Estate Planning

Provide overall planning for client either fee-based on product-based. Below are some basic concepts that clients can have some self-education about.


1. Estate Planning in a Glance

 An estate plan protects your family and finances after you die. Your first step in estate planning is to write a comprehensive will that moves smoothly through the probate process. Make sure you’re aware of current estate taxes that may influence your planning and how insurance factors into your estate plan. Various types of trusts are available; do some research to find out if setting up a trust is the way to go, and consider some special circumstances that may arise and how they can affect your estate planning.

Things to Remember When You’re Writing Your Will


  • You can be both specific and general in your will — it’s up to you. You can parcel out individual items to people by name and also let your beneficiaries decide how to divide up your worldly goods.
  • Certain parts of your will “self-adjust” to changes in your estate and your family. For example, even if you don’t update your will after a child is born or if youadopt a child, your will covers the child just the same so that the child isn’t accidentally cut out of an inheritance.

Estate-Related Taxes You Need to Know About

Depending on the value of your estate, you may not have to deal with at least some of the federal taxes, but you or your surviving beneficiaries may have a substantial amount of tax-related paperwork to file. When estate planning, use these tips to understand what you’re dealing with from a tax standpoint:

  • Most people don’t have to pay the federal estate tax — the so-called “death tax” —because their estates fall below the federal threshold. But your estate may still be subject to state inheritance or estate taxes.
  • The federal gift tax and the federal estate tax are part of a unified tax system, so you need to pay attention to both of these taxes as you plan your overall estatetax strategy.
  • The little-known Estate Recovery Act can devastate your estate if you need to tap into certain types of government-paid health care. But you can protect your estate if you understand the rules.

Factoring Insurance into Your Estate Plan


  • Your life insurance policy may be an estate tax trap if you don’t take appropriate measures, such as setting up an irrevocable life insurance trust.

Setting Up a Trust in Your Estate Plan


  • Some trusts are general-purpose; others focus on specific objectives, such as supporting your favorite charity or helping to pay for your children’s or grandchildren’s education.
  • Some trusts are revocable, meaning that you can change your mind. Other trusts are irrevocable — they can’t be changed once you set them up. Make sure you understand the tradeoffs for your estate planning.

Estate Planning for Special Situations


  • If you’re in the process of getting a divorce, you have a lot on your mind. But you also need to look at how your divorce will affect your estate planning. Chances are the answer is “a lot!”
  • Unmarried couples, either opposite-sex or same-sex, need to pay special attention to each person’s estate planning. Otherwise, problems almost always occur when one partner dies before the other.


2. Estate Planning First Steps: How Much Is Your Estate Worth?

Estate planning is all about what you want to have happen to you, your dependents, and your stuff when you’re gone. Estate planning also covers what happens if you’re alive but can’t make decisions for yourself. You may think that you don’t care what happens after you’re gone, but what about the family, friends, and stuff you leave behind? Do you care if the most important person in your life receives anything you may have of value, or are you okay with having the state decide how to divvy up your stuff? Who’s going to go through your underwear drawer? Who will care for your beloved cat or, more importantly, your dependent children?

The first thing you need to do when planning your estate is to calculate your gross estate. Then you can employ different estate planning strategies based on the size and composition of your estate. Begin by entering your Net Worth total in Step 1 of the Calculating Your Gross Estate worksheet, which you can download and print here:


3. The probate process

Even though you won’t be around when your estate goes through probate (after all, you’ll be dead), you need to understand how the probate process works. At the most basic levels, the probate process involves two steps:

  • Pays debts you owe
  • Transfers assets to your beneficiaries

A state court called the probate court oversees the probate process.Because probate courts are state courts and not federal courts, the processes they follow may vary from one state to another. Yet despite their differences, these courts all pretty much follow the same basic processes and steps, which typically include:

  • Swearing in your personal representative
  • Inventorying your property
  • Distributing your estate (including paying bills and any taxes)

Swearing in your personal representative

In your will, you name who you want to be your personal representative — that is, the person in charge of your estate after you die. However, the court determines the personal representative for your estate under the following circumstances:

  • You die without a will.
  • You have a will but for some reason didn’t specify who you want to be your personal representative.
  • The person you selected has died or for some reason can’t serve — and you didn’t “bring in someone from the bullpen” to replace your original choice.

A family member, such as your spouse or an adult child, can request that the court appoint him or her as the personal representative for your estate. Regardless of who is finally selected, the court gives your personal representative official rights to handle your estate’s affairs. As evidence that this person has the authority to act on behalf of your estate, the court gives your personal representative a certified document called the Letters of Administration or Letters Testamentary.

In either case, the personal representative named in your will or determined by the court has to first be formally appointed by the court before officially entering into office (the term that’s used). Usually this involves that the personal representative take an oath of office, after which he or she will then receive the official documentation showing his or her status (the Letters of Administration or Letters Testamentary we mention above).

Your personal representative files a document called a Petition for Probate of Will and Appointment of Personal Representative with the probate court. This petition begins the probate process. If you have a will, the probate court issues an order admitting your will to probate. Basically, the court acknowledges your will’s validity.

Notifying creditors and the public

Some state laws require your personal representative to publish a death notice in your local paper. The death notice serves as a public notice of your estate’s probate and enables people who think they have an interest in your estate (such as creditors) to file a claim against your estate within a specified time period.

The notice is part of the process to make the matters of your estate part of the public record. Some people view the general public’s ability to review your private estate matters as one of probate’s disadvantages.

Inventorying your property

The personal representative must inventory the different types of property — real and personal — that make up your estate so that your estate value can be determined. This inventory is important for a couple of reasons:

  • To make sure you left enough to cover your debts and distributions to beneficiaries: If your estate doesn’t meet the monetary obligations of both your estate creditors and your property transfers to your beneficiaries, it’s subject to abatement statutes, meaning that one or more beneficiaries may receive less than you had wanted or even nothing at all.
  • To ensure that all property is accounted for. Your personal representative is in charge of collecting and inventorying your estate’s assets to make sure that all property is available for distributing at the end of the probate process. (Your beneficiaries, of course, will want to know what assets are in your estate.) If property is missing or not in your ownership at the time of your death, ademption statutes become relevant. These statutes determine if a replacement asset or cash equivalent should replace the missing property intended for your beneficiary.

You should already have a pretty good idea of what your estate is worth so that you can make intelligent choices for your estate plan. Obviously, your personal representative needs to know this information, too. So make sure that your personal representative has easy access to the list that shows what your estate includes and what your assets are worth. Even a slightly out-of-date list can serve as a starting point so that your personal representative doesn’t have to create an inventory from scratch.

Distributing the estate

The final step in the probate process is the distribution of your estate property. In other words, everyone (ideally) — both your creditors and your heirs — gets what’s coming to them.

Creditors that have a valid claim are likely to be paid in the following order (though the order varies from state to state):

1. Estate administration costs (legal advertising, appraisal fees, and so on)

2. Family allowances

3. Funeral expenses

4. Taxes and debt

5. All remaining claims

Whatever’s left after your creditors get their money is distributed to your heirs or to the beneficiaries you named in your will. If you died without a will, the laws in your state determine how your property is distributed.

If probate proceeds according to plan and all notices and communications are properly handled, your personal representative is usually protected against any subsequent, late-arriving claims. Your personal representative will be protected after some specified time period expires.



4. What Is a Trust?




  • Beneficiary. Just like with other aspects of your estate plan (your will, for example), a trust’sbeneficiary (or, if more than one, beneficiaries) benefits from the trust in some way, usually because the person or institution will eventually receive some or all of the property that was placed into trust.


5. Using Will Substitutes to Reduce Estate Taxes

Why would you want to use a will substitute (a legal agreement that transfers ownership upon your death) rather than your will for certain property? Property covered by a will substitute is transferred outside of probate, which may provide you with some significant advantages in the following:

  • Time. With will substitutes, property is typically transferred immediately upon your death, even if other parts of your estate are just beginning what may be a lengthy probate process.
  • Money. Will substitutes may save you and your estate some money, depending on whether or not your state’s version of the Estate Recovery Act — used to recover certain government-provided health care expenses you may receive — applies to your estate after you die. If the government is trying to grab part of your estate after you die under provisions of its Estate Recovery Act, you may be able to protect property from the government’s grasp by using will substitutes rather than your will.

If the resulting transfer of nonprobate property results in a death tax — whether state, federal, or any other tax — the taxes must still be paid. Will substitutes only help you do an end run around probate; applicable death taxes must still be paid. However, in many cases, will substitutes may reduce your taxes, so work with your accountant and attorney to coordinate your tax strategy with what you plan to do for will substitutes.

You can hold property in a variety of will substitute types, including:

  • Joint tenancy: This means that you and others have an equal and undivided ownership of some property.
  • Living trusts: These are a convenient for avoiding additional probates if you have real property like a house, vacation home, or income-producing investment property located in more than one state.

Additional will substitutes include:

  • Tenancy by the entirety: Similar to joint tenancy, the property’s co-owners have a right of survivorship feature that enables property to automatically transfer at the death of a co-owner to the surviving co-owner.
  • Payable on death accounts (PODs): This simple will substitute form keeps personal property out of probate. You fill out a form at your financial institutions and designate your account beneficiary. After your death, your beneficiary provides the financial institution with a copy of the death certificate and proof of identity, and then collects what is in the account.
  • IRAs, life insurance annuities, and other assets paid to named beneficiaries

Will substitutes predetermine who gets your property upon your death in one of two ways:

  • Right of survivorship: Whether you have a will or not is immaterial to the property transfer. If you have a will, the property transfers outside of your will. If you don’t have a will, the property transfers outside of intestate succession laws. The surviving joint tenant(s) receive(s) the property.
  • Beneficiary designation

Joint tenancy, tenancy by the entirety, and payable on death accounts use right of survivorship, while the other will substitute types use beneficiary designations.


6. Ownership of US Real Estate by Foreign Persons

(by Stuart Freeland, March 20, 2013)

Non US purchasers of US real property need tax advice as well as representation by a qualified real estate lawyer.  This is true for purchasers of residential real estate as well as commercial property.  There are a number of reasons:

1.  Non US persons that die owning US real property are liable for the US estate tax based on the fair market value of the property.  Although the exemption from the US estate tax has become very generous for US persons, especially after the most recent tax   act that became effective at the end of 2012 that provides a $5 million exemption from the tax, the exemption for non US persons remains at $60,000.  Many purchases by non US persons that your author has represented have involved properties, including vacation homes that cost them millions of dollars.  The marginal rate for the estate tax imposed on the estate of decedents dying after December 31, 2012 is 40%.

2.  In order to ensure that taxes owed by non US persons will be collected, the US has imposed withholding requirements on most payments of US source income made to them.  These include:

a.         a 30% withholding tax on most items of US source income, including interest, dividends, and, importantly, rental income and gain from the sale of US real property; and

b.        a requirement that 10% of the amount realized from the sale of US real property be withheld by the buyer and delivered to the US Treasury.  The withheld amount is applied against the tax due with respect to gain from the sale.

Although most capital gains derived by non US persons are exempt from US income tax, gain from the sale of US real property by a non US owner is subject to a 30% withholding tax imposed by the US Foreign Investment in Real Property Tax Act.  The amount withheld is applied against the tax due.  The seller must file a US tax return and pay any amount due or may claim a refund if the amount withheld exceeds the tax.

3.  Most non US persons do not wish to become known to the US Internal Revenue Service.  Direct ownership will likely require the purchaser to obtain a US taxpayer identification number and file a US tax return at some point in his or her ownership.  Returns are not required where taxes due from a non US person are withheld at the source; however, where the tax is not withheld, a US tax return is required.  Reporting is also required where treaty benefits are claimed.

4.  If US real property, including vacation property, is rented to parties other than family members, it may be treated for tax purposes as property used in a trade or business.  The US Tax Court has found that the rental of single property may satisfy this requirement.  If a foreign corporation is found to be engaged in a trade or business by renting the property, income including gain from the sale of the property, may become subject to a 30% branch profits tax on distributions to the home company that is in addition to the regular tax.  This is the principal reason that non US purchasers are generally advised to avoid ownership of US real property in a foreign corporation.  While it seems likely that the occasional rental of a vacation home to non family members would not constitute a trade or business, it is unclear what level of engaging in or management of such rentals would rise to that level.

5.  If a non US person spends 183 days in the US during a calendar year, he or she will be treated as a resident alien and become subject to the same tax obligations as a US citizen for that year.  If such person becomes domiciled in the US, he or she will become liable for US transfer taxes, including federal estate and gift tax liabilities incurred during any year while a US domiciliary.  The strategies discussed below assume that the non US purchaser does not become a resident alien.

For the reasons set forth above, many non US persons hold US real property, including vacation homes, in an entity that enables them to avoid personal contact with the US tax system.  If the purchaser wishes to have control over the property while ensuring that his or her estate will not be liable for the US estate tax, it is common to hold title to US real property in a US corporation owned by a foreign corporation.  This is the form of ownership that your author has most commonly recommended.  Direct ownership of the stock of the corporate owner by a non US person will not avoid the US estate tax in most circumstances because stock in a corporation that owns US real property that comprises more than one-half of its real property plus other business property is treated for tax purposes as though US real property.  Such stock is defined as a US real property interest, and the corporation is defined as a US real property holding company.

Although the US estate tax can be avoided by ownership of US real property in a corporation organized in the purchaser’s home country, that structure is generally avoided because of the branch profits tax described above.  This tax can be avoided in certain circumstances, particularly if the ownership of the property does not constitute a trade or business, but it is quite impenetrable, introducing a great deal of complexity into the ownership and disposition of the property that is generally avoided.

As described above, most capital gains derived by non US owners from the sale of US property are exempt from US tax, an important exception being the sale of a US real property interest.  Therefore if, after the sale of the property, a corporation is no longer a US real property holding company, it can distribute the sale proceeds to its non US parent in liquidation free of US tax.  A corporation is no longer a US real property holding corporation and its shares are no longer a US real property interest if it owns no US real property and all of its real property interests owned within the preceding five years have been disposed of in taxable transactions.

Alternatively a purchaser might elect to purchase US real property in a family trust that is not a grantor trust that would cause him or her to be treated as the owner of the property.  The purchaser would thereby avoid the US estate tax and eliminate the double level of tax that would be imposed on dividends paid by a US corporation.  Distributions to beneficiaries of income and some types of gain would be subject to withholding by the trustee.

If the property is owned in a corporation, fair market rent should be paid for use of the property.  Otherwise such use is effectively a taxable distribution from the corporation.  In most cases payment of rent to a corporation owning US property should not result in significant tax liability as the rental income will be needed to cover deductible operating expenses of the property.  The tax treatment of rent and expenses where the property is owned by a trust is more complex and beyond the scope of this comment.

Many of the adverse consequences described above are considerably ameliorated by income and estate tax treaties between the US and most of the principal countries of the world, significantly excluding many countries that serve as havens for tax avoidance strategies.  It is important to determine whether there is an existing treaty with the purchaser’s home country and the benefits provided by the treaty.

Another important consideration is to ensure that the purchaser involves his or her tax adviser in the home country in the creation of the ownership structure.  In some matters that your author has advised on the corporate arrangement described above was not favorable in the home country.  In that circumstance, ownership of the US corporation by a corporation located in a country that provides tax advantaged ownership such as the Cayman Islands may provide a satisfactory (although complicated) structure.

To ensure compliance with requirements imposed by the Internal Revenue Service, you are informed that any U.S. tax advice contained in this comment is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. tax penalties.

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