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Estate Planning
Estate planning describes the process which includes management of the family assets, preservation of wealth, protection from creditors, and minimization of taxes. If you have a well-drafted estate plan in place, you'll ensure that your estate passes to whom you want, when you want, and is carried out in the manner you've chosen.
The process of estate planning often includes the preparation of the following documents, as appropriate: Wills or Will substitutes (sometimes called “Revocable Living Trusts”), trusts to own life insurance policies or other property (Irrevocable Life Insurance Trusts), legal instruments providing for the management of your property upon an incapacitating event (Durable Powers of Attorney for Financial Affairs) and authorizing someone to make critical health care decisions on your behalf if you are unable to make those decisions yourself (Georgia Advance Directive for Health Care and HIPAA authorizations) just to name a few.
Our firm also specializes in more advanced estate planning techniques. Many of our clients wish to establish charitable foundations and/or trusts so that they may give in an organized approach. Advanced planning may also consist of trusts for children who may have specials needs (Special Needs Trusts) or the creation of a Family Limited Partnership (FLP). Whatever the situation, MENDEN, FREIMAN & ZITRON, LLP is here to guide you.
For more information about the planning documents mentioned above, click on the following links and also download a copy of our Frequently Asked Questions about Estate Planning. The information on this website is intended to give an overview of the services we offer, and is by no means to be construed as legal advice. The techniques summarized below are complex and must be executed by a skilled and qualified attorney. An effective estate plan should be customized to individual needs and circumstances. To begin your personal estate plan, please contact us to schedule an appointment.
Wills and Revocable Living Trusts
Irrevocable Life Insurance Trust (ILIT)
Incapacity Planning
Qualified Personal Residence Trust (QPRT)
Grantor Retained Annuity Trust (GRAT)
Charitable Planning
Intentionally Defective Grantor Trust (IDGT) or Defective Grantor Trust (DGT)
Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC)
Special Needs Trust (SNT)
Wills and Revocable Living Trusts
The Will
A Will is a legal document that becomes effective at your death. It allows the court to:
- Distribute your property in a way that you direct in the Will
- Appoint the executor you name in the Will - a person who will make sure that your wishes are followed
- Allows you to designate a guardian for minor children – although the court will have the final say in this matter, they typically accept the person you designate
Additionally, a Will can be created quickly and easily. In fact, in some states, creating a Will is as simple as writing down your instructions in your own handwriting, known as a “holographic” Will. This is not true in Georgia.
A Will still has to go through the Probate process.
What Is Probate?
Probate is the court process that proves the Will is valid and carries out the instructions of the Will. Through this process, title is transferred from the name of the person who died to the beneficiaries named in the Will.
Time
After your death, your chosen executor will file your Will with the court. The court then appoints your named executor if there is no objection. After publishing the notification of your death, all of your creditors are contacted by publication. They can then submit claims against your estate. During this same period of time, all your valuables are inventoried and valued as of your date of death. Even if you have a very straightforward estate, the Probate process can take more than a year. For those estates that are more complex, the process can run several years!
Expense
Probate, due to its many laws and regulations, may be a costly affair. It is quite likely that your executor will need to hire a lawyer. It is also probable that he or she will have to hire an appraiser to get an accurate value of your assets (although you may want an appraisal to get the “step up” in basis on the asset). All of this costs money. Nationally, typical fees for a Probate lawyer are 1.5% to 4% of the value of your estate, however, many lawyers charge on an hourly basis. The executor also may get paid from 1 to 5 percent. Then you have court fees and appraiser fees. All of these fees combined can reduce your estate value.
Access
If you are leaving your worldly goods to your spouse and children, it is obvious that you want them to benefit from those assets. However, while in Probate, your heirs may not be able to use those assets. Except for a family allowance, they simply have to wait until the final disposition of your estate.
This is even true for investments. The executor may be able to do very little in terms of buying or selling any investments in your portfolio depending, on how your will is drafted.
Public Eye
There is nothing private about Probate. Depending on how your Will is drafted, everything that you have and everything that you owe may be found at your local courthouse. Also, the state must make public notice of the Probate in the local newspaper. This is a privacy matter.
Ability to Contest
Anyone can contest a Will or file a claim against a Probate estate. It can be a family member that is not happy with the way your assets are distributed or a creditor claiming you owe more money. The cost of defending a contested Will can be very expensive. The options for your loved ones are to settle, thereby getting less than you intended, or fighting in court and getting less than you intended due to the additional lawyer fees and court costs.
Having a Will is far better than dying intestate. However, for many people, a Living Trust is a better option.
The Revocable Living Trust
Like a Will, a Trust can be changed during your lifetime and like a Will, it keeps you from dying intestate, thus allowing you to determine the beneficiaries of your assets. This is where the similarities end.
A Revocable Living Trust is a document that takes effect during your lifetime. This document helps you manage your assets before you die as well as after you die. There are many good reasons to consider a Living Trust. Let’s look at a few of them:
- All the issues of Probate – time, expense, privacy, access, and contests – are minimized, if not eliminated, when you use a Trust instead of a Will.
- Your Trust and Successor Trustee will take care of you and your assets should you become disabled and unable to make decisions regarding your person or your finances.
- A Trust with proper tax saving provisions helps to reduce the financial burden of estate taxes.
- A Trust allows you to control your assets even after you’ve died.
- A Trust can keep your heirs from losing your assets to their creditors.
How does a Trust do all of this? A Trust is the owner of all of your assets. You are the Trustee and the Beneficiary. This means that, in reality, you own nothing. It is your Trust that owns everything. You have total control as the Trustee and you can make changes, invest, buy, and sell your assets as you see fit. From your standpoint, it will feel exactly like owning the assets in your own name like you did before. To make this method work the Trust must be properly funded, meaning assets must be retitled into the name of the Trust rather than your individual name.
However, upon death, since you didn’t actually own anything, there is nothing to Probate. Your Successor Trustee will distribute the property in the Trust according to your instructions. There is no court, no need for approval, no extra expenses, and no publicity.
Estate planning is for everyone. No matter your age, your financial situation, or your marital status, you will want to plan for the eventuality of your death. Whether you choose to use a Will or a Living Trust depends upon your own circumstances. Seeking expert legal advice will benefit you and those whom you love.
Bypass or Credit Shelter Trust
 (Used when combined estates are over the credit exemption amount, which is currently $2 million)
Both a Will and Revocable Living Trust can be drafted to include a bypass or credit shelter trust. A person may leave any amount to his or her spouse free of estate tax, thereby however, increasing the estate of the spouse, which will be subject to estate tax upon his or her death. If that is the case, the estate tax credit amount applicable to the estate of the initially deceased is essentially wasted.
A Credit Shelter Trust can be revocable or irrevocable, living or testamentary and is designed to “bypass” this problem. It is funded up to the estate tax credit amount ($2 million in 2007 and 2008) and names the ultimate beneficiaries; in most cases, children of the deceased. The surviving spouse retains the right to draw funds from the trust as and when needed, and the remainder passes to the ultimate beneficiaries, free of estate tax. To make this work, it is important to have assets titled properly.
Irrevocable Life Insurance Trust (ILIT)
(Used to avoid inclusion of a life insurance payout in a taxable estate)
Although the proceeds of a life insurance payout are generally free from income tax, they do form part of the gross estate of the deceased owner, and are thus subject to estate tax.
An ILIT is an irrevocable trust used to avoid inclusion of life insurance payouts in the taxable estate of the decedent insured. If done properly, the insurance payout will not be subject to estate tax. In addition, an ILIT can be structured so that the trust will provide benefits to the insured's surviving spouse without inclusion in the surviving spouse's gross estate either.
An ILIT can be useful in providing liquidity to the insured’s estate. Estates often consist of hard-to-sell assets such as real estate and art work. The trustees of an ILIT can use the proceeds of the life insurance policy to buy those assets in order to allow the estate to have sufficient liquid assets (i.e. money) to pay expenses such as estate taxes and outstanding debts.
Incapacity Planning
Incapacity planning is a broad area of law that covers how you are cared for should you become physically or mentally unable to care for yourself. The type of care could range from simple tasks like buying groceries, paying bills, and handling financial matters to more important decisions such as selling real estate or gifting assets to your children. A properly drafted Durable Property Power of Attorney will give you some coverage with respect to these matters should you become incapacitated.
In addition to a Durable Property Power of Attorney, you also need documents to protect your wishes regarding your health care. The Terri Schiavo case has reminded adults throughout the world of the importance of proper health care planning. In Georgia, an Advance Directive for Health Care document allows us to choose the kinds of medical treatment we want or don't want, and whether or not we want to die naturally, without our death being artificially prolonged by various medical procedures.
In 2005 one of our senior partners, George Menden, was interviewed by Atlanta’s Fox 5 News on the importance of creating a living will in lieu of the Terri Schiavo case. See what he has to say here:
George Menden's Fox5 Television Interview
Click here to view the interview online!
(Windows Media Player, 1:55)
NOTE: You will need Windows Media Player to view this video clip, click here to install.
On July 1, 2007 the Advance Directive for Health Care Act became effective in Georgia (following passage by the Georgia General Assembly and the signature of Gov. Sonny Perdue). As a result, a NEW Georgia Advance Directive for Health Care form is now in effect which replaces the old Living Will and Durable Power of Attorney for Health Care forms and merges them into one easier-to-understand document. If you have a Living Will and Durable Power of Attorney for Health Care and the agent designations are correct you are okay - the documents are still effective. However, the availability of this new, simpler Georgia form creates a great opportunity for you to make sure you have a plan in place in the event you become incapacitated.
Menden, Freiman & Zitron is pleased to make this new and important Georgia Advance Directive for Health Care document available on this site for you to download and use. This is a statutory document based on forms provided by the Georgia Legislature. Every adult in Georgia should consider the important choices reflected in this document. When using this form with our clients we add an optional attachment which pertains to Section 4 of Part One of the Directive. It contains additional information and guidance for the named agent(s) regarding medical treatment in the event illness makes the Declarant unable to communicate his/her wishes directly. If you are interested in obtaining our modified Georgia Advance Directive for Health Care, or if you need help understanding your choices, please contact our office today to set up an appointment with one of our attorneys.
If you are not a Georgia resident, you should obtain a form that has been specifically authorized for use in your state of residence.
**Please Note: The forms provided on this website are informational and do not constitute legal advice regarding any specific situation. The law does not require a lawyer to prepare or otherwise help with these documents. However, if you do not completely understand everything, or if you have questions about the documents, ask an attorney or contact the State Legal Services Developer of the Georgia DHR-Division of Aging Services at (404) 657-5319.**
Qualified Personal Residence Trust (QPRT):
(Often used with an appreciating personal residence or second home)
A QPRT is an irrevocable trust to which the owner (“grantor”) of a principal residence or second home may transfer that property, for the ultimate benefit of children, thereby removing the value of that property and any additional appreciation from the estate of the grantor in order to avoid burdensome estate taxes.
How it works:
Under a QPRT, the grantor retains the right to live in the property until a specified time, at which point ownership of the property will fall to the beneficiaries of the trust. The period in which the grantor resides in the property is called the retained interest. The value of the retained interest is subtracted from the Fair Market Value of the property to leave the remainder interest, which is the value of the gift which passes to the beneficiaries. Only the remainder interest is subject to the gift tax. So, the longer the term of the retained interest (i.e. the longer the owner reserves the right to reside in the property), the less the value of the remainder interest, and the less gift tax due. On the other hand, the shorter the retained interest, the higher the value of the remainder interest, and the higher the gift tax.
If the grantor dies before the expiration of the trust term, then the property remains part of the grantor’s estate, undermining the purpose of the QPRT. It follows that a longer trust term increases the risk of this occurring. However, although the settlor must survive the term of the trust in order for the property to be removed from his estate, there is no gamble involved, as the full value of the property would have been taxed had no QPRT been created in the first place.
The gift tax must also be weighed against the potential loss through capital gains tax if the property appreciates in value substantially.
Grantor Retained Annuity Trust (GRAT):
(Often used with an appreciating asset)
The GRAT is a way of shifting wealth, practically free of gift tax, from the grantor of the trust to his beneficiaries. Assets such as non-voting stock are donated to the trust and annuity payments to the grantor are paid from the value of the assets in the GRAT according to a regular schedule over a period of years, with a few hundred dollars remaining as a taxable gift for the beneficiaries of the trust. The IRS sets an assumed rate of return for the assets in the GRAT.
The benefit of the GRAT begins when the assets’ rate of return exceeds that set by the IRS. This growth remains in the trust after the annuity payments to the grantor and passes to the beneficiaries when the trust matures, with all but the original few hundred dollar gift free from gift tax.
There are two risks to this estate planning mechanism:
- Like a QPRT, if the grantor fails to survive the trust term, it reverts back to the estate and is subject to estate tax.
- The asset contributed does not realize the anticipated level of appreciation. In that event, the trust would return most, or possibly all, of its assets to the grantor in the form of annuity payments. Because there is little gift tax cost to the strategy, the grantor’s out-of-pocket costs would consist primarily of the professional fees incurred.
Charitable Planning
You will learn there are advanced estate planning techniques our firm can assist you with as well. Many of our clients wish to establish charitable foundations and/or trusts so that they may give in an organized approach. This exercise helps you to evaluate your personal values and select charitable organizations and gift-giving vehicles that best reflect your values and maximize the financial and tax benefits of the gifts. We can help you determine what giving vehicles is best for you.
Charitable Remainder Trust (CRT)
(Often used with low basis assets for clients who have charitable desires)
A CRT is an irrevocable trust that allows the grantor of the trust to nominate charitable or non-profit organizations as the remainder beneficiaries, while receiving an income of a set percentage of the trust assets for a period of years or the remainder of the grantor’s life. Though the trust is irrevocable, the grantor may change the charitable remainder beneficiaries at any time, but not the income beneficiaries. A CRT is considered separate from the grantor’s estate and is therefore not subject to estate taxes. In addition, upon setting up this trust, the grantor receives a current charitable income tax deduction for the charitable remainder amount.
The payout rate is determined by the grantor; however, the total net distributions of the CRT must be at least equal to 5% of the Fair Market Value of the assets (valued annually) in the trust. It is possible to set up and make contributions to a CRT during high earning years and arrange for it to make payments during retirement.
Upon the grantor’s passing, the residual funds (or ‘remainder’) in the trust pass to the charitable beneficiaries.
Because charitable donations are not subject to capital gains tax, assets that are likely to significantly appreciate in value (like stock or real estate) are well suited to be placed in a CRT.
Charitable Lead Trust (CLT)
CLT works similarly to a CRT, except that the charitable organizations receive the payments throughout the term of the trust, while the owner’s family receives the remainder of the assets in the trust upon expiration of the trust term. A CLT can be established both during your life or in your will.
Like the CRT, the CLT offers charitable tax deductions. However, because the ultimate asset is to pass to an heir, not a charity, the original transfer is subject to gift tax on the remainder value. The benefit of the CLT is that the IRS considers the gift to have been made on the day the asset is donated to the trust, not a number of years later, when it eventually passes to the beneficiary of the trust. If the asset has appreciated significantly in value over the trust term then the beneficiaries inherit a valuable asset free of estate tax, which would have been significantly higher than the gift tax originally paid by the donor.
Private Foundations
Private foundations can be founded by an individual, family or a group of individuals who work towards a common goal. Since a private foundation is a charitable organization, it is exempt from federal income tax on its income, although it must pay a 1 to 2 % excise tax on its net investment income. The gifts made to establish a new foundation or grow an existing foundation can afford certain tax advantages; income, gift and estate tax deductions are available under the law. The persons setting up a private foundation are subject to filing an application for tax exempt status with the IRS.
A private foundation is usually funded by a single source, such as an individual, family, or corporation, and typically makes grants to charitable organizations rather than operates charitable services or programs itself. A private foundation does not solicit funds from the public.
In setting up a private foundation, one can elect oneself or family members as directors of the foundation. This allows the founder(s) to remain in control of the distribution of money or assets while avoiding taxes to which they would otherwise be subject. Furthermore, the foundation survives the death of its founders and donors, thus removing the gifts to the foundation from their estates and avoiding estate taxes.
Intentionally Defective Grantor Trust or Defective Grantor Trust (IDGT or DGT)
The IDGT or DGT is an irrevocable trust that presents the opportunity of ‘freezing’ the value of assets for estate planning purposes. The grantor retains no interest in the trust, all of which passes to children or grandchildren as beneficiaries.
The trust is structured so that the grantor is treated as the owner of the trust solely for income tax purposes under the rules set forth in IRS Code Sections 671-678. The advantages of the trust are in the estate and gift tax benefits.
The grantor sells assets (stock, limited partnership interests, real estate etc.) to the trust in exchange for an installment note with interest. The interest rate is set at the approved IRS rate, so as not to be considered a retained interest and therefore part of the grantor’s estate. The installment note is for a period of years. Upon the grantor’s death, only the fair market value of the note is part his estate, which will be less than the outstanding principal of the note depending on several factors, including the payout of the note, the interest rate, the absence of security, default provisions, covenants and other note terms.
The IDGT technique freezes the value of the note in the grantor's estate. Any increase in value of the sold assets will not be taxed in the grantor's estate and will inure to the benefit of the trust beneficiaries.
Example:
Parent creates an IDGT funded with a contribution of $100,000. Grantor thereafter sells his limited partnership interests to the IDGT for its fair market value (after appropriate discounts) of $1 million taking back an installment sale note with an adequate interest rate. When Parent dies 10 years later, the balance owing on the note is $500,000, but the limited partnership interests have increased in value to $2 million. Parent's estate includes the discounted fair market value of the note (which should be less than $500,000 with discounting). All of the increased value of the stock escapes any tax in the grantor's estate.
Family Limited Partnership or Family Limited Liability Company (FLP or FLLC)
A Family Limited Partnership is a complex legal entity with its own tax identification number. The partners are either general partners or limited partners. Any income or losses from assets in the partnership are reported by the partners in their tax returns. As the FLP is a separate legal entity, any assets transferred to the FLP may be untouched by claims and lawsuits against individuals. In order to avoid claims against the limited partnership interest by a child’s creditors or ex-spouse, gifts of FLP interest should be placed in a trust.
An FLP may provide significant tax advantages by transferring family assets to the FLP and then gifting an interest in the FLP to children. For example, if $1 million is transferred to an FLP and parents decide to give a 40% interest in the FLP to their children, the parents retain full control over the property. The children’s 40% interest is outweighed by the 60% controlling interest of the parents and as such is considered less valuable by the IRS than its actual worth. The $400,000 gift to the children may only be valued at $250,000, so that the tax value of the gift is significantly reduced.
Interest in an FLP can also be transferred on an annual basis in order to capitalize on the annual gift tax exclusion amount. By so doing, assets are transferred out of an estate without making cash gifts to children before they are ready and able to manage them. All transfers require current appraisals of the value of the interests transferred.
An LLC may provide its members similar creditor protection as does a limited partnership. No member has personal liability.
The LLC can provide a vehicle for passing wealth to younger family members in the form of LLC shares. These shares can be transferred to children as tax-free gifts ($10,000 worth per year), while the parents retain control of the property during their lifetime by acting as managers for the company.
Special Needs Trust
(Used if a disabled child is a potential beneficiary)
A Special Needs Trust is an irrevocable trust created for the benefit of an individual who has a disability. Congress has passed laws that allow a disabled person to claim governmental benefits such as Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, subsidized housing, and other benefits based upon need, in spite of any funds or assets available to such a person that have been placed in a Special Needs Trust. Monies placed in the Trust remain non-countable assets and allow the beneficiary to qualify for available federal and state benefits and programs.
In addition, the trustee(s) of a Special Needs Trust can only use the trust’s assets for the benefit of the person under the chronic illness and for no other purposes whatsoever. This protects the assets in the trust from claims against the estate of the trust’s grantor, the beneficiary’s creditors and ex-spouse.
Whatever your situation – from a basic to advanced – we can help. Download a copy of our Frequently Asked Questions about Estate Planning. After reviewing, don’t delay in contacting us for a free one hour estate planning consultation with one of our attorneys.
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