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In the United States, we prize our right as citizens to dispose of our property at death in accordance with our wishes. Yet the vast majority of us die without a will or living trust. The implications are daunting, and, when we consider the rapid growth of the aging population, the consequences for many could be relatively immediate. By contrast, a little estate planning with a qualified attorney will go a long way to ensure that we and our beneficiaries receive the maximum benefit possible from our estates. Proper planning currently allows each individual to pass $1.5 million free of transfer tax, and an unlimited amount free of transfer tax if the transfer is to a spouse. This translates into a total of $3 million that a couple can transfer to their children tax-free, and, with proper planning, without any significant sacrifice of control and benefit to the surviving spouse for his or her lifetime. When we have no will to dispose of our property upon our demise, the legislature has a scheme for doing so. That scheme, broadly aimed at the most common situations, is unlikely to fulfill our individual wishes regarding those we care for most. In the absence of planning, we run the risk that thousands of dollars will be paid in transfer taxes that could easily have been avoided. Furthermore, when we fail to provide for our care in the event of incapacity, the court system will appoint someone to make decisions for us under judicial supervision that is both expensive and of highly uncertain quality. This arrangement subjects the individual to great personal and financial risk, and it subjects the over-worked courts to dramatically increased administrative and judicial burdens. LIVING TRUSTS TO THE RESCUE The law, with the help of thoughtful estate planners, offers rather straightforward approaches to estate planning that avoid all of these pitfalls. One of the most popular devices today is the revocable inter vivos (living) trust. Properly structured, a revocable living trust can provide a number of benefits: asset management by one’s self and, in the event of incapacity, by a person of one’s choice; the use of all assets by the surviving spouse for his or her lifetime; the full use of the $1.5 million exemption per person that can pass free of the transfer tax; and disposition to the chosen beneficiaries in a manner that protects against dissipation of assets. It works like this: The client goes in to confer with his or her estate planner, who makes careful inquiries into the nature and value of the client’s assets, the names and circumstances of the individuals he or she wants to benefit after his or her death (including any special needs any of them may have), and the identity of the individuals or institutions the client would like to have manage the assets should incapacity be a factor. Take a hypothetical situation: John Doe, age 70, is married and lives in Maryland with his spouse, Jane Doe. Both currently enjoy good health, but John has been diagnosed as being in the very early stages of Parkinson’s disease. He wants to ensure Jane’s well-being, and he acknowledges that she is not financially sophisticated or capable of handling the assets if he should become incapacitated. At his death, he wants Jane to benefit from all of his assets for her lifetime and thereafter wants his two children, Sam and Sue, to share the remainder equally. Both are adults and have small children. If either Sam or Sue should die before their parents, John wants the portion of the estate that otherwise would go to Sam or Sue to go instead to the respective grandchildren. Sam is a theoretical physicist and completely uninterested in financial issues; Sue is a CPA with a lot of financial experience, and she would be a fine candidate to serve as successor trustee should John become disabled. The estate planner has ascertained that John has a $1 million brokerage account and Jane has a somewhat smaller account in her name. They own their $500,000 principal residence as tenants by the entirety, so that the survivor will own the home outright at the death of the other. Jane recently inherited a Delaware beach house from her parents; it is worth $300,000. Thus the “joint estate”�the assets of the couple taken together�well exceeds the $1.5 million that each can pass tax-free to the children, and there is a need for an asset manager should John lose his capacity to perform that function. In addition, there is real estate in two separate states, meaning there would have to be a probate proceeding in both states eventually. LIMITING COURT INVOLVEMENT All of these factors argue for the creation of an revocable living trust. The estate planner proceeds accordingly, creating a trust that offers the following characteristics during John’s lifetime: (1) John is trustee and grantor; Sue will succeed him if he becomes disabled or at his death. There will be no need for any court involvement or for the appointment of a conservator or any of the expenses that pertain to a conservatorship, nor will John’s affairs become the subject of a public record, assuming his assets are transferred to a revocable living trust. (2) During his tenure as trustee, John will have substantially all the control over his assets that he had when they were held in his own name. He can buy, sell, trade, and otherwise negotiate financial transactions much as before the revocable living trust was created. The caveat is that, since the assets will be transferred from John’s personal name to John as trustee of his trust, he will have to enter into transactions as trustee rather than simply as John. (3) The transfer of the assets to the trust will have no tax implications, and the income-tax consequences of John’s trust transactions will have no negative effect on his income-tax liability. In addition to the revocable living trust, the estate-planning attorney will also create for John (and Jane) a durable power of attorney, a health-care power of attorney, and a will that work in tandem with the revocable living trust. The revocable living trust does not eliminate the need for a will, and everyone should have one. (In this example, Jane will have a will and revocable living trust that mirror John’s, in the event she should die before him.) USING A CREDIT SHELTER TRUST At John’s death, the trust offers the following benefits: (1) Assets valued at $1.5 million, the amount of John’s transfer tax credit, will pass tax-free to a “credit shelter trust” created for the benefit of Jane for her lifetime. The remainder of the trust assets will go to Sam and Sue (or to a trust for their children if either had died). The trustee of the credit shelter trust will have the obligation to pay all of the income of the trust to Jane and will have the power to dip into the principal of the credit shelter trust to pay for medical, support, and maintenance needs for the benefit of Jane. That access to the principal is absolute to the extent Jane has medical, support, and maintenance needs, so the creation of the credit shelter trust does nothing to compromise Jane’s security. At her death, however, the assets in the credit shelter trust will pass to the next generation free of any tax. (2) The remainder of John’s assets will go to Jane outright and will not be subject to any transfer tax because they will qualify for the marital deduction. (3) In total, there will be no tax at John’s death, and little, if any, need for probate. At Jane’s subsequent death, her estate will consist of the assets in her name and in her trust, which are unlikely to exceed the $1.5 million she can pass tax free to the children. Thus, the revocable trust has accomplished much for John Doe and for his family. THE PLIGHT OF THE UNPREPARED In contrast, had John not taken the time and effort to construct an estate plan, the outcome would have been vastly different. Assuming John eventually became incapacitated, there would have been little choice but to go to the local court and have a guardian appointed. The guardian would have been required to file regular reports of all transactions made in the reporting period, and the contents would be public documents accessible by anyone taking the trouble to go to the courthouse and look. The cost of this process is substantial, so John’s resources would be diminished significantly because of the guardianship proceeding. In addition, it is entirely possible that the guardian appointed would not be a family member, but a complete stranger. In practice, these arrangements prove problematic, and in recent years, there have been many reports of abuses. In fact, this writer has personal knowledge of a conservatorship in the metropolitan Washington area that had not been closed until more than four years after the death of the ward. It was closed only after the heirs to the estate, who live out of the area, contacted counsel to open a probate proceeding and try to wrest the assets from the conservator. By the time the legal proceedings are over, the heirs will receive significantly less because of the need to have a conservator. All too often, our assets that take a lifetime to accumulate end up benefiting taxing authorities rather than our intended beneficiaries. That outcome can be easily avoided with planning. Jane Moretz Edmisten is a D.C. practitioner who teaches trusts and estates at several local law schools. She can be reached at [email protected].

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