If a living trust works so well, why hasn’t my attorney told me about it?
Conventional wisdom mistakenly believes that the family lawyer, because of mutual familiarity and the sole fact that he is a lawyer, is best qualified to help set up the family estate plan (usually a will). But probably less that 1% of all lawyers could be recognized as legitimate estate planners. And only a fraction of those that actually do have estate-planning knowledge have a system efficient enough to take clients all the way through to full implementation and funding of a proper plan. In actuality, it is clearly a financial conflict of interest for most all lawyers to first of all (a) create the comprehensive estate planning document generation systems necessary to service estate-planning clientele, and secondly (b) provide hands-on assistance for their clients in order to fully implement and fund the plan. Unless a lawyer is actively involved with proper estate planning as a full time practice, it becomes a comparative loss for him to get involved in the type of estate planning services that are usually necessary to get the job done right. Without question, on a client-per-client basis, it is much more profitable for a lawyer to probate an estate than to spend the time and effort it takes to help an occasional estate-planning client meet their real planning goals and objectives. So, in defense of the family attorney (like everything else), it all boils down to the undisputable "Laws of Economics—101".
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What is an estate plan(s)?
Estate planning is simply an activity wherein the property/asset owner decides upon one or more concerted methods of transferring all he owns, at his death, to chosen recipients. A proper estate plan takes into account personal, administrative, and transfer tax matters when deciding the most optimal, desirable and cost-effective means of transferring an estate upon death.
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What happens if I don’t plan my estate?
Actually, everyone who owns any asset(s) whatsoever already has an estate plan. If the asset owner does not prescribe his own plan during his lifetime (and he therefore dies “intestate”), then the state will have to implement a statutory plan (a statutory Last Will & Testament) for him at his death.
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What is a Last Will & Testament?
A will (Last Will & Testament) is simply a statement or a “testimonial” of one’s intent regarding the disposition of his assets that is to occur upon his death. It is not a contract, and it therefore cannot be binding on anyone. A will can also create a “trust” in the meaning that it can appoint a trustee to hold (probated) assets for the benefit of another. This type of trust is called a “testamentary trust” and it is always funded only with probate assets.
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How are the terms of a will enforced?
The probate court generally enforces the intent of the decedent unless evidence is submitted (by due diligence, law suits or other litigation, obvious impropriety etc.) that causes a determination that the decedent’s intent cannot be carried out as stated in his will. Because a will is not a contract (and is therefore not binding), it requires the venue of a court of law to be administered.
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Why is it necessary to probate a will?
First of all, the court has to procedurally determine that the decedent’s will is valid and that it is, in fact, his/her will. Moreover, when an asset-owner dies, he becomes a deceased asset-owner. A deceased person is obviously unable to transfer ownership of his assets to anyone. The result is that only a court of law has the legal authority and ability to appoint (and transfer) ownership of the decedent’s assets even if it is only to the decedent’s own family members. The role of the decedent’s personal representative, then, is first to be vested title – by the court – to all of the decedent’s assets. After vesting by the court, the personal representative eventually transfers title of the decedent’s property to the decedent’s intended heirs. All of this can happen only through formalized/statutory probate court procedures.
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So, what’s so bad about probate?
Probate tends to (i) be relatively costly to the estate, (ii) take several months or even years to complete, (iii) be a source of frustration to the heirs, (iv) disclose all pertinent family and financial matters – by an open file – for even unscrupulous people to discover, and (v) be more prone to disputes (and even court litigation) among family members including attracting the unwanted services of corporate entities who do not have altruistic motives.
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Is there a positive side to probate?
Before the major tax law changes in 2001, there were a few obscure, minor tax benefits to certain estates with certain conditions. Now, that “advantage” is all but gone. However, some probate attorneys take the position that the formal supervision provided by the court in settling an estate is worth the expense, time-lapse, undesirable publicity, vulnerability, and frustration that can be experienced by the heirs while waiting to get their inheritance.
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How can probate be avoided?
There are several ways. Outright gifting is one. But, the most common method is by holding property as “joint-tenants-with-rights-of-survivorship (JTWROS). Another method is deeding realty property with a life estate retention clause in the deed. Another well known strategy of avoiding probate is using payable-on-death (POD) accounts. However, all of these conditions carry potentially undesirable outcomes ranging from loss of control and unnecessary lawsuit exposure during lifetime to the forfeiture of a thoughtfully structured disposition of one’s estate at death.
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Is there a singular way to address problems inherent to estate transfers?
Yes. A properly drafted, properly funded, properly implemented Revocable Living Trust is a well proven foundational estate plan that has the structure to remedy most all of the problems that can be associated with transferring an estate regardless of the size. Wealthy estates may need additional planning devices such as irrevocable trusts, discounting family partnerships, charitable trusts etc. But, a living trust is still necessary to optimize the transfer activity of any estate, large or small.
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How does a living trust avoid probate?
When the creator of a living trust transfers assets to the trust (actually to himself as the trustee) that means he has now already conveyed legal title of his assets to a “party” that does not cease to exist when he dies. That party is the office of the trustee – which he may occupy during his lifetime. (Moreover, he is also the beneficiary of his own trust during his lifetime.) So, probate is not necessary because the (successor) trustee already holds legal title to the decedent’s assets by operation of law – that is, the law of contract. And, that’s what a trust is – a contractual agreement between the creator and trustee of the trust.
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What does it mean to “fund” a trust?
Funding a trust simply means to transfer one's assets to the trust (actually to the trustee of the trust). That is generally accomplished such means as (a) assignment deeds for realty interests, (b) specific assignment/conveyance documents for contractual interests or other non-account assets, (c) request-for-retitlement letters (and beneficiary-change letters), (d) by stock & bond powers, or even by (e) an entry in a corporate records ledger.
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Why must a living trust get funded during the creator’s lifetime?
A living trust must be funded during lifetime for the creator to realize it's full benefit. In fact, that is why it is referred to as a "living" trust; it is designed to be funded and functional during the creator's life as well as being able to transfer his assets to his loved ones upon death. Any (non-funded) assets still in the decedent's name at his death will have to be probated in order to get into the trust through the "pour-over will" (a will that "pours" the assets into the trust—after they have been probated).
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How does a Marital A/B Trust work?
A Marital A/B Trust provides a format for legally married spouses (husband & wife) to establish a living trust together as co-creators of the trust (note: spouses can also establish a "Marital Simple Trust" which has no A/B format). When the first spouse dies, Trust "B" (the Credit Shelter Trust) is to be funded with that part of the entire trust estate deemed to belong to the first spouse to die. That is to mean his (assuming husband dies first) sole and separate property (if any) and his interest in the jointly owned property (community property and/or tenants-in-common or tenants-by-the-entirety property) is transferred to Trust"B" —which then also utilizes the unified credit of the first spouse to die by not having the decedent spouse's estate go directly to the surviving spouse under her full control.

The assets of Trust "B" are maintained IN TRUST for the lifetime of the surviving spouse (unless a prior arrangement is agreed upon) wherein the surviving spouse can receive all distributable net income from Trust "B" and distributions from the principal for health, education, maintenance and support purposes. Trust "B" provides legitimate protection from the surviving spouse's potential creditors, or a new predatory spouse, or even possible spendthrift tendencies of the surviving spouse because if becomes irrevocable upon the death of the first spouse to die. Upon the surviving spouse's death, the assets of Trust B, along with the assets of Trust "A" (the surviving spouse's estate) are then to be distributed according to the decrees of the trust.
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What is a conservatorship?
A conservatorship (is a legal proceeding that) must be established for a person who has become mentally and/or physically debilitated to the extent that he is no longer able to perform financial decisions or responsibilities on his own behalf. An incapacitated person's assets cannot be used on his behalf unless a (probate) court appoints a legal conservator over that person. His loved ones need to petition the court for an adjudication of his incompetency—a public matter.
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How can a potential conservatorship be avoided?
A Financial Durable Power of Attorney (DPA) can be used in some cases to help avoid issues with conservatorship. But a transfer agent (one who acts as a custodian over private accounts held in an institution such as a bank, etc.) is not under any legal requirement to transact with the agent appointed under the DPA. The reason is that a DPA is not a contract, only a valid statement. Because it is not in contract form, the transfer agent is taking a "risk" in agreeing to conform to the statement of the DPA.
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What is the best way to avoid a conservatorship?
A funded living trust is the most effective means to prepare for a potential conservatorship. A living trust is a contract. Therefore, when a transfer agent honors the trust creator's request to have the account retitled into his trust, the transfer agent is representing the institution where the account is held) which is agreeing to the terms of the trust/contract. That is what the transfer agent must transact with the trustee who is now serving as a trustee over the trust assets of the incapacitated creator.
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What are estate taxes?
The estate tax is a transfer tax imposed upon the estate (not the heirs) belonging to the decedent at the time of (and because of) his death. It is imposed on the decedent's estate beginning at dollar one. However, the unified credit can shelter the estate from estate taxes under the unified credit up to the exemption equivalent amount—then in effect at the year of the decedent's death. Estate taxes are generally not deemed as an "inheritance tax". Inheritance taxes are imposed (only in a small number of certain states) at the state level upon the beneficiaries of the estate (the heirs) and usually at lower rates than the federal (and state) estate tax.
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What is the unified credit?
Let's use an illustration to define a tax credit. A taxpayer owes a tax of say $500 as a result of selling an appreciated stock portfolio less than one year (short term gain) after acquisition; at first glance, he seems liable for the full $500 tax bill. But let's assume he is allowed a tax credit of $200 that he can take against any tax liability(s) incurred as a result of selling the short-term appreciated property. That means that he would only have to pay a $300 tax instead of $500. The tax credit is a dollar-for-dollar credit against (i.e., a per dollar reduction from) that taxpayer's tax liability.

The Unified Credit works the same way. A credit (the Unified Credit) is allowed against (e.g., used to reduce from) the federal transfer tax imputed on all transfers of assets (other than assets "excluded" from the transfer tax base, as are excluded with the annual exclusion). Transfer taxes are imposed on each and every dollar of value that may be transferred by either a lifetime gift or by bequest at death (such as with a will or a trust).

The term unified, when referring to the Unified Credit, means that the transfer tax credit is allowed to be taken against transfer taxes incurred as a result of either (a) lifetime gifts, or (b) transfers at death, or (c) a combination of both; thus, it is unified—or combined. If the taxpayer uses part of the Unified Credit against a gift tax liability incurred as a result of a large gift made in a given year, then he has effectively reduced the Unified Credit that is available to his estate in the exact dollar-for-dollar amount of the credit that was used whether his death occurred in the same year that the gift(s) was made or in a subsequent year.
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What is the federal exemption equivalent amount?
Let's start with an illustration. If we wanted to make a loaf of French bread that was to become exactly 1 foot in length, 7 inches wide, and 6 inches high—assuming it was to be baked for a specific amount of time and with a specific temperature—we would need to use a certain amount of flour, water, and yeast to make that loaf of bread, every time. So, let's say that it required 7 cups of flour, 3 cups of water, and 1 package of yeast to make the loaf we have described. That means that every time we had those exact ingredients in our possession, we have the equivalent of a loaf of French bread—1 foot in length, 7 inches wide, and 6 inches high. Is the flour, yeast and water the same as the loaf? Obviously, they are not. But when kneaded together and applied with the correct amount of baking time and temperature, the equivalent amount of those ingredients is that loaf of French bread.

So, what the term "exemption equivalent" tells us is that since a specific transfer value (of say 1 million dollars) will be taxed at a progressive, marginal tax rate, a tax credit (the unified credit) can be used to offset the tax imputed on the transfer—which equates to that amount being exempted from tax. Using our illustration, because we have the current unified transfer tax credit ($345,800) in hand, we have the corresponding ability to transfer 1 million dollars free (e.g. exempt) of taxation.

To use more specific terms, the tax rates start at a tentative tax rate of 18% with the first $10,000 transferred; then 20% for the transferred value between $10,001 - $20,000; then 22% for the transferred value between $20,001 - $40,000; et cetera. What we find when we do the math using the tentative rate schedule is that an aggregate transfer tax liability of $345,800 will ultimately be incurred as a result of transferring a total of 1 million dollars. Under current law existing at the time of this writing, transferors are allowed a Unified Credit of $345,800 in the year 2003 against the tax liability that would be imposed on transfers of (or transfers in one or more years equal to an aggregate of) 1 million dollars. Therefore, because a taxpayer/transferor is allowed a federal transfer-tax unified credit of up to $345,800, the equivalent amount allowed to be transferred free from estate and/or gift tax is 1 million dollars.
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What is an unlimited deduction pertaining is an estate?
There are essentially only two deductions associated with estate and gift taxes for which we need to be aware of—the marital deduction and the charitable deduction. Taking a deduction from an estate value (e.g., to reduce the estate value for tax purposes) is not the same as using the unified credit against the tax itself, as pointed out above, but the ultimate desired result of transfer tax reduction or elimination is the same.

All transfers to a legal spouse or to a qualified [(501(c)(3)] charity—whether a lifetime-transfer (a gift) or a transfer at death (a bequest)—are not subject to taxation. Such transfers are therefore simple deducted dollar-for-dollar from the total value that the transferor or the transferor's estate has made or will ever make.

Ever since the Economic Recovery & Tax Act of 1981 (ERTA), the value of the marital deduction is no longer limited. That means that any amount of value transferred to a spouse—regardless of how great the value and regardless if it is a lifetime transfer or a transfer at death—is not subject to transfer tax. In other words, all transfers to a spouse regardless of the amount(s) are deducted from the value of the transfers, dollar-for-dollar, for the purposes of calculating transfer tax. Of course, unlike transfers to a qualified charity, transfers to a spouse do not generate income tax deductions for the transferor.

As mentioned, the charitable deduction is also unlimited. Any transfer to a qualified charity—regardless of how great the value and regardless if it is a lifetime transfer or a transfer at death—is not subject to taxation. The main difference between transfers to a charity as opposed to transfers to a spouse is that transfers to a charity can generate income tax deductions (another subject altogether).
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What is a “step-up in basis”?
The determined "tax basis" of property (stock, real estate etc.)—for the purposes of calculating the value of property obtained by a taxpayer as a buyer/transferee—turns on a few different rules depending upon the nature of the transaction. A property-exchange transaction between two or more living parties is generally classified a one of three separate occurrences: (i) a completed, bone-fide gift, (ii) a sale at fair market value, or (iii) a sale for less than fair market value.

When property is exchanged for fair market value in a willing-seller (Jane) / willing-buyer (Peter) arrangement, the property value receives a full "step-up in basis" to the fair-market-value sale amount, and that stepped-up in basis value is passed on to the buyer (Peter). If the sale transaction was a "bargain sale", meaning that the exchange was for less than fair market value, then the difference between the sale amount and the fair market value would actually be deemed a gift to the buyer/donee (Peter); therefore the stepped-up basis value in the acquired property would only be the purchase amount. It should be noted that when bone-fide gifts (or partial gifts) are made, not only does the donee (Jane) not acquire a step-up in basis in the gifted property (or in a formulated value because of the partial gift transaction) but also, for transfer tax purposes concerning the donor's (Jane's) estate, the fair market value is used to calculate the amount transferred.

When the buyer/donee (Peter) of the acquired property subsequently sells the property (to Mary) at fair market value (for example), he will be deemed to have acquired a capital gain and is therefore subjected to capital gains tax because of the sale. The capital gains tax is calculated on the appreciated value of the property, which is simply the spread between the acquired basis and the acquired basis of the subsequent buyer.

The determined tax basis of all property acquired by beneficiaries of a decedent transferor's estate is simply the value of the property at the date of the transferor's death—or the value of the property six months later if the "alternate valuation date rule" is used. Transfers occurred by reason of death of the transferor is never a sale transaction. Therefore, under the current transfer tax rules, the value of all property owned and transferred by a decedent receives a full step-up in basis as to the value of the property at the date of his/her death.

The general rule, then, is that all property over which a decedent enjoyed unhindered control (i.e., general power of appointment control) is deemed to be in the taxable estate of the decedent and therefore must receive a full step-up in basis at the decedent's death. In addition, under the grantor trust rules, certain property irrevocably transferred to a grantor trust by the transferor during his/her lifetime will still be classified as being in the transferor's estate for estate tax purposes if the transferor retained a right to receive income from the trust during his/her lifetime. The most notable exception to that rule is a qualified charitable remainder trust.
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What is the annual exclusion?
Here is yet another term whose application can have a similar desired impact on transfer tax liability as does the unified credit or the unlimited (marital or charitable) deductions. Exclusions are not deductions; but for transfer tax purposes, they essentially could be deemed the same; it's mostly a matter of semantics. An exclusion is something that is removed altogether from the value of the transfer base of the transferor (deductions are deducted from the transfer). The transfer tax exclusion pertains primarily to the annual gift tax exclusion.

Under current law (as of the year 2004) transferors are allowed an Eleven Thousand Dollar ($11,000) annual exclusion. The annual exclusion can be utilized each and every year, but only on a non-accumulative basis. The term non-accumulative means that even though a transferor did not utilize the exclusion in a prior year(s), he cannot add up, or accumulate, the exclusion amounts that were not utilized (each year) to increase the exclusion amount. It is non-accumulative and if it's not used in a given year then the exclusion amount for that particular year has been completely and forever forfeited.

The annual exclusion can be utilized with the unified credit. That means that if a transferor gave $25,000 to a transferee in a single given year, the transferor's actual transfer (or gift) value for the purposes of computing the gift tax would be $14,000 ($25,000 minus $11,000 = $14,000) and the non-excluded $14,000 could be sheltered by taking a part of the unified credit against the transfer tax incurred as a result of the transfer. To put it another way, a transferor could hypothetically give a transferee one million & eleven thousand dollars all in the same year. The one million would be exempt from transfer tax by virtue of the unified credit and the annual gift tax exclusion could be utilized to exclude the remaining eleven thousand from the transfer base. If the transferor wanted to make another annual exclusion gift in that year, he could do so if he had another transferee of whom he wanted to receive an annual exclusion gift. In that event, the transferor could transfer one million, twenty-two thousand dollars, free from tax.

Transfers during life by a married person can receive the benefit of "gift splitting" with the other spouse. If one spouse had a $22,000 gift that she wanted to give to her child (or whoever), then her 709 gift tax return could list her spouse's name on the return to verify that both spouses made a split gift totaling $22,000—thus utilizing each spouse's annual exclusion.

There is a bit of a twist with the annual exclusion law. Credits, exemptions, deductions always pertain to the transferor or the transferor's estate. The annual exclusion applies correspondingly to each giftee/transferee, and not just the giftor/transferor. So, although the annual exclusion excludes the transfer amount for tax purposes from the estate of the giftor, it can be applied repeatedly and separately for each giftee, every year.
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