What better place to start the initial SGR newsletter on estate planning and wealth protection techniques than with a discussion of basic estate planning principles? For most of you, this article will serve to remind you of the fundamentals on which your estate plan has been built. For others, it may provide the building blocks for the construction of your estate plan.

JUDICIOUS USE OF THE APPLICABLE CREDIT AMOUNT (“ACA”) IS A CORNERSTONE

The ACA, formerly known as the Unified Credit, is currently $3,500,000, and represents the amount of property that each person can pass to his or her beneficiaries without incurring federal estate tax. It is scheduled to be repealed next year and replaced the following year by a lower ACA. However, it is widely believed that the ACA in the amount of $3,500,000 will be continued for the foreseeable future. Accordingly, couples with a combined net worth of less than $3,500,000 and single persons having a net worth of less than $3,500,000 have the luxury of creating an estate plan that does not require serious consideration of the federal estate tax consequences to his or her estate. However, consideration should be given to the tax consequences that may result to a beneficiary.

Last year, a client came to us with a “simple” will that left all of her property equally to her children. During our discussion with her, we learned that her son had sold his business and was quite wealthy. So her will was changed to provide for the bequest to be made in a trust for the benefit of her son for his lifetime, and at his death the trust would continue for the benefit of his children. The son would have some control over the trust because he was named the Trustee, but the trust was drafted so that the property in the trust was not subject to estate tax at her son’s death.

CAREFUL CONSIDERATION OF THE MARITAL DEDUCTION — ANOTHER BUILDING BLOCK

The Marital Deduction is a simple concept. Anything bequeathed to a surviving spouse or to certain types of trusts qualifies for the Marital Deduction, the effect of which is to avoid estate taxation on those assets. There is no monetary limit on the Marital Deduction. Use of the full Marital Deduction by the first to die postpones the payment of estate tax until the death of the survivor. For example, a wife with a $10 million estate could leave everything to her husband, in which event there would be no estate tax at her death. However, all of the family assets would be subject to estate taxation at the husband’s subsequent death. This would not be a wise estate plan in most cases because the ACA of the wife would be wasted and only the husband’s ACA would be available to reduce estate tax at his death. Only $3,500,000 of value would pass to the children or other beneficiaries estate tax free, instead of the $7,000,000 that could be passed using both the husband’s and wife’s ACAs.

In order to utilize the wife’s ACA, the wife’s estate planning documents could first create a trust for the benefit of her husband (and possibly other family members) to be funded by the amount of her ACA. The trust could be drafted so that the assets in that trust would not be subject to estate taxation at the husband’s subsequent death (no matter how large the trust was at that time). The rest of the property in the wife’s estate could be left outright to the husband (or in a special trust for his benefit). Under this estate plan, there still would be no estate tax at the death of the wife, but both the husband’s and the wife’s ACA would be used, thereby allowing up to $7,000,000 to pass to the children or other beneficiaries without estate taxation.

APPROPRIATE TITLING OF ASSETS IS OFTEN OVERLOOKED

Basic estate planning also requires a review of how assets are owned because their ownership must dovetail with the provisions of the estate planning documents in order for the estate plan to be effective. Married couples in particular should pay attention to the ownership of their assets. Often, married couples own all of their assets jointly with rights of survivorship and name each other as the primary beneficiaries of their life insurance policies, 401(k) plans, etc. The effect of this ownership is to negate the provisions of the estate planning documents, because the title to all of these assets would pass directly to the surviving spouse and would not be governed by the provisions of the estate planning documents (unless the surviving spouse chose to renounce some or all of these assets in a rather complicated procedure). Therefore, every couple should monitor the ownership of their assets to be sure that it complements the provisions of their estate plan.

Another common mistake made by many couples is titling too few assets in the name of one spouse. If possible, each should own assets having a value equal to his or her available ACA (usually $3,500,000).

DON’T FORGET TO PROTECT ASSETS FROM THE CREDITORS OF BENEFICIARIES

A final fundamental of estate planning involves protection of beneficiaries from the claims of their creditors. An outright bequest to a beneficiary subjects those assets to the claims of the beneficiary’s creditors, both current and future. However, trusts can be created which may afford partial or total protection from creditors. Parents who see their children as fiscally responsible have a tendency to leave bequests directly to their children. However, to do so exposes those assets directly to the claims of their children’s creditors. A bequest to a trust for the benefit of a child can afford protection from creditors, while at the same time, in many cases, avoid estate taxation on the assets in the trust at the child’s death.