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Wealth Advisory & Planning

May 25, 2022

Principles of Estate Planning

Estate planning is the process of arranging for the orderly and efficient transfer of wealth from one person to another. You may want your children to receive certain assets during your lifetime and the balance of your assets at your death, or to plan for transfers of wealth to your spouse, other individuals or one or more charities. Regardless of your intentions, you can greatly facilitate the process— and reap significant benefits—by starting early and implementing your estate plan over a period of time.


The manner in which property is held dictates how (and to what extent) the owner or owners may transfer it in the future. Thus, the first step in constructing an estate plan should be to compile an inventory of all of your assets, identifying the way in which each item is titled. Depending upon titling, property can pass one of three ways at death:

  1. All of your individually owned assets, that is, everything held by you in your name alone, will pass pursuant to the terms of your Will. This includes your share of property held with another (or others) as joint tenants-in-common. In community property states, this would also include your one-half interest in community property. If you fail to leave a Will, or if no Will is found within a certain period of time following your death, your estate is “intestate,” and your individually owned assets will pass to your closest living relatives as determined pursuant to state law.
  2. Assets that you own with another (or others) as joint tenants “with right of survivorship,” or with your spouse as tenants “by the entireties,” will pass directly to your survivors by operation of law. The transfer of these assets is unaffected by the provisions of your Will and the assets are not part of your probate estate, rather, the transfer is effectuated merely by the fact of one tenant surviving another.
  3. Other assets pass subject to the terms of a beneficiary designation form you’ve executed, again, independent of the provisions of your Will. Beneficiary designations govern the disposition of everything from life insurance to retirement plans, including IRAs, and annuities. Even some non-retirement investment accounts can pass by beneficiary designation. Since these assets, in the aggregate, can make up a significant portion of your wealth, it’s important to ensure beneficiary designations are current and correct. Depending upon titling, the terms of your Will may control the disposition of much or little of your estate. Failure to take titling into consideration in formulating an estate plan can result in inequities or other outcomes that are contrary to your intent.


Legal documents, drafted by an experienced estate planning attorney, are necessary to ensure that your intentions regarding both your person and your property will be carried out. Lawyers often recommend that clients execute at least three, if not more, different documents designed to anticipate most contingencies and provide appropriate direction. A typical array of estate planning documents may include:

A will

As previously stated, your Will governs the disposition of your individually owned assets. The part of your estate that will pass pursuant to the provisions of your Will is called your “probate estate.” Your Will may provide for trusts to be created after your death. A trust created under your Will is called a “testamentary trust.”

A trust

The use of a trust permits you to complete a transfer of assets to your intended beneficiaries without simultaneously empowering the beneficiaries to exercise unfettered control over the assets of the trust. A third party you select will serve as trustee, making decisions with respect to the use, investment and distribution of trust assets in accordance with the terms you’ve stated in the document.

The trustee is responsible for the trust assets during the period of time that the trust is in effect, which may be years or lifetimes. Trusts are utilized for a myriad of reasons: to protect beneficiaries from imprudence, disability or litigation; to provide beneficiaries with investment expertise or mentorship regarding the responsible stewardship of wealth; and, in some situations, to achieve tax savings. Two common types of trusts are described below.

A revocable trust

Also known as a “living trust” or a “pour over trust,” this technique enables you to transfer assets out of your name during life while retaining full use, benefit and control of the assets as long as you are alive and well. Because the trust document is revocable, you can amend the terms of the trust, or even revoke it in its entirety, at any time. This type of trust functions in conjunction with your Will, usually as beneficiary of the residue, which “pours over” into the trust at your death (hence the moniker).

After your death, the terms of the trust govern the distribution of trust property, whether you transferred the property during your lifetime or by Will. Assets you place in the trust during your lifetime are removed from your probate estate. For that reason, even though use of a revocable trust does not serve to reduce death tax liability, it does streamline the administration of an estate and curtail some of the expenses and delays associated with estate settlement.

An additional advantage associated with the use of a revocable trust is that in the event that you become unable to manage your own affairs, the trustee(s) you designate in the document can assume financial responsibility for the property in the trust, even while you are still living. Of course, the trustee is bound by a fiduciary duty to administer the trust assets pursuant to the provisions set forth in the trust instrument (for your benefit during your lifetime, and for the benefit of your beneficiaries after your death). This arrangement provides for a continuity that can prevent losses from occurring due to incapacity or external influence. Also, the provisions of your revocable trust are hidden from public record at your death. That means that, unlike a Will, details such as the extent of the wealth held in the trust, the identity of your beneficiaries and any restrictions you’ve placed upon the inheritance are not disclosed as a matter of course.

An irrevocable life insurance trust

In certain Instances it is appropriate to create a separate and permanent vehicle to own and serve as beneficiary of your life insurance. Structured and maintained properly, the trust, and not you as the insured individual, owns the policy and receives the death benefit. As a result, the life insurance proceeds are not included in your taxable estate at death. Moreover, the assets inside the trust are afforded a measure of protection from the creditors of your beneficiaries. Depending upon trust provisions, an irrevocable life insurance trust may enable you to provide for liquidity in an illiquid estate or to preserve assets for future generations of your descendants. This technique is not without traps for the unwary, however. Before implementing this type of trust, be aware that the administrative formalities required are critical to its success, and must be rigorously observed.

A financial power of attorney

A financial power of attorney confers upon your legal agent (one or more individuals you specify in the terms of the document) the power to take any action with respect to your property that you yourself would be able to take. A financial power of attorney may take effect immediately upon execution of the document—called a “durable” power—or may require the named agent to furnish proof of your incapacity in order to act, called a “springing” power. A power of attorney may be limited in scope (providing the named agent the authority to act only with respect to a given asset, transaction, or during a specific time frame), or may be plenary. The authority granted to your agent pursuant to this document is extinguished immediately upon your death.

A health care power of attorney

A health care power of attorney confers upon your agent the authority to request and receive medical information and make health care decisions for you, except for end of life decisions. Generally, the grant of authority is bifurcated into two parts: the first, the power to deal with your medical information, is effective immediately, and the second, which enables the agent to make medical decisions on your behalf, is effective upon your incapacity (as determined by one or more physicians, depending upon state law). This agent’s authority terminates if you are determined to be in a terminal state or end of life condition, as those terms are defined in your state’s statutes. At that time, your Advanced Medical Directive (Living Will) applies.

An advanced medical directive, or living will

A living will names an agent to make end of life decisions for you in the event that you are unable to do so. Your agent may accept or refuse medical treatment on your behalf according to your stipulations in the document. Your living will may be precatory (an expression of your wishes) or a directive (which obligates your agent to take certain actions under a given set of circumstances), or contain elements of both. Your attorney or physician may recommend that you complete other ancillary documents providing direction with respect to your medical care, e.g., a Physician’s Order for Life Sustaining Treatment (“POLST”) or a Do Not Resuscitate Order (“DNR”), depending upon your individual views and your state of residence.


The transfer of wealth by a US citizen or resident can be subject to considerable tax, consuming a substantial portion of the assets your family or other beneficiaries would otherwise receive. A gift tax is imposed upon transfers made during lifetime and an estate tax is imposed upon wealth transferred at death. In addition, the generation skipping transfer tax (“GST”) is levied on the transfer of wealth to grandchildren or more remote descendants. And, depending upon your state of residence, transfers of wealth may be subject to state tax, too.

On January 1, 2018, a new law became effective, entitled the “2017 Tax Cuts and Jobs Act” (“TCJA”). The new law temporarily increases the “basic exclusion amount,” which is the amount an individual can pass free of Federal gift, estate or GST tax during his/her lifetime and at death, in the aggregate. The increased basic exclusion amount is
$10,000,000, indexed for inflation occurring after 2011, and is applicable to gifts made and estates of decedents dying after 2017 and before 2026. As of January 1, 2021, the inflation-adjusted basic exclusion amount is $11,700,000. The TCJA maintained the top gift, estate and GST tax rate of 40%, and the concept of “portability” of the estate tax exemption, as explained later in further detail.

3.1 Federal Estate Tax

The Federal Estate Tax is imposed on the value of all assets owned at death, regardless of whether the transfer is made by will, by survivorship or by beneficiary designation. The following paragraphs explain the effects of titling on tax treatment, special deductions and exemptions, and rates of tax.

How titling affects tax treatment.

The general rule is that the value of everything you own at death is added together to determine your total taxable estate. The way in which a piece of property
is titled will determine how much of that asset will be included in your estate for tax purposes.

  1. Individually owned assets are included in your estate at their full fair market value on the date of death.
  2. Likewise, the fair market value of each asset held in a revocable trust is also included.
  3. Any property held as tenants in common with another or others is included to the extent of your fractional or percentage share of ownership. Tenants in common is a form of co-ownership that does
    not provide for direct transfer to the surviving co- owner(s). Instead, the disposition of your share of the property is controlled by the provisions of your Will.
  4. For joint tenants with right of survivorship there are two rules. If you own assets as joint tenants with anyone other than your spouse, the full value is generally included in your taxable estate and the asset passes directly to the co-owner at your death by operation of law. In the case of assets owned jointly with your spouse with rights of survivorship or by the entireties, one-half is included in the estate of the first deceased spouse and the asset passes to the surviving spouse by operation of law. Because these assets pass by survivorship to your spouse (for which your estate may take a marital deduction, as explained later), the full value is included in the surviving spouse’s taxable estate when he or she later dies.
  5. The proceeds of life insurance policies on your life are subject to estate tax unless:
    (1) you possess no ownership rights in the policy;
    (2) you have not made a gift transfer of your policy within three years before your death; and
    (3) the death benefit is not payable to your estate. So, individually owned life insurance is generally subject to estate tax, while life insurance owned by and payable to an irrevocable trust is generally not.
  6. Qualified retirement savings plans and IRAs. The full fair market value of retirement plans as of the date of death are included in your taxable estate. Furthermore, payments from the plans to your designated beneficiaries—whether in a lump sum minimum required distributions to a spouse or other eligible designated beneficiary who is exempt from the provisions of the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act effective January 1st of 2020, or partial distributions during the 10-year maximum withdrawal period permissible under the SECURE Act to a beneficiary who is not exempt—will be subject to tax at the beneficiaries’ personal income tax rates. Fortunately, if your spouse is the beneficiary of your retirement plan and he or she survives you, estate tax on plan assets is deferred until your spouse’s death due to the availability of the marital deduction, discussed below. Non-spouse beneficiaries can receive an income tax deduction for the portion of the estate tax paid that is attributable to your retirement plan or IRA. Nevertheless, the combination of estate and income tax can, in the aggregate, eventually consume as much as 70% of the value of these balances. If retirement savings plans and IRAs represent a significant part of the value of your estate, you should be considering engaging in advanced planning strategies that can alleviate some of the tax burden and preserve a greater portion of your wealth.

Estate tax treatment of lifetime gifting.

The aggregate value of taxable gifts made during
your lifetime is taken into account for estate tax purposes. In this fashion, the estate tax is a cumulative tax levied on the total wealth you transfer during lifetime or at death. Some rules relating to this
aspect of the estate tax are:

  1. “Excluded gifts,” which are explained later, are not taken into account.
  2. Ordinarily, the amount taken into account for purposes of the estate tax is the fair market value on the date of the gift. That means any appreciation in the value of assets that occurs after the date of the gift, as well as any income produced by those assets, is not subject to tax. That’s one reason why lifetime gifts continue to make sense from a tax planning perspective.
  3. If you make a gift but retain any form of benefit or control over the property you give away, the value as of the date of death is taken into account.
  4. The method of calculating the taxes is designed to prevent imposition of both gift tax and estate tax on the same property.

Estate tax marital deduction.

Most property that passes at death to your surviving spouse is not subject to tax in your estate. For these purposes, it is irrelevant whether the transfer takes place under your Will, pursuant to a beneficiary designation or by right of survivorship. After your death, unless your spouse depletes the resources received from you, the full value as of the survivor’s date of death is includible in his or her estate. The marital deduction is simply a means of deferring estate tax until your spouse’s death. In addition to making outright transfers to your spouse, you can obtain the marital deduction for transfers in trust for the benefit of your spouse, under certain circumstances. In order to qualify for the marital deduction, a trust for the benefit of your spouse must provide that your spouse is the sole beneficiary during his or her lifetime. Your spouse must receive all of the income from the trust at least annually. No other individual may exercise any power over the trust, or receive any distributions from the trust, during the life of your surviving spouse. The trust may also grant your spouse the right to direct the distribution of the remaining trust assets at his or her death by Will among a certain group of beneficiaries that includes his or her creditors or estate. This is called a “Life Estate with Power of Appointment” trust. If the trust does not grant your spouse that right, your executor must make an election on your estate tax return that specifically designates the trust as marital property, ensuring that the balance will be included in your spouse’s estate at his or her death. This is called a “Qualified Terminable Interest Property” or “QTIP” trust. In the case of a QTIP trust, you, as testator, could direct how the balance of the trust assets will be distributed at your spouse’s death.

Tax rates.

The current effective tax rate is a flat 40%.

The unified credit.

This term refers to the figure used on gift and estate tax returns to calculate remaining exemption amounts after each reported transfer.


As previously mentioned, the exemption is now
$11,700,000 per person, and the combined exemption of a married couple is $23,400,000 (2021).

Exemption portability.

A surviving spouse is entitled to use any remaining portion of the predeceased spouse’s unused exemption either for gift or estate tax purposes. Note, however, that the exemption from the GST tax is not portable, and must be used by each spouse individually.

3.2 Federal gift tax

The gift tax was created in order to prevent avoidance
of the estate tax by way of lifetime transfers. The following is a summary of the basic gift tax rules.

Certain gifts are excluded from tax altogether.
These are:

  1. The first $15,000 in value of gifts to each individual recipient (as many as you wish) in any year or every year. This is known as the “annual exclusion.”
  2. Payments for tuition and/or for medical expenses, if payment is made directly to the school, university, medical facility or physician providing the education or medical service (including health insurance paid directly to the provider).

The unlimited marital deduction is available for lifetime transfers, so that no taxable gift results from transfers between husband and wife.

If you are married and you make a gift from your separate property, you may treat the gift as made half by you and half by your spouse, provided that the recipient is someone other than your spouse and that your spouse consents to “gift splitting.”

Among other things, this means that a married couple can transfer up to $30,000 per year to each recipient without exceeding the annual exclusion.

If you make gift transfers that exceed or do not qualify for these exclusions, you pay gift tax only when the cumulative amount of your taxable gifts exceeds the lifetime exemption amount.

Otherwise, any gifts over the annual exclusion amount in any given year are simply counted against the amounts you are able to transfer tax free at death. Gift tax rates have been identical to estate tax rates for a number of years and, under the TCJA of 2017, the rates remain unified.

3.3 The generation-skipping transfer tax

The federal wealth transfer tax system anticipates that, as wealth is passed along to the descendants of each family, a tax will be imposed at each transfer from one generation to the next. The underlying purpose of the GST tax is to make sure that a wealth transfer tax is imposed upon each generation. One advanced planning technique is to create trusts that provide income and other financial benefits to your children, with the balance of the trust assets held in continued trust for the benefit of your grandchildren. Since your children never acquire outright ownership of, or control over, the wealth transferred in this manner, the remaining trust assets are not subject to estate tax when they die.

Over the years, the use of trusts for the benefit of multiple generations became widespread. It became commonplace for a wealthy family to incur estate tax only once every 2 or3 generations. In order to curtail these strategies, a new tax was established called the “generation-skipping transfer tax” (“GST”). Despite the GST tax, it remains possible to preserve a substantial portion of your estate for future generations free of tax. A review of the basic principles of GST tax follows:

The generation skipping transfer tax is separate from and in addition to the estate and gift tax.

It is imposed when wealth passes to a beneficiary who is more than one generation (or, if unrelated, more than 37½ years) younger than you. These beneficiaries are called “skippersons.”

Transfers to anyone in the same generation or just one generation younger are not subject to GST.

Examples are your spouse, brothers, sisters and children. These are called “non-skip persons.”

If you make a substantial transfer directly to a grandchild, you incur GST immediately.

This is called a “direct skip.” If you create a trust for the benefit of your children and grandchildren, the tax must be paid only when distributions are made to skip persons. If that occurs during the term of the trust, it is called a “taxable distribution;” or, if skip persons receive the balance upon termination of the trust, it is known as a “taxable termination.”

For direct skip transfers, the GST rules allow for the same exclusions as those available for gift tax.

That means you can give up to $15,000 per year (or $30,000 if you are splitting gifts with your spouse) to each of your grandchildren any year or every year, free of GST. You can also pay any medical costs or their tuition for private school, college or university without utilizing your exemption from the GST tax for those transfers.

As with the estate tax, every person is also entitled to a lifetime GST tax exemption of $11,700,000 (in 2021).

This amount is also indexed annually for inflation. Like the estate tax, this amount is available for transfers made during your lifetime or at your death, but unlike the estate tax, is not “portable.”

From a planning standpoint, it is imperative that GST exemption be applied, or “allocated,” to a trust for the benefit of multiple generations when the trust is initially funded, and at the time of each subsequent transfer to the trust.

If GST exemption is allocated to all amounts transferred to the trust, the entire trust, including all future appreciation, remains exempt from GST tax throughout its existence and final distribution. This efficiency enables the transfer of significant wealth to future generations of your descendants at a reduced tax cost.







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