Wills, Trusts, and Estate Planning


Warning: The information provided herein is for general background purposes only. You should consult an attorney for advice concerning your circumstances.

  • Administration of Trusts
  • Preparation of Trusts
  • Powers of Attorney
  • Wills
  • Advance Health Care Directives

Why Should I Create A Trust?

As a result of recent changes in the federal estate tax law that took effect January 1, 2013, most families will not incur a federal estate tax at either the death of the first spouse or the second spouse to die.  However, the importance of declaring a trust while an individual or both spouses are mentally competent could hardly be overstated.  Often a person’s mental competence decreases gradually with age.   When an individual reaches the point at which he or she cannot understand his or her business and financial affairs, unless the individual has either executed a durable power of attorney or created a trust, it may be necessary to petition a court for a conservatorship order.  Conservatorships are expensive, time consuming, and usually something to be avoided.  A power of attorney might have some benefits during the lifetime of the principal, however the power of attorney ceases to have any effect once a person becomes deceased.

By utilizing a trust, the settlor of the trust gives written detailed instructions to a trustee concerning management of the financial affairs of the trust during the settlor’s lifetime and the disposition of assets after the settlor’s death.  Trusts are often established jointly by husband and wife and provide that both spouses act as joint co-trustees.  In the event of the death or mental incapacity of one spouse, the other spouse usually acts as sole trustee.  Thereafter, upon the mental incompetence or death of the second spouse, the trust instrument may appoint another person, perhaps an adult child or two adult children acting as co-trustees, to assume the office of trustee, pay final expenses, and distribute assets in the manner directed by the settlors.

Is tax due if I transfer property by gift?

At least three different types of taxes can governor the transfer of property. While most people are familiar with the concept that income tax may be owed for capital gains resulting from the sale of property, the transfer of property by gift is governed by the federal gift tax laws, and the transfer of property at death is governed by the federal estate tax laws.

The gift tax law contains an annual exclusion, and the exclusion amount varies from year to year. As of the year 2012, an individual may gift up to $13,000 per donee, per year, free of gift taxes. Hence, a husband and wife acting together can gift up to $26,000 per year to a child without incurring gift tax liability.

Gifts that exceed the annual gift tax exclusion require that a federal gift tax return be prepared. A lifetime exclusion is available as against the gift tax, the amount of which Congress changes from time to time.

Is estate tax due for transfers by a Will or a Trust that result at death?

A federal estate tax applies to transfers by either Will or Trust that occur by reason of death. Transfers from a deceased spouse to a surviving spouse usually qualify for an unlimited marital deduction as long as the transfer is either outright or contains only the limited restrictions permitted by the federal estate tax Law.

Often the spouses have children from different relationships. In that circumstance, the spouses can make use of the federal estate tax provisions that allow the spouses to create a Qualified Terminable Interest Property Trust (known as a “QTIP” trust) and take advantage of the marital deduction for transfers to the surviving spouse, and, at the same time, lock in the beneficiaries that will receive assets after the death of the second spouse. A QTIP trust can provide the surviving spouse with an income interest for life, and after the death of the surviving spouse, the property in the QTIP trust can pass to designated beneficiaries, such as the children of the two settlors.

Besides the marital deduction, each person is entitled to an exemption to pass property to third parties at death free of estate tax. The amount of the exemption changes from time to time by act of Congress.

One of the primary functions of estate planning is for a married couple to declare a trust that allows each spouse at death to take advantage of the full amount of the applicable estate tax exemption. For example, if the spouses have a combined estate of $2,000,000, and if the estate tax applicable exemption in the year of death is $1,000,000, then, without a trust, if husband dies first, his half of the estate passes tax free to wife by reason of the marital deduction. But when the wife dies, there is $2,000,000 in her estate, and she has only a $1,000,000 exemption, and the other $1,000,000 in her estate is subject to federal estate tax. If the couple had established a trust prior to the first death, then upon the death of the husband, the trust document would provide that his part of the estate fund a bypass trust with income for life to wife, thereby utilizing his $1,000,000 exemption. Upon the death of the wife, only her one-half ($1,000,000) would be in her estate, and her estate would pay no tax. In that manner, the parties could make use of two estate tax exemptions, and pass $2,000,000 to their children with no estate taxes.

What is a trust?

A trust is a declaration by a person known as the settlor stating how his or her property should be administered in the event of a disability, illness, or death. The person named to administer the trust is known as the trustee. Often, the settlor acts as the trustee, and when a triggering event occurs, such as disability or death, a successor trustee is named to continue the administration of the trust for the benefit of a surviving spouse or children.

What are the advantages of declaring a trust?

A trust allows another person, known as the trustee, to control property and distribute funds when the settlor is not personally able to do so as a result of disability, incapacity, or death. A trust usually avoids the necessity of a probate case if the trust is properly prepared.

What is Asset Protection Planning?

The subject of Asset Protection Planning generally means planning ones financial affairs to protect particular assets from particular types of creditor claims. Various techniques are used depending on the client’s situation, ranging from the use of business entities (such as corporations or limited liability companies) to converting non-exempt assets to assets that may be exempt from execution for the particular type of creditor claim.

What is a Will?

A Will is a document that must be executed with certain legal formalities, and it sets forth the beneficiaries of a decedent’s estate. A Will takes effect at death. Wills are the subject of a court supervised probate court proceeding.

What is Estate Planning?

Estate Planning is the practice of planning for the disability or death of the client and the succession of property and business interests. Estate Planning includes the preparation of documents such as a trust, Power of Attorney, and an Advance Health Care Directive. Estate Planning also concerns the disposition of retirement assets, such as IRA and pension plan accounts. Estate Planning addresses the issue of minimizing the Federal Estate Tax. Estate Planning can protect the surviving spouse and the children of the parties, including children by prior relationships of each party. Careful drafting is required to meet the requirements of each client. There is not an all-purpose estate plan or all-purpose trust for all persons.

What is an Advance Health Care Directive?

An Advance Health Care Directive allows a person, known as the agent, to make healthcare decisions for another person, known as the principal, if the principal is unable to do so due to illness or incapacity. An Advance Health Care Directive can describe the type and manner of medical care the principal wishes if he/she cannot make decisions for himself/herself.

What is a power of attorney?

A power of attorney is a document by which one person, known as the principal, grants to another person, referred to as the agent, the power to make decisions and enter contracts on behalf of the principal. A power of attorney can include provisions that make the power of attorney durable. In other words, the power of attorney will continue to be effective even if the principal becomes mentally incompetent. An advantage of a durable power of attorney is that it may avoid the necessity of a conservatorship for a person who has become mentally incompetent. A power of attorney can be drafted so that it is either narrow or broad in scope. For example, the power of attorney may only give the agent a power to deal with a particular business or a particular transaction, or it may be limited to contracts concerning a particular parcel of real property or particular items of personal property. The power of attorney can be drafted with broad provisions allowing the agent to buy and sell securities, to purchase or sell real estate, or engage in almost any other transaction on behalf of the principal. There are other statutes governing the creation of a power of attorney for healthcare decisions.

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