The following documents are the foundation of a good basic estate plan: will, durable financial power of attorney, and advance health care directive (which includes information included in a living will).
A will is used to set out the terms of how your assets are distributed upon your death. Generally, couples leave all of their assets to the surviving spouse and then to their children. In Georgia, if you die without a will, state law designates that your spouse will receive a one-third share if you have at least two children, with the two children receiving a one-third share each. If you have minor children, your will is the only place you can designate a guardian if both parents die. If you are married and own property in excess of $12 million (including the face value of any life insurance), you need a Will with tax planning to ensure that the IRS does not take more than its fair share. Even if your estate is less than $12 million, you might need tax planning. Of course, anything jointly held, such as a house if titled correctly, will go to the other joint owner. Also, assets with a beneficiary designation, like life insurance or retirement benefits, are distributed outside of probate and directly to the designated beneficiary.
Durable Financial Power of Attorney
Powers of attorney go by many different names in the estate planning context. A durable financial power of attorney is used to designate someone to act on your behalf regarding your financial affairs in the event of your incapacity. Ensuring that a financial power of attorney is included in your estate plan could eliminate the need to request that a probate court appoint a Conservator of your property if you are incapacitated. Conservatorships should generally be avoided due to the expense and burden of having the probate court monitor the activities of the Conservator. Georgia enacted a law in 2017 providing for a statutory form, so if you do not have an updated document, it might be time to revise it.
Georgia Advance Directive for Health Care
There are many different forms of Health Care Directives or Living Wills. The Georgia Advance Directive for Health Care is a document which allows you to appoint someone to make health care decisions for you when you are unable to verbalize your wishes. It is a detailed document which enables you to make choices regarding specific types of health care you are willing to be subjected to including blood transfusions and amputation and to state your treatment preferences if you have a terminal condition or if you are in a state of permanent unconsciousness. It is used to allow your appointed agent access to your health care information when they otherwise would not be allowed that information pursuant to the privacy protections required by the Health Insurance Portability and Accountability Act (HIPAA). You may also use this document to specify that your health care agent can make decisions for you after your death with respect to autopsy, organ donation, body donation and the final disposition of your body. With this document, you can also appoint a guardian for you in the event of permanent physical and mental incapacity. Advance health care directives are used only after the initial emergency has passed and the outlook for recovery has been established. This document is separate from a Do Not Resuscitate (DNR) Order. A DNR is issued by a physician after conferring with the patient (or family or health care agent) and is generally used when CPR would be medically futile or only temporarily successful. These documents must be formalized in the appropriate manner requiring two witnesses and in most cases a notary public. The witnesses cannot be related to you nor can they be a beneficiary under the Will.
When discussing wills and trusts, one of the most important decisions you can make is in choosing the people you will appoint to serve as fiduciaries. The following offices must be filled:
The Executor files the original will for probate in the county of residence of the deceased. The Executor is sworn by the probate judge to follow the fiduciary duties required of an executor; specifically, to follow the terms of the will. An Executor usually serves for a finite period of time until all of the property of the estate has been transferred to the beneficiaries and the estate is closed.
If a trust is created either in your will or outside of your will, a Trustee must be appointed. This person has a fiduciary duty to follow the terms of the trust as specified in the will or trust document. Services required of a Trustee vary depending on the terms of the trust, but generally, the Trustee is responsible for investing assets and paying income and principal either to or for the beneficiary’s benefit including health, education, support and various other expenses. The trust term can be the entire life of the Trustee or more usually, until your children have attained an age at which the trust requires final distribution of all of the trust assets. The Executor and Trustee are sometimes called Personal Representatives.
This is the person you appoint to care or see to the care of your minor children until they have attained age 18. The same person or several different people can fill any of the listed offices. You may also designate more than one person. If you do not want an individual to serve in the Executor or Trustee capacity, many banks have trust departments that fill these responsibilities.
The recently enacted Tax Cuts and Jobs Act significantly increased the per person exemption for estates. This means that in 2023, you may pass $12.92 million in assets estate tax free to your beneficiaries. Perhaps even more important for some married couples, the law retains a portability provision that provides for an exemption of up to $25.8 million. If one spouse dies without using up his or her federal estate tax exemption, the unused portion may be transferred to the surviving spouse if elected by the executor of the estate of the first-to-die spouse.
There are many considerations and limitations associated with planning for portability that could impact your overall estate plan. The details may or may not lead you to revise your existing plan. Here are some of the details you should consider: Portability applies only to a surviving spouse. Unused federal estate tax exemptions cannot be transferred to anyone but a surviving spouse. In the event of remarriage, while the surviving spouse may continue to take advantage of any unused exemption inherited from the original spouse so long as the new spouse is alive, if the surviving spouse also outlives his or her new spouse, the surviving spouse will then lose the exemption inherited from his or her original spouse but may inherit an additional exemption from his or her new spouse. To make the portability election, the Executor of the estate must file a timely estate tax return. What happens when assets appreciate? With traditional estate planning, the amount exempted from federal estate taxes for the first-to-die spouse is put into a trust for the benefit of the surviving spouse. The assets in this trust, no matter their amount, are outside of the surviving spouse’s estate for estate tax purposes. This means that this trust can appreciate in value to any size, and will not be subject to federal estate taxes when the surviving spouse dies. If you take advantage of the portability provision, however, any assets above $24.1 million will be subject to federal estate taxes when the surviving spouse dies. As a result, if you believe your total marital assets have the potential of appreciating past the $24.1 million threshold, then you should think about using a bypass trust.
The Use of Trusts to Save Estate Taxes and For Other Reasons
Bypass Trusts are also known as Credit Shelter Trusts. A bypass trust is used by married couples to take advantage of the estate tax exclusion amount. While portability allows for a potential $25.8 million exemption for married couples, there are still reasons to use a bypass trust: 1. The advantage of the bypass trust is that the money you leave behind can be used for your spouse during lifetime, but anything remaining is ultimately earmarked for your children. 2. Any asset held in the bypass trust is protected from the creditors of not only your spouse, but depending upon how it’s drafted, also creditors of your children.
A disclaimer trust is a flexible trust and can be very beneficial in certain circumstances. Your Will is set up to distribute everything outright to your surviving spouse, who can then choose to disclaim an amount equal to the estate exemption amount available at the time of your death. This is similar to creating a bypass trust but the decision to disclaim does not have to be made until 9 months after the date of death of the first spouse. There are specific rules that must be followed for a disclaimer to be legal, so it is very important that the Executor consult an attorney with expertise in this area of law.
A QTIP (Qualified Terminable Interest Property) Trust is often teamed with a bypass trust. For the purpose of taxes, the QTIP trust’s assets are distributed to your spouse’s estate, not yours, even though you designate who ultimately receives the trust’s assets. That is an important distinction, because generally, when you name the ultimate beneficiaries of a trust, the money must be included in your taxable estate. A QTIP trust is the exception. The benefit is that you can bequeath $12.92 million to your children, but they will not be required to pay taxes on it until your spouse dies. There is one potential cost to this benefit (depending on your situation): Your spouse must get the income generated by the trust as long as he or she is living. This setup can be really helpful if this is your second marriage and your spouse is worth either far less or far more than you are.
Requirements for Trust
For these trusts to work, each spouse must own assets in their individual name. This might require changing ownership on certain assets, such as your residence or investment accounts.
Irrevocable Life Insurance Trusts
Many clients are surprised to learn that life insurance is included in their taxable estate. Most of my clients have their spouse named as beneficiary and their children named as contingent beneficiaries. This means that the face value of the policy is included in their estate for estate tax purposes, not the cash value as believed by some of my clients. As a result, the more life insurance that is owned, the greater the taxable estate and the greater the estate taxes owed. One way to delay the estate tax is to name the surviving spouse as beneficiary of the entire estate. He or she will receive it federal estate-tax free because of the unlimited marital deduction. However, if your spouse dies before you do, your insurance will be distributed to your children and your estate could face a significant federal estate tax liability. Transferring the estate to the spouse usually just delays the federal estate tax burdens that will be faced by your children or other beneficiaries at the death of the second spouse. A good solution to the federal estate tax problem involving life insurance is an irrevocable life insurance trust. With a properly drafted irrevocable life insurance trust, the trust owns the policy on your life, thus removing the insurance from your taxable estate and protecting it from creditors. The proceeds of the policy are paid to the trust at death. The trust agreement controls the distribution, timing and management of the trust assets following death. As with traditional life insurance, no income tax is owed by the trust or its beneficiaries upon death. There are some very specific steps that have to be followed to make the Irrevocable Life Insurance Trust work properly:
- Have the trust drafted by an attorney. This trust will likely be in effect for many years. Fund the trust. Make a gift to the trust of the first year’s premium so the trustee can purchase the policy. An existing life insurance policy can be transferred to the trust, but the disadvantage of transferring an existing policy is that if the grantor dies within three years of the date of any transfer made to the trust, the IRS will disqualify the transfer and the transfer will be included in the taxable estate. Also, the transfer of an existing policy to an irrevocable life insurance trust is considered a taxable gift if there is cash value in the policy. The better approach is to create the trust and allow it to purchase the policy.
- Make annual gifts. Each year, make a gift to the trust at least 30 days before the premiums are due. This will make the gifts “present interest gifts,” so that you can use up your annual exclusion. These are typically tax-free gifts made to the trust each year of up to $17,000 per beneficiary (annual gifts made in excess of $17,000 are permitted but gift taxes may apply). These gifts are then used to pay the premiums on the policy.
- Give notice. The trustee must notify each beneficiary of the gift made to the trust by you and give the beneficiary a reasonable opportunity to withdraw his or her portion of the gift (this is called a Crummey notice based on a federal case). Crummey notice must be given each time a gift is given to the trust.
In addition to minimizing federal estate tax liability, a life insurance trust can meet other financial and estate planning needs. These include providing financial support for a surviving spouse, minor children or legally incompetent family members and creating future financial security. Some of my clients wish to create a “dynasty” with the trust whereby their children and grandchildren will be well taken care of for their entire lives. A common use of the life insurance trust is to provide liquidity in an estate. An illiquid estate that consists generally of real estate, collectibles, a business or other property, may be difficult to sell quickly. Proceeds from a life insurance trust can be used to pay estate taxes or other settlement costs which will help the beneficiaries avoid the forced sale of assets for such taxes. Other advantages include avoidance of probate and being very difficult for disgruntled beneficiaries to challenge.
The disadvantage of creating an irrevocable life insurance trust is just that, it is irrevocable. This means that once the trust terms are determined, they can’t be changed. If one child is not living up to expectations, and they are to be written out of the will, they can still benefit from the proceeds of the irrevocable trust.
Living Trust (also known as a Revocable Trust)
A living trust or revocable trust is sometimes called a will substitute. This is a document drafted and funded during your lifetime and which stays in effect even after your death. Typically you name yourself as the trustee of your own trust and someone else (spouse, relative, friend, bank) as the successor trustee.
Reasons to use a living trust:
- Your assets are transferred to your beneficiaries without having to go through probate (the process by which the Probate Court declares your Will valid and gives your Executor authority to transfer your assets). This is a big advantage in states like California and Florida where probate can be time consuming and the expense can be very high due to court costs and attorney fees.
- If you own property in several states, multiple probate proceedings may be required to settle your estate in the absence of a living trust.
- A living trust is private, while probate is a public process. This is a plus if you do not want people to know who received your assets.
- If you think someone is likely to be unhappy with your carefully crafted estate plan, a living trust is less likely to be contested than a Will.
- A living trust can provide better management of your property in the event that you become incapacitated.
- A living trust can function as a coordinator of all probate and non-probate assets (such as qualified retirement benefits).
Reasons NOT to use a living trust:
- A living trust is generally more expensive to create than a Will.
- In Georgia, a Will instead of a living trust is generally used because probate is simple and inexpensive.
- There is no tax avoidance. If your estate is taxable, a Will can accomplish exactly the same tax savings as a trust at a much cheaper cost.
- Even if you have a living trust, you will still need a Will to ensure that anything that was inadvertently omitted from the living trust will be transferred to the trust upon your death.
- You cannot appoint a guardian for minor children in your living trust, it must be done in your Will.
- To make the living trust effective, all your assets, your house, your brokerage accounts, life insurance, essentially everything you own, must be transferred into the trust. In my opinion, this is the biggest problem with living trusts, if you do not transfer all of your assets to your living trust, probate will still be required.