Estate Planning Guide

Estate Planning A Guide for Clients

The purpose of this guide is to give you a general sense of what will be involved in planning and administering your estate. It is not intended to be encyclopedic, or to give conclusive advice on your particular situation. Still, we hope it will make the whole process a little less mysterious and a little simpler for you. We have also enclosed an Estate Plan Information sheet which should help you to organize your planning and ours.

What is a will for?

Your will is the document by which you direct how your property will be distributed after death. It is also, if you have children under age 18, your best hope of ensuring that your children will have the guardian or guardians you think will be best for them.

A will is a matter of public record. After death, it is filed with the Probate Court for the county in which you lived. (If you owned real estate in other states, a court-certified copy of the will must generally be filed in those states as well.)

Once the will is "allowed" or "probated," the executor, who is the person or financial institution named in the will to manage the estate, receives a court appointment, and from that time on, until the estate is closed, the executor is responsible for all of the property of the estate. When the work is done, the executor must file an account with the court reporting all financial transactions. It is possible and sometimes advisable to have more than one executor. Also, it is not uncommon to name one's spouse or child as executor. In choosing any one child over another as executor, give careful consideration to the potential for family discord.

Why is a will advisable?

If you die "intestate," that is, without a will, your heirs will select who will administer your estate and the laws of Massachusetts will determine where your property goes. What the laws provide rarely coincides with what anyone would freely choose. For example, if you have a spouse and two children and die with a probate estate of $500,000, half will go to your spouse and half to your children. (The term "probate estate" includes only property held in your individual name that is governed by your will and excludes “non-probate” property, such as jointly held assets, insurance or retirement benefits payable directly to a beneficiary or property held in trust.)

Furthermore, if you have a child who requires a guardian and die without a will, the Probate Court will have no guidance in choosing who should serve in this role. It will turn in most cases to your closest relatives, who may or may not be the appropriate persons for the task.

Should you "avoid probate"?

Some years ago a man with a good feel for how to alarm people wrote a book on this subject. While it is true that probate proceedings can in some cases make it more difficult to sell the decedent's property to raise cash, the dangers of this are greatly exaggerated. A competent executor will be able to handle the process smoothly, and except in the first few months after death, there should be no difficulty in keeping a steady flow of cash to a surviving spouse or other dependents. To ease the transition period it is a good idea to keep some cash in a joint account with such a dependent, and life insurance is often advisable as well.

Keeping your probate estate low can, however, somewhat reduce your executor's fees and legal expenses if your estate is relatively modest and tax planning is not a consideration. This can be done by holding property jointly with your intended beneficiary, making your life insurance payable directly to a beneficiary, or putting your assets into a lifetime trust. But each of these approaches has drawbacks, and none should be taken without thought on your part and good advice.

What is a trust?

A trust is essentially an agreement between you and a trustee or trustees, who promise to hold your money upon whatever terms you specify. It enables you to allocate your property in ways that reflect your family's true needs, where a simple division of assets is inappropriate. It permits you, for example, to give income to an ailing parent for life, and the principal to a child later on, or to give a child all necessary support without putting the property into his or her hands at an immature age. Where a sizeable estate is concerned, it is also a necessary part of any sound tax plan.

Choosing trustees is in many ways more important and more difficult than choosing executors. Your trust will probably last much longer than your estate, and the trustees must not only be good investors but sensitive to your family's needs. Sometimes it is a good idea to have one trustee who is good with money, and one who knows the family well.

Most large banks and many law firms offer trustee services, and there are a number of individuals and small companies that specialize in this work. A professional trustee offers experience and organization, and, if chosen carefully, access to good investment advice. A professional trustee will not always, however, be in the best position to know your family's needs, and you should consider naming an additional trustee for that purpose. You may also choose to rely solely on family members or friends to be trustee, particularly a family member or friend with a good business sense.

What taxes will your estate incur?

Both the federal and Massachusetts governments levy an "estate tax," which is a graduated tax based on the size of your "taxable estate" at death. The taxable estate includes both probate and non-probate property, to the extent of a decedent's power to control where the property goes. Thus, life insurance is usually included, because the insured person normally retains the power to change the beneficiary. Jointly-owned property is also included, but the amount taxed varies depending upon the relationship of the co-owners. Married couples are treated as if each owned 50% of jointly-owned assets at death, while up to 100% of assets owned jointly with another person will be included if the decedent contributed all the funds to purchase the property. Fees, debts, expenses, and charitable bequests are deducted, as is 100% of property passing to a surviving spouse. Special rules apply to married couples if one or both members are not U.S. citizens.

The federal government may also tax gifts made by you while living in excess of $13,000 per year per person (with future adjustments for inflation), but subject to a $1,000,000 lifetime exemption. You may also pay tuition or medical expenses for another free of gift tax as long as the payment is made directly to the institution. In addition to the gift and estate taxes, there is also a generation-skipping transfer (“GST”) tax on gifts or bequests of more than a set exemption amount to any individual two generations or more below you, e.g. a grandchild. This GST tax has been repealed (with the estate tax) for the 2010 calendar year as explained below.

Congress made significant changes to the federal tax laws in an act that was signed into law on June 7, 2001. Under the act, estates that are less than a defined “exemption amount” were not taxed. The exemption increased over a 10 year period from $1 million to $3.5 million (in 2009). The 2001 tax act provided that the estate tax would be eliminated in 2010, but only for one year. After that one year, the 2001 act would “sunset” and the old estate tax (pre-2001 law) would return in 2011. The exemption amount would then revert to $1 million. Although it was expected that Congress would act prior to 2010 to extend the estate tax and keep the exemption at its 2009 level of $3.5 million, they failed to do so. While it is difficult to predict what Congress will do, it is expected that the estate tax will return no later than 2011 with an exemption that could be as low as $1 million or as high as $5 million.

Prior to the 2001 changes, gift and estate taxes were tied together in a unified transfer tax system, which meant that the exemption amount was available over the course of your lifetime and, to the extent it was not used during life, the balance could be used by your estate. Although the 2001 law kept the integration of lifetime gifts and deathtime transfers and continued to permit annual gifts and payments of tuition and medical expenses, it froze the gift tax exemption at $1,000,000, rather than matching it to the estate tax exemption. The 2001 act also kept the gift tax in effect in 2010.

The Massachusetts estate tax law is based on the federal law as it existed on December 31, 2000. This means that the exemption amount for Massachusetts may not match the federal exemption amount, with the result that a Massachusetts tax may be due even though the estate is exempt from federal tax. The change complicates tax planning because the federal and state tax systems are not based on the same law.

Can these taxes be reduced?

If your estate exceeds the exemption amount, you may be able to take steps which will reduce or, perhaps, eliminate the estate tax.

For example, couples with combined estates in excess of the exemption amount may want to consider the use of a trust as a fairly simple way to save estate taxes. A couple with $7 million in 2009 split evenly between them could avoid all federal (but not Massachusetts) estate taxes on both deaths by having the first one to die leave their share of the combined property in trust for the benefit of the survivor rather than outright to him or her. This permitted the full use of the $3.5 million exemption amount of each person. This planning option will continue to work in 2010 with respect to the Massachusetts estate tax (for up to $1 million worth of property at the first death) and will likely be restored as a federal planning method once Congress acts.

In addition, any person with charitable intent can achieve tax savings by making gifts to charitable organizations. These may be made directly or through special charitable trusts which permit the gift to be split between an individual and a charity.

These are merely two of the many tax planning options which may be appropriate for your plan. You can choose to explore such options in detail or to keep them in the background as is suitable to your individual situation.

* * * *

We hope this guide helps in your initial thinking about your estate plan. Please remember that each estate plan is unique and that these are only general guidelines. We look forward to helping you work through the particulars of your own plan.

K O T I N, C R A B T R E E & S T R O N G, L L P
One Bowdoin Square
Boston, Massachusetts 02114-2925
Voice: 617-227-7031
Facsimile: 617-367-2988
Email:


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Business Law Education and Disability Law Employment Law Estate Planning and Administration Intellectual Property Law Litigation Personal Injury and Medical Malpractice Real Estate Law Tax Law		Estate Planning A Guide for Clients The purpose of this guide is to give you a general sense of what will be involved in planning and administering your estate. It is not intended to be encyclopedic, or to give conclusive advice on your particular situation. Still, we hope it will make the whole process a little less mysterious and a little simpler for you. We have also enclosed an Estate Plan Information sheet which should help you to organize your planning and ours. What is a will for? Your will is the document by which you direct how your property will be distributed after death. It is also, if you have children under age 18, your best hope of ensuring that your children will have the guardian or guardians you think will be best for them. A will is a matter of public record. After death, it is filed with the Probate Court for the county in which you lived. (If you owned real estate in other states, a court-certified copy of the will must generally be filed in those states as well.) Once the will is "allowed" or "probated," the executor, who is the person or financial institution named in the will to manage the estate, receives a court appointment, and from that time on, until the estate is closed, the executor is responsible for all of the property of the estate. When the work is done, the executor must file an account with the court reporting all financial transactions. It is possible and sometimes advisable to have more than one executor. Also, it is not uncommon to name one's spouse or child as executor. In choosing any one child over another as executor, give careful consideration to the potential for family discord. Why is a will advisable? If you die "intestate," that is, without a will, your heirs will select who will administer your estate and the laws of Massachusetts will determine where your property goes. What the laws provide rarely coincides with what anyone would freely choose. For example, if you have a spouse and two children and die with a probate estate of $500,000, half will go to your spouse and half to your children. (The term "probate estate" includes only property held in your individual name that is governed by your will and excludes “non-probate” property, such as jointly held assets, insurance or retirement benefits payable directly to a beneficiary or property held in trust.) Furthermore, if you have a child who requires a guardian and die without a will, the Probate Court will have no guidance in choosing who should serve in this role. It will turn in most cases to your closest relatives, who may or may not be the appropriate persons for the task. Should you "avoid probate"? Some years ago a man with a good feel for how to alarm people wrote a book on this subject. While it is true that probate proceedings can in some cases make it more difficult to sell the decedent's property to raise cash, the dangers of this are greatly exaggerated. A competent executor will be able to handle the process smoothly, and except in the first few months after death, there should be no difficulty in keeping a steady flow of cash to a surviving spouse or other dependents. To ease the transition period it is a good idea to keep some cash in a joint account with such a dependent, and life insurance is often advisable as well. Keeping your probate estate low can, however, somewhat reduce your executor's fees and legal expenses if your estate is relatively modest and tax planning is not a consideration. This can be done by holding property jointly with your intended beneficiary, making your life insurance payable directly to a beneficiary, or putting your assets into a lifetime trust. But each of these approaches has drawbacks, and none should be taken without thought on your part and good advice. What is a trust? A trust is essentially an agreement between you and a trustee or trustees, who promise to hold your money upon whatever terms you specify. It enables you to allocate your property in ways that reflect your family's true needs, where a simple division of assets is inappropriate. It permits you, for example, to give income to an ailing parent for life, and the principal to a child later on, or to give a child all necessary support without putting the property into his or her hands at an immature age. Where a sizeable estate is concerned, it is also a necessary part of any sound tax plan. Choosing trustees is in many ways more important and more difficult than choosing executors. Your trust will probably last much longer than your estate, and the trustees must not only be good investors but sensitive to your family's needs. Sometimes it is a good idea to have one trustee who is good with money, and one who knows the family well. Most large banks and many law firms offer trustee services, and there are a number of individuals and small companies that specialize in this work. A professional trustee offers experience and organization, and, if chosen carefully, access to good investment advice. A professional trustee will not always, however, be in the best position to know your family's needs, and you should consider naming an additional trustee for that purpose. You may also choose to rely solely on family members or friends to be trustee, particularly a family member or friend with a good business sense. What taxes will your estate incur? Both the federal and Massachusetts governments levy an "estate tax," which is a graduated tax based on the size of your "taxable estate" at death. The taxable estate includes both probate and non-probate property, to the extent of a decedent's power to control where the property goes. Thus, life insurance is usually included, because the insured person normally retains the power to change the beneficiary. Jointly-owned property is also included, but the amount taxed varies depending upon the relationship of the co-owners. Married couples are treated as if each owned 50% of jointly-owned assets at death, while up to 100% of assets owned jointly with another person will be included if the decedent contributed all the funds to purchase the property. Fees, debts, expenses, and charitable bequests are deducted, as is 100% of property passing to a surviving spouse. Special rules apply to married couples if one or both members are not U.S. citizens. The federal government may also tax gifts made by you while living in excess of $13,000 per year per person (with future adjustments for inflation), but subject to a $1,000,000 lifetime exemption. You may also pay tuition or medical expenses for another free of gift tax as long as the payment is made directly to the institution. In addition to the gift and estate taxes, there is also a generation-skipping transfer (“GST”) tax on gifts or bequests of more than a set exemption amount to any individual two generations or more below you, e.g. a grandchild. This GST tax has been repealed (with the estate tax) for the 2010 calendar year as explained below. Congress made significant changes to the federal tax laws in an act that was signed into law on June 7, 2001. Under the act, estates that are less than a defined “exemption amount” were not taxed. The exemption increased over a 10 year period from $1 million to $3.5 million (in 2009). The 2001 tax act provided that the estate tax would be eliminated in 2010, but only for one year. After that one year, the 2001 act would “sunset” and the old estate tax (pre-2001 law) would return in 2011. The exemption amount would then revert to $1 million. Although it was expected that Congress would act prior to 2010 to extend the estate tax and keep the exemption at its 2009 level of $3.5 million, they failed to do so. While it is difficult to predict what Congress will do, it is expected that the estate tax will return no later than 2011 with an exemption that could be as low as $1 million or as high as $5 million. Prior to the 2001 changes, gift and estate taxes were tied together in a unified transfer tax system, which meant that the exemption amount was available over the course of your lifetime and, to the extent it was not used during life, the balance could be used by your estate. Although the 2001 law kept the integration of lifetime gifts and deathtime transfers and continued to permit annual gifts and payments of tuition and medical expenses, it froze the gift tax exemption at $1,000,000, rather than matching it to the estate tax exemption. The 2001 act also kept the gift tax in effect in 2010. The Massachusetts estate tax law is based on the federal law as it existed on December 31, 2000. This means that the exemption amount for Massachusetts may not match the federal exemption amount, with the result that a Massachusetts tax may be due even though the estate is exempt from federal tax. The change complicates tax planning because the federal and state tax systems are not based on the same law. Can these taxes be reduced? If your estate exceeds the exemption amount, you may be able to take steps which will reduce or, perhaps, eliminate the estate tax. For example, couples with combined estates in excess of the exemption amount may want to consider the use of a trust as a fairly simple way to save estate taxes. A couple with $7 million in 2009 split evenly between them could avoid all federal (but not Massachusetts) estate taxes on both deaths by having the first one to die leave their share of the combined property in trust for the benefit of the survivor rather than outright to him or her. This permitted the full use of the $3.5 million exemption amount of each person. This planning option will continue to work in 2010 with respect to the Massachusetts estate tax (for up to $1 million worth of property at the first death) and will likely be restored as a federal planning method once Congress acts. In addition, any person with charitable intent can achieve tax savings by making gifts to charitable organizations. These may be made directly or through special charitable trusts which permit the gift to be split between an individual and a charity. These are merely two of the many tax planning options which may be appropriate for your plan. You can choose to explore such options in detail or to keep them in the background as is suitable to your individual situation. * * * * We hope this guide helps in your initial thinking about your estate plan. Please remember that each estate plan is unique and that these are only general guidelines. We look forward to helping you work through the particulars of your own plan. K O T I N, C R A B T R E E & S T R O N G, L L P One Bowdoin Square Boston, Massachusetts 02114-2925 Voice: 617-227-7031 Facsimile: 617-367-2988 Email:
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