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What Can Happen Without Proper Planning
To see what happens without proper planning, let us consider a common family situation. Assume that you own most or all of the significant family assets in your individual name and you die leaving a spouse and minor children. If you died in Georgia without a valid will, your "probate" estate will be distributed in accordance with the Georgia rules of intestacy. These rules provide generally that the your spouse and each of your children will receive an equal share of your estate, with the your spouse entitled to at least a 1/3 share (1). Since your children are minors, your spouse can petition the probate court to serve as the guardian of their share of your property. Of course, your spouse will have to obtain an insurance bond to ensure that the children's shares are not improperly used, and your spouse will need to file an inventory and (at least) annual returns with the probate court showing the activities with regard to the children's shares. While your spouse may use the income (i.e., interest and dividends) from the children's shares for the children's benefit, the spouse may not use any of the principal without prior Probate Court approval. Your spouse may not use any of the children's shares for his or her own benefit, except for his or her annual statutory guardianship fees of generally 10% of the income from the children's shares plus, eventually, up to 5% of the principal. Your minor children will own more of your "probate" estate than your spouse, and this includes your residence and any other asset you owned outright at your death. THIS RESULT IS A BONA FIDE DISASTER.
To avoid this result, many couples will own all of their assets jointly with rights of survivorship, while many of their other assets will pass by beneficiary designation to the surviving spouse outside the probate estate. While not handling all of the probate concerns, this method will normally ensure that the most significant assets pass to the surviving spouse upon the death of the first spouse to die. However, with this planning you fail to address numerous other issues, such as:
Executor
Selection of Executor who will ensure that your wishes are properly followed, especially upon your surviving spouse's death;
Guardian
Selection of guardian to take care of your minor children after your surviving spouse's death;
Trust for Children and Selection of Trustees.
Providing that your selected trustee(s) will take care of the children's property after the surviving spouse's death, at least until the children reach the age of majority, and preferably to stretch out the asset distributions to the children over a period of years. For example, children can be given their share of your property in installments, such as 1/2 at 30 and the remainder at age 35. This allows the children to have a second chance if they foolishly spend their first installment. Of course, your trustee can utilize the trust assets for your children's benefit prior to the trust assets being distributed outright to them;
Utilize The Exemption From the Generation-Skipping Transfer Tax ("GST Tax") To Provide Creditor And Divorce Protection To Increase Benefit Of Property Passing To Intended Beneficiaries.
Utilizing GST tax planning can enable your property to benefit your intended beneficiaries without being subject to the claims of their creditors, including the beneficiaries's spouses in divorce situations, and can also enable the property remaining at their deaths to pass to their families without being subject to estate tax in their estates;
Creditor and Divorce Protection For Beneficiaries.
Even where the GST tax is not an issue, can utilize trusts to protect the property passing to your beneficiaries from their creditors, including their spouses in divorce situations;
Special/Supplemental Needs
You can enable your assets to provide additional benefits to your loved ones who qualify for needs based government benefits, either because of being in a nursing home, having a mental or physical disability, or otherwise, instead of requiring your beneficiary to spend these assets to zero before re-qualifying for the government benefits. In other words, enable needs based government benefits to be paid to your beneficiary in addition to and not in lieu of the assets that you provide to him or her;
Help Ensure Property Benefits Desired Beneficiaries.
You can ensure that all of your property that is not used by your surviving spouse during his or her life is left to your children (or your other desired beneficiaries), instead of your surviving spouse's possible new family created sometime after your death. Further, to ensure that your beneficiaries are benefited in the desired manner and with the desired timing, especially in non-traditional family situations which are becoming much more commonplace. For example, situations with children from prior marriages and/or where your current spouse is significantly younger or older than you;
Business Succession
You can ensure a smooth succession of your business, whether to family members, co-owners, employees or otherwise;
Avoid Disputes.
You can avoid after death disputes and litigation in cases where this may arise;
Estate Tax Reduction or Elimination.
You can undertake tax planning. Tax planning is required for couples with a combined estate value in excess of the applicable exclusion amount (2) (currently $2,000,000) to ensure that most or all of their property passes to their desired beneficiaries rather than to the government in the form of estate taxes. With proper planning before the first spouse's death, a married couple can double the tax exclusion amount to $4,000,000, which can save up to $700,000 in estate taxes. Please note that your combined estate value is generally equal to your net worth (i.e., assets less debts) plus the face amount (i.e., death benefit) of your life insurance policies. If you are still projected to owe estate taxes after fully utilizing the available applicable exclusion amounts, various other estate tax reduction strategies can be utilized to minimize or eliminate this remaining projected tax liability; and
Income Tax Reduction.
You can enable steps to be taken to reduce income taxes after your death, such as with post-mortem planning (ex., selection of appropriate marital formula in your will) and with regard to the eventual distribution of your IRA and other qualified plan funds. During the estate planning process, other income tax strategies may also become available, including, for example, the Bradshaw Sale technique to lock in capital gain rates on appreciation in real estate prior to development, the use of a charitable remainder trust prior to the sale of a substantially appreciated capital gain asset, especially where you would like to benefit charitable beneficiaries at your death, or the use of a grantor charitable lead trust to create a large and immediate charitable income tax deduction while also helping your favorite charitable organization(s).
1. The surviving spouse could file for a "year's support" to possibly obtain a larger share of the estate.
2. The estate and gift taxes, which were part of a "unified" system prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA" or the "2001 tax act"), have now been separated. The gift tax lifetime exemption will remain at $1,000,000, while the estate tax lifetime exemption (which is known as the "Applicable Exclusion Amount") is scheduled to gradually increase to $3,500,000 by 2009 and the estate tax is scheduled for repeal as of January 1, 2010. However, unless the provisions of the 2001 tax act which relate to the gift and estate taxes are extended or made permanent, the estate tax will return as of January 1, 2011, and the gift and estate taxes will once again be part of the unified system which existed prior to the pre-2001 tax act.
Thus, a husband and wife together can have the first $4,000,000 of assets pass estate tax-free provided (1) both husband and wife each own their assets properly, and (2) both husband and wife have a Will structured to take full advantage of their respective applicable exclusion amount. Under the Taxpayer Relief Act of 1997, the Applicable Exclusion Amount was scheduled to increase from $675,000 (the 2001 amount) per person to $1,000,000 per person by 2006. Under the 2001 tax act, however, the Applicable Exclusion Amount is instead scheduled to increase from $675,000 (the 2001 amount) to $3,500,000 by the year 2009, with the increases beginning in 2002. In addition, the estate tax is scheduled to be fully repealed in 2010, for decedents dying after December 31, 2010. Under the 2001 tax act, the Applicable Exclusion Amount increased to $1,000,000 as of January 1, 2002. As of January 1, 2004, the Applicable Exclusion Amount increased to $1,500,000. As of January 1, 2006, the Applicable Exclusion Amount increased to $2,000,000. As of January 1, 2009, the Applicable Exclusion Amount increases to $3,500,000. As of January 1, 2010, the estate tax ceases to exist. However, under the current law, the estate tax reduction and repeal will have to be extended or otherwise preserved by a future tax act, or the tax rules will revert to the rules which were in place prior to the 2001 tax act as if the 2001 tax act had never existed. As a result, the estate tax law, as it existed prior to the 2001 tax act, including the increase in the Applicable Exclusion Amount to $1,000,000 under the 1997 Act, will come back into existence as of January 1, 2011.
