COMMONLY ASKED QUESTIONS
1. What is the difference between a will and trust?
A will is a written instruction explaining one’s wishes upon death. In contrasts, a Revocable Living Trust “Living Trust” (or otherwise called a trust) is a written agreement that operates during your life and upon your death. There are several differences:
Will
• Simple and easy to create;
• Must go through probate court, which is supervised by a judge;
• Guardianship provision can describe who shall be your guardian for your children;
• Inheritances are subject to divorce or creditor proceedings for your beneficiaries;
• Public information, which means anybody can know what you inherited.
Trust
• Avoids the pain and expense of probate court;
• Inheritances are not subject to divorce or creditor proceedings;
• Private proceeding where only the beneficiaries know the written details;
• Can require inheritances to be disbursed at different times or have strings attached to an inheritance such as go to college;
• Operational during your lifetime and avoids guardianship court, which reduces headaches, significant expense, and hassle associated with court proceedings.
2. What is probate court?
Probate court is the court where a person’s assets are distributed. Most people falsely assume that a will does not go through probate court. A will must undergo probate court and probate court invites conflict due to mailing out certified notices to potential beneficiaries. This creates conflict and family feuds. If you do not have anything in writing, this is called intestate succession, which simply means that the State distributes your assets according to the state succession formula. There are no exceptions to the succession formula.
3. Why do most people have to go through probate court?
Most people go through probate court because they own real estate. By law, real estate cannot be sold without providing proper legal title. Many heirs do not realize that have to go through probate court until they get ready to sell their family home. Probate court can be expensive because if there is more than one heir, the family is required to have an attorney, pay court costs, and may have to pay an annual surety insurance bond.
4. What typically happens to a husband and wife that own property?
Generally, the surviving spouse inherits one hundred (100) percent of the house after their spouse dies. Thus, the surviving spouse does not go through probate court because they have proper title. However, upon the surviving spouse’s death, probate court becomes necessary for most people.
5. What if we add somebody’s name to our title, will this avoid probate court?
No, adding somebody else’s name, which is recommended by many attorneys are not a good strategy to avoid probate court. In fact, adding somebody else’s name could cause you problems because their creditors could sell your home at public auction to pay off any credit card, medical bills, or other bills that a person has. Thus, if a person gets sued and loses, their creditors may force you to sell your home to satisfy their debt. Additionally, adding another’s name to your title increases your risks of probate court because if any title holder dies or becomes incapacitated, this could cause you to undergo probate court prior to selling your home.
6. Why do most husband and wives have their property titled in the wrong manner?
In today’s economy, people are faced with increasing debts, which they cannot handle. Most husbands and wife’s title their home where if one spouse dies, than the other spouse automatically inherits the home. This is called Joint Tenants with Right of Survivorship. The benefit is avoiding probate court. However, if one spouse has creditor problems such as business debts, credit cards, medical bills, or any debt related debts than your creditors can force the public sale of your home despite being current with your mortgage. The main point is title your home as Tenancy by Entirety. With Tenancy by Entirety, one spouse can have a judgment against them and the creditor cannot force the husband or wife to sell their home. Please note that you must have a will or trust to distribute your property upon your death, or you will go through probate court. There are other strategies to titling your home to avoid probate court as well that are beyond these questions.
7. Do you have to undergo probate court for each state where you own real estate or property?
Generally, you must undergo probate proceedings wherever you own property such as real estate. For example, Bob and Sue own a house in the Western Suburbs and have an investment or vacation property in Wisconsin. In this example, Bob and Sue must undergo probate court in Wisconsin and Illinois if they do not have a proper succession plan.
8. Can a Will or Trust Avoid My In-laws From Gaining Access to My Inheritance?
An inheritance distributed by a will is subject to your children’s creditors including a divorce spouse. A creditor also could involve a business dispute, credit card companies, hospital or medical collections, or any other debts. A trust has a spendthrift provision, which prevents a beneficiary’s inheritance being subject to a divorce or credit proceeding.
9. How Much Will An Estate Plan Costs Me?
Our law office cannot access your specific circumstance without a consultation asking you about your wishes or concerns. Generally, most families have issues that must be addressed to provide a smooth transition upon death or incapacity. As a rule, an estate planning cost a minimum of $500 to $3,000. To receive a free initial consultation at your home, please call Robertson Law Group, LLC at 630-364-2318 or 312-498-6080.
Showing posts with label Trusts and Wills. Show all posts
Showing posts with label Trusts and Wills. Show all posts
Monday, November 23, 2009
Sunday, June 7, 2009
What are Estate Taxes and How Do I Avoid Them?
What are Estate Taxes and How Do I Avoid Them?
In 2001, the Economic Growth and Tax Relief Reconciliation Act was enacted and included sweeping changes to how estate taxes are determined and calculated. The Act also repeals federal estate taxes in 2010. However, there is a Sunset Provision, which means that all of the estate and gift tax laws revert back to the law in effect prior to the passage of the Act—which would be the laws that were in existence in 2001. This “sunset” provision is part of Congress’ procedures and budgetary estimates.
Federal estate taxes are expensive in 2004 they start at 45% and quickly go up to 55%. And they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, assets often have to be liquidated. But estate taxes can be substantially reduced or even eliminated-if you plan ahead. If your estate exceeds the estate exemption amount set by Congress below, your family must pay estate taxes within 9 months of your death.
Estate Exemption and Tax Rates
Calendar Year Estate Exemption Amount Highest Tax Estate Rate________
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
2010 $0 n/a
2011 $1,000,000 55%
Unlike a will, a Trust agreement has provisions, which reduce federal and state estate taxes. A Trust agreement may take advantage of federal laws, which allow the separation of one’s estate into Marital and Family Trusts or sometimes referred to as Credit Shelter Trusts or A/B Trusts. The purpose of the Marital Trust is to maximize the surviving spouse’s estate tax exemption. Any amount of money over the estate tax emption should go into the Family Trust and be spent first to reduce or eliminate the likelihood of paying estate taxes (see Attorney for explanation). Upon the surviving spouse’s death, the marital trust is transferred to the Family Trust. The purpose of two Trusts: Marital and Family Trust is to reduce the likelihood of a federal and state estate tax.
HOW IS MY NET WORTH DETERMINED?
Simply put, you add your total assets minus your liabilities to equal your net worth. To get your total net worth, you add all of your assets together such as your home, business interests, bank accounts, investments (CDs, Stocks, etc), personal property, retirement plans, stock options, and death benefits from your life insurance to equal your total net value. Here is a form to assist you entitled “Calculating Your Net Worth”.
Calculating Your Net Worth
Inventory
Assets
Stocks, bonds, mutual fund $___________________
Bank accounts $___________________
Retirement accounts [IRAs, 401(k)s, etc.] $___________________
Life insurance proceeds $___________________
Annuities $___________________
Real Estate $___________________
Personal property (jewelery, belongings, etc.) $___________________
Automobiles and other vehicles $___________________
Business Interests $___________________
Other/miscellaneous $___________________
Total Assets $___________________
Liabilities
Residential mortgages $___________________
Personal debts (loans, credit cards, etc.) $__________________
Estate settlement costs (3-8% of estate) $___________________
Business-related debt $___________________
Total Liabilities $___________________
Net Worth $___________________
(total assets minus total liabilities)
HOW DO I REMOVE ASSETS FROM MY ESTATE?
A. Tax Free Gifts
First, you may want to be charitable with some of your assets while you are alive (if you can afford it). You likely already know who you want to be the beneficiary of your assets upon your death. You could give tax free gifts to your children, grandchildren or even your favorite charity. Tax free gifts are easy and cost effective. Each person can give away $12,000 per year ($24,000 if married) to as many people as you wish. Gifting is tied to inflation and may increase every couple years.
For example, if you have three children and six grandchildren and you give the maximum amount of gifts allowed per beneficiary each year, your estate will be reduced by $108,000 per year. If your spouse joins in and makes gifts with you, your estate will be diminished by $216,000 per year. With estate taxes around 50%, this could save your estate over $100,000 in estate taxes per year. Additionally, an individual (or married couple) may make unlimited gifts to charities, educational institutions, and healthcare providers if the gifts are made in the correct manner. Why should you begin a gifting program? A simple gifting strategy may save your estate thousands to millions of dollars in estate taxes. Before you start a gifting program, you should consult an estate planning attorney.
B. Irrevocable Life Insurance Trusts (ILITS)
An irrevocable Life Insurance Trust (“hereinafter referred to as ILIT”) are an irrevocable trust that cannot be amended, revoked, or altered upon formation. For most families, death benefits from life insurance proceeds are a major asset of their total net worth. Removing life insurance proceeds from one’s estate may save some families thousands to millions of dollars. For instance, Dan Smith (hypo only) has a total net worth of $4 million with $2 million dollars in life insurance proceeds in 2004. In 2004, the estate tax exemption amount is $ 2 million.
Therefore, anything over $2 million will be taxed at a rate of approximately 50 percent. By setting up an ILIT and removing $ 2 million dollars of life insurance from Mr Smith’s estate, his estate is getting an estate tax savings of around $1 million. Additionally, ILIT may be an inexpensive way to pay estate taxes without liquidating any non-liquid assets such as a business or real estate. Please note that transfers within 3 years of your death, may be disregarded by the IRS if not planned correctly.
C. Equalize Both Spouses’ Estates
A great way to reduce estate taxes is to maximize the marital exemption provided by the IRS. With many families, one spouse earns substantially more than the other and owns the business in their individual name (in an LLC or Corporation typically). For example, a doctor earns $400,000 per year and owns his/her medical practice worth $2 million (according to IRS). In this case, one spouse may have a disproportionate amount of the net worth of the family due to the ownership of the medical practice. Therefore, an effective estate strategy is to equalize both spouses’ estates, so that each spouse uses the maximum amount of estate exemption allowed by the IRS. Please see an attorney for a better explanation.
C. Qualified Personal Residence Trust
A qualified personal residence trust (QPRT) is an irrevocable trust that removes a home from one’s estate at a discounted value while remaining to live in the property. The purpose of a QPRT is to remove assets from one’s estate and reduce the amount of estate taxes due upon death while enjoying the benefits of living in their home.
D. Family Limited Partnership/LLC
A family limited partnership or limited liability corporation is an estate tax and asset protection strategy designed to minimize one’s estate value. Simply put, a family limited partnership/LLC is designed for business, farm, real estate, or stock assets thereby saving thousands to millions of dollars in estate taxes. A family limited partnership/LLC also allows you to transfer appreciating assets to your children, reducing your gross taxable estate. If planned correctly, the general partner (senior family member with high net worth) can keep full control of the family limited partnership/LLC.
E. Charitable Trust
A charitable trust (CT) converts appreciated assets into lifetime income with no capital gains tax and saves estate (assets out of your estate) and income taxes (by creating a charitable deduction). Upon your death, the charity of your choice receives trust assets.
Sean L. Robertson is a Wealth Preservation Attorney and Principal of Robertson Law Group, LLC. Sean concentrates in Wills and Trusts, Advanced Estate Planning, Probate and Guardianship, and Asset Protection law. Sean can be reached at 312-498-6080 or RobertsonLawGroup@gmail.com.
In 2001, the Economic Growth and Tax Relief Reconciliation Act was enacted and included sweeping changes to how estate taxes are determined and calculated. The Act also repeals federal estate taxes in 2010. However, there is a Sunset Provision, which means that all of the estate and gift tax laws revert back to the law in effect prior to the passage of the Act—which would be the laws that were in existence in 2001. This “sunset” provision is part of Congress’ procedures and budgetary estimates.
Federal estate taxes are expensive in 2004 they start at 45% and quickly go up to 55%. And they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, assets often have to be liquidated. But estate taxes can be substantially reduced or even eliminated-if you plan ahead. If your estate exceeds the estate exemption amount set by Congress below, your family must pay estate taxes within 9 months of your death.
Estate Exemption and Tax Rates
Calendar Year Estate Exemption Amount Highest Tax Estate Rate________
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
2010 $0 n/a
2011 $1,000,000 55%
Unlike a will, a Trust agreement has provisions, which reduce federal and state estate taxes. A Trust agreement may take advantage of federal laws, which allow the separation of one’s estate into Marital and Family Trusts or sometimes referred to as Credit Shelter Trusts or A/B Trusts. The purpose of the Marital Trust is to maximize the surviving spouse’s estate tax exemption. Any amount of money over the estate tax emption should go into the Family Trust and be spent first to reduce or eliminate the likelihood of paying estate taxes (see Attorney for explanation). Upon the surviving spouse’s death, the marital trust is transferred to the Family Trust. The purpose of two Trusts: Marital and Family Trust is to reduce the likelihood of a federal and state estate tax.
HOW IS MY NET WORTH DETERMINED?
Simply put, you add your total assets minus your liabilities to equal your net worth. To get your total net worth, you add all of your assets together such as your home, business interests, bank accounts, investments (CDs, Stocks, etc), personal property, retirement plans, stock options, and death benefits from your life insurance to equal your total net value. Here is a form to assist you entitled “Calculating Your Net Worth”.
Calculating Your Net Worth
Inventory
Assets
Stocks, bonds, mutual fund $___________________
Bank accounts $___________________
Retirement accounts [IRAs, 401(k)s, etc.] $___________________
Life insurance proceeds $___________________
Annuities $___________________
Real Estate $___________________
Personal property (jewelery, belongings, etc.) $___________________
Automobiles and other vehicles $___________________
Business Interests $___________________
Other/miscellaneous $___________________
Total Assets $___________________
Liabilities
Residential mortgages $___________________
Personal debts (loans, credit cards, etc.) $__________________
Estate settlement costs (3-8% of estate) $___________________
Business-related debt $___________________
Total Liabilities $___________________
Net Worth $___________________
(total assets minus total liabilities)
HOW DO I REMOVE ASSETS FROM MY ESTATE?
A. Tax Free Gifts
First, you may want to be charitable with some of your assets while you are alive (if you can afford it). You likely already know who you want to be the beneficiary of your assets upon your death. You could give tax free gifts to your children, grandchildren or even your favorite charity. Tax free gifts are easy and cost effective. Each person can give away $12,000 per year ($24,000 if married) to as many people as you wish. Gifting is tied to inflation and may increase every couple years.
For example, if you have three children and six grandchildren and you give the maximum amount of gifts allowed per beneficiary each year, your estate will be reduced by $108,000 per year. If your spouse joins in and makes gifts with you, your estate will be diminished by $216,000 per year. With estate taxes around 50%, this could save your estate over $100,000 in estate taxes per year. Additionally, an individual (or married couple) may make unlimited gifts to charities, educational institutions, and healthcare providers if the gifts are made in the correct manner. Why should you begin a gifting program? A simple gifting strategy may save your estate thousands to millions of dollars in estate taxes. Before you start a gifting program, you should consult an estate planning attorney.
B. Irrevocable Life Insurance Trusts (ILITS)
An irrevocable Life Insurance Trust (“hereinafter referred to as ILIT”) are an irrevocable trust that cannot be amended, revoked, or altered upon formation. For most families, death benefits from life insurance proceeds are a major asset of their total net worth. Removing life insurance proceeds from one’s estate may save some families thousands to millions of dollars. For instance, Dan Smith (hypo only) has a total net worth of $4 million with $2 million dollars in life insurance proceeds in 2004. In 2004, the estate tax exemption amount is $ 2 million.
Therefore, anything over $2 million will be taxed at a rate of approximately 50 percent. By setting up an ILIT and removing $ 2 million dollars of life insurance from Mr Smith’s estate, his estate is getting an estate tax savings of around $1 million. Additionally, ILIT may be an inexpensive way to pay estate taxes without liquidating any non-liquid assets such as a business or real estate. Please note that transfers within 3 years of your death, may be disregarded by the IRS if not planned correctly.
C. Equalize Both Spouses’ Estates
A great way to reduce estate taxes is to maximize the marital exemption provided by the IRS. With many families, one spouse earns substantially more than the other and owns the business in their individual name (in an LLC or Corporation typically). For example, a doctor earns $400,000 per year and owns his/her medical practice worth $2 million (according to IRS). In this case, one spouse may have a disproportionate amount of the net worth of the family due to the ownership of the medical practice. Therefore, an effective estate strategy is to equalize both spouses’ estates, so that each spouse uses the maximum amount of estate exemption allowed by the IRS. Please see an attorney for a better explanation.
C. Qualified Personal Residence Trust
A qualified personal residence trust (QPRT) is an irrevocable trust that removes a home from one’s estate at a discounted value while remaining to live in the property. The purpose of a QPRT is to remove assets from one’s estate and reduce the amount of estate taxes due upon death while enjoying the benefits of living in their home.
D. Family Limited Partnership/LLC
A family limited partnership or limited liability corporation is an estate tax and asset protection strategy designed to minimize one’s estate value. Simply put, a family limited partnership/LLC is designed for business, farm, real estate, or stock assets thereby saving thousands to millions of dollars in estate taxes. A family limited partnership/LLC also allows you to transfer appreciating assets to your children, reducing your gross taxable estate. If planned correctly, the general partner (senior family member with high net worth) can keep full control of the family limited partnership/LLC.
E. Charitable Trust
A charitable trust (CT) converts appreciated assets into lifetime income with no capital gains tax and saves estate (assets out of your estate) and income taxes (by creating a charitable deduction). Upon your death, the charity of your choice receives trust assets.
Sean L. Robertson is a Wealth Preservation Attorney and Principal of Robertson Law Group, LLC. Sean concentrates in Wills and Trusts, Advanced Estate Planning, Probate and Guardianship, and Asset Protection law. Sean can be reached at 312-498-6080 or RobertsonLawGroup@gmail.com.
Subscribe to:
Posts (Atom)