CASE STUDY IN WILL, TRUST AND ESTATE PLANNING
Thinking about updating your estate plan? Whether due to the birth of a child, the death of a friend, reaching retirement, the sale of your business, reaching a certain age, or hitting the lottery, whatever the reason, most people eventually decide to see a lawyer about preparing a Will or updating their old one. By considering the particularities of a family's circumstances, the amount of wealth involved, and the desire to achieve estate tax savings and/or protection from creditors, what may start out in the client's mind as "updating my will" should result in the formulation of a comprehensive estate plan. This article will discuss the legal ...view middle of the document...
The Internal Revenue Service will not impose an estate tax on estates at or below $600,000 (sometimes called the "credit shelter amount" or the "exemption equivalent"). Because the estate tax imposed by a sponge tax state is equal to the "state death tax credit" allowed against the federal estate tax (zero in this case), no state estate taxes will be imposed. Accordingly, the Murphy's estate plan can be formulated without the need for estate tax planning at this point in their lives. As their net worth grows, however, so will the need to reconsider their estate plan in the future.
The plan recommended for the Murphy's will consist of nine documents:
Reciprocal Wills (2)
Durable Powers of Attorney (2)
Living Wills (2)
Health Care Proxies / Health Care Durable Powers. (2)
Reciprocal Wills. While it may be possible to plan the Murphy's estates to avoid probate, Reciprocal (simple) Wills are still necessary to direct the disposition of assets for which probate is required, nominate guardians for minor children, and to name executors to administer the estate. Without Wills, the Murphy's property would pass according to the laws of intestacy and, in most states, would divide the family property between the surviving spouse and children, not what the Murphy's had in mind. The Murphy's should continue to have simple Wills which bequeath all property to the surviving spouse. However, under their new Wills, if there was no surviving spouse (i.e., if one spouse was already deceased), property would instead pass to a Family Trust to be held for the children.
Family Trust. The purpose of the Family Trust is to hold and administer the family's assets for the benefit of the children in the event both spouses died prior to their children reaching a predetermined age. For this reason, this trust is sometimes referred to as a "stand by" trust. Selecting the age for distribution to children requires careful consideration by parents. When the question is put to many parents, age 21 is a common first response. Upon reflection, however, the prospect of a 21-year old son or daughter gaining unrestricted access to one-half of a $585,000 estate (in the Murphy's example) would cause most parents to reconsider. The Murphy's decided that their children would receive one-half of their share of the trust at age 30 and the remainder at age 35. Until these ages, income and principal of the trust would be distributable to the children in the discretion of the trustee(s). The Murphy's must also decide if the trustee's discretion will be absolute or subject to a predetermined standard (e.g., "health, education and support").
In the event that one of the Murphy children predeceased them, his share would be allocated to the surviving child. If a child predeceased them leaving children of his own (the Murphy's grandchildren), the Family Trust would hold such deceased child's share for the health, education and support of these grandchildren until they reached...