017 $5,490,000 plus any deceased spousal unused exclusion amount
2018 $11,200,000* plus any deceased spousal unused exclusion amount
*2018 amount may be adjusted by the IRS. After 2025, the amount is scheduled to be cut by about one-half.

Generally, any portion of the applicable exclusion amount used for gift tax purposes effectively reduces the applicable exclusion amount that will be available for estate tax purposes.

It is especially important for spouses to understand the applicable exclusion amount. For 2011 and later years, the applicable exclusion amount is portable. That means that each spouse is entitled to an applicable exclusion amount (referred to in this context as the basic exclusion amount). If the estate of the first spouse to die does not use all of its applicable exclusion amount, the executor can elect to transfer the unused portion to the surviving spouse. The surviving spouse’s estate can then add this unused portion to its own basic exclusion amount. The sum is referred to as the applicable exclusion amount. So, for example, say that the husband dies in 2011 and his estate uses $3 million of its basic exclusion amount, and the executor of the husband’s estate elects to transfer the balance of $2 million to the wife. The wife dies in 2018. Her estate is entitled to an applicable exclusion amount of $13,200,000 (her own basic exclusion amount of $11,200,000 plus her husband’s unused portion of $2 million).

How will estate taxes be paid if I leave no provision in my will?

The IRS places an automatic lien against your estate for any estate taxes that may be due. If your will leaves no specific provision about how these taxes are to be paid, state law generally controls how the burden of paying the taxes will be distributed among your beneficiaries. As a result, your beneficiaries may end up paying taxes out of their own pockets or selling some of the property that you left to them to meet this obligation.

Most state apportionment statutes impose the tax payment liability only on those assets that contributed to the tax imposed. Thus, your spouse will not be responsible for any taxes if he or she received all your property free of tax under the unlimited marital deduction. Likewise, charities that received property free of tax under the charitable deduction will not have to carry any of the tax burden.

In addition, most state apportionment acts divide up the tax burden on a prorated basis. For example, if your taxable estate was evenly split between two beneficiaries, each beneficiary would be responsible for 50 percent (one-half) of the taxes due. Beneficiaries who received the taxable portion of your estate must pay their share of the taxes owed when they are due–generally nine months from the date of your death. They may have to sell their inheritances to get the cash. If their inheritances are already spent, however, they still must pay the taxes, and the IRS can go after any of their other assets to satisfy the lien.

What is a Crummey power?

A Crummey power is a provision contained in certain irrevocable trusts that permits specified trust beneficiaries to withdraw gifts you make to the trust for a limited period of time. The provision allows gifts to the trust to qualify for the federal annual gift tax exclusion. The exclusion effectively exempts annual gifts up to $15,000 (in 2018, 14,000 in 2017) per trust beneficiary from the federal gift tax. Over your lifetime, regular gifting to the trust may reduce the size of your gross estate. Without a Crummey power, all gifts you make to your irrevocable trust will be subject to gift tax.

Here’s how it works. You transfer funds to an irrevocable trust containing a Crummey power. The trustee must then give adequate notice to each beneficiary stating that the funds can be withdrawn. The time frame for withdrawal should be reasonable (e.g., 30 days). Whether or not the beneficiaries exercise their right, the gift still qualifies for the annual gift tax exclusion. If the withdrawal right is not exercised, the trustee may use these gifts for other purposes permitted under your trust document, such as investing the money or making premium payments on a life insurance policy that the trust owns.

Crummey powers are commonly used in irrevocable trusts. But for them to succeed in qualifying gifts for the annual exclusion, the rules must be followed carefully. That is, the beneficiaries must receive prompt notice that a gift has been made and be given reasonable time and opportunity to request a withdrawal. Consult your estate planner or tax advisor to learn more about this complex tool.

How often do I need to review my estate plan?

Although there’s no hard-and-fast rule about when you should review your estate plan, the following suggestions may be of some help:

  • You should review your estate plan immediately after a major life event
  • You’ll probably want to do a quick review each year because changes in the economy and in the tax code often occur on a yearly basis
  • You’ll want to do a more thorough review every five years

Reviewing your estate plan will not only give you peace of mind, but will also alert you to any other changes that need to be addressed.

There will be times when you’ll need to make changes to your plan to ensure that it still meets all of your goals. For example, an executor, trustee, or guardian may change his or her mind about serving in that capacity, and you’ll need to name someone else.

Other reasons you should do a periodic review include:

  • There has been a change in your marital status (many states have laws that revoke part or all of your will if you marry or get divorced) or that of your children or grandchildren
  • There has been an addition to your family through birth, adoption, or marriage (stepchildren)
  • Your spouse or a family member has died, has become ill, or is incapacitated
  • Your spouse, your parents, or other family member has become dependent on you
  • There has been a substantial change in the value of your assets or in your plans for their use
  • You have received a sizable inheritance or gift
  • Your income level or requirements have changed
  • You are retiring
  • You have made a change in your estate plan (e.g., you created a trust or executed a codicil to your will)

Is it possible to name a charity as the beneficiary of my life insurance policy?

Yes, you can name a charity as your beneficiary. After you die, the charity will receive the death benefits from your life insurance policy just as any other beneficiary would.

You won’t have to worry about gift taxes, and although the policy proceeds will be included in your taxable estate, you’ll get an offsetting estate tax charitable deduction. On the downside, though, you won’t be able to deduct your insurance premium payments (as a charitable income tax deduction) on your federal income tax return.

There are other ways you can help your favorite charity while still deriving an income tax benefit. For example, if you own an existing insurance policy on your life, you can donate the policy to a charity. You’d then make income-tax-deductible cash gifts to the charity, which the charity would use to continue the premium payments on the policy. You’d be eligible to claim an income tax deduction in the year of donation, for either the fair market value of the policy or your adjusted tax basis in it, whichever is less.

For information about other ways to help a charity while lowering your income taxes, speak with an attorney or tax advisor.

What is funeral insurance, and do I need it?

Funeral insurance is a way to spare your loved ones the financial burden of having to pay for your final expenses. However, not all funeral insurance policies are alike. Different types of funeral insurance are available, and policies can vary widely. In general, they work by you purchasing a policy that will cover your final expenses, usually a few thousand dollars. You pay the premiums (either in a lump sum or spread out over a certain number of years), and when you die, the death benefit is used to pay for your funeral.

Funeral insurance policies are often sold through a funeral director acting as an agent on behalf of an insurance company. However, some of the larger national funeral home chains are beginning to sell funeral insurance.

If you’re concerned that funds won’t be available to pay for your funeral costs, or that these costs would be a large burden to your family, a funeral insurance policy might be appropriate for you. However, before you decide, explore the possibility of purchasing a small term life insurance policy as an alternative. If you have sufficient assets to pay for your own funeral, you probably don’t need funeral insurance.

Currently, there is no federal law regulating funeral insurance, and state regulations vary. And many individuals–especially the elderly–have been victimized by funeral insurance scams. As a result, it may be wise to consult a professional advisor to find out if funeral insurance fits into your overall estate plan.

When I die, is my beneficiary required to take a lump-sum payment of my life insurance death benefit?

It isn’t necessary for your beneficiary to take a lump sum, although many people prefer that option. Many settlement options for life insurance proceeds exist. Some of the more common options are as follows:

  • Interest option, where the life insurance company retains the proceeds and pays only the interest earned to the beneficiary at regular intervals
  • Fixed-period option, where the company pays the proceeds together with the interest at regular intervals for a fixed period of time
  • Fixed-amount option, where benefits are paid in fixed amounts at regular intervals until the proceeds and the interest are depleted
  • Annuity option, where the proceeds and the interest are used to provide regular payments to the beneficiary for the remainder of his or her life
  • Lump sum, where the life insurance company pays the total amount of the benefit in one single payment at the death of the insured

Your beneficiary may have flexibility within the options, as well. For example, if your beneficiary chooses the fixed-amount option, your beneficiary might elect to receive $250 per month for the first five years, and then $500 per month until the proceeds are depleted. Your beneficiary may also choose a combination of options. For example, your beneficiary could receive the interest option until retirement and then receive the remainder of the benefit as an annuity.

Your company will allow your beneficiary to choose how the proceeds are received when they become payable. If you think it’s necessary, you may choose how the beneficiary will receive the proceeds when you purchase the policy. Consult your financial professional to see what choices your life insurance company offers.