ESTATE PLANNING OVERVIEW
The basic objectives of an estate plan is to provide for medical decision-making if you are incapacitated, and for the management and distribution of your assets in the event of your incapacity or death.
Without a valid financial power of attorney and health care directive, your disability or incapacity may require a guardian or conservator to be appointed in a public probate court proceeding to manage your medical decision-making and financial affairs.
By signing these two important forms, you will decide who manages your medical decision-making and give that person some direction. You will also name who will manage your financial affairs if you are not able to do so.
Probate only applies to assets titled in your name alone with no named death beneficiary. The basic purpose of probate is to make sure that all bills and taxes are paid and how your remaining probate assets are distributed to your named death beneficiaries. A probate can be done with or without a Will. However, without a Will your estate will pass to your heirs at law, and your executor will be determined by the Minnesota statutes.
If you elect to use a Will, your probate assets will be subject to a probate court proceeding. Probate is a public legal proceeding, so people can read your probate file and find out about your assets, debts and beneficiaries. If you own real estate in more than one state, a probate in each state where the real estate is located will be required. To avoid probate, you can set up a revocable trust.
Assets held in joint tenancy are non-probate assets that pass to the surviving joint tenant upon the first death. Typically, the survivor files a form and death certificate to transfer the joint asset into the survivor’s name.
Assets that have designated death beneficiaries are non-probate assets and go directly to the named death beneficiaries. These assets are not governed by your Will or Trust unless your estate or trust is named as death beneficiary.
I will help you retitle assets and name death beneficiaries so that your assets pass to beneficiaries according to your wishes. You will complete an asset form to assist us with planning. This helps us see what is in place when we begin the work. I then make notes on the form to show you the changes that I recommend for you.
After the changes are made, I update the form to show titling and beneficiaries. The asset form is a significant tool for us in planning and later for your legal representative if you are unable to handle your affairs. It minimizes the need to go through your papers and records to try to figure things out.
REVOCABLE TRUST AGREEMENT
A revocable trust may be used instead of a Will to allow for private asset management and estate administration without a probate proceeding. You can alter, amend or revoke your trust at any time prior to death. While you are alive and have legal capacity, you have complete control over your trust assets. The assets are treated as if they are in your name for income tax purposes. You can add additional assets to the trust or take assets out of the trust at any time.
A married couple can set up individual trusts or a joint revocable trust for both people. You, or you and your spouse will typically be the original trustees, and you will name the individuals or professionals to serve as successor trustee if you are not able to serve as trustee due to death or incapacity. The trustee manages and distributes the trust assets according to the terms of the trust document.
This includes assets titled to the trust during your lifetime and assets that pass into the trust after your death. You can name the trust as a death beneficiary for assets held in your name outside of the trust during your lifetime. You can title real estate in the trust during your lifetime. If you own real estate in more than one state, you can title all real property into the trust to avoid a probate in multiple states.
The trust assets are managed for you and your family by the successor trustee if you are disabled. The trust document spells out what happens to your estate upon your disability. It also specifies what happens to your estate upon your death.
With a joint trust, the assets can stay in the trust for the surviving spouse or children. Minors cannot inherit assets, so I will assist you in transferring assets to a minor beneficiary, using a minor trust or custodial account created under your trust.
If your children are under the age(s) that you specify they should receive distributions, the assets are managed for them by the trustee or custodian until they reach that age. In the meantime, the assets are available for them to use for expenses related to their health, education, maintenance and support, or for another purpose as determined by the trustee.
If you use a trust, you must also sign a short “pour over” Will. The Will is a safety net in the event there is a need to transfer probate assets into your trust after death. I will work with you to make sure you have all of your assets going into the trust or to named death beneficiaries so there are no probate assets.
If you would benefit from estate tax planning, the trust can provide that upon the first death of a married couple a family trust is established and funded with certain assets of the deceased spouse.
In the alternative, the surviving spouse can disclaim assets of the deceased spouse and just the disclaimed assets are used to fund a disclaimer trust that operates like a family trust.
The family trust is set up automatically if the conditions specified exist. The amount used to fund this trust is often tied to the amount that is exempt from Minnesota estate tax, but it can be tied to the federal exemption amount for very large estates. Because these trust assets do not pass to the surviving spouse, they are not part of the estate of the surviving spouse for estate tax purposes. However, the income and principal of the trust remain available to provide for the surviving spouse. The appreciation of the assets held in the family trust is also shielded from estate tax.
The family trust or disclaimer trust allows both spouses rather than just one spouse to take advantage of the estate tax exemptions. Federal and state estate taxes are based on the size of your estate and marital status. In 2021, $11,700,000 of assets are exempt from federal estate and gift tax, and $3,000,000 of assets are exempt from Minnesota estate tax. These exemption amounts include all your assets, including the entire death benefit on life insurance.
I will assist you in determining if these trusts will benefit you.
During your lifetime, a revocable trust does not change how you file or pay your income taxes. Although an estate plan using a revocable trust is not designed to save on income taxes, there are some features which the trustee can use to minimize income taxes after both of you are deceased.
CAPITAL GAINS TAX
There is a tax benefit for assets you own at the time of your death that can help you to minimize taxes that might otherwise have been owed if the asset was gifted during your lifetime – a step-up in basis. Your basis is usually what you paid for the asset.
According to the IRS, a capital gain or loss is the difference between your basis and the amount you receive when you sell an asset. In other words, if you sell an asset that is worth more than you paid for it, you will have to pay taxes on the gain. For example, if you purchased stock for $10 a share and sold it later for $75 a share, the $65 per share gain would be taxed.
When someone inherits an asset following the death of the owner, the cost basis of the asset is “stepped up” to the value on the date of the owner’s death.
For example, let’s assume a person leaves real estate to a child that is valued at $400,000 on the date they pass away, and the deceased person’s cost basis of the property is $100,000. The beneficiary will avoid capital gains tax on the $300,000,000 gain.
When the person inheriting the real estate sells it, they will pay capital gains tax based on any increase in value over $400,000.While utilizing a step-up in basis can lead to big tax savings, there are limitations to consider.
First, this does not apply to assets held jointly with children. Additionally, it does not apply to tax deferred accounts such as IRAs or 401(k)s. Assets can also receive a “step down” in basis if the value on the date of death is less than the deceased person paid for it.