Estate Planning, Wills and Trusts
Designed to Protect Your Loved Ones

by Michael D. Larsen

There will always be difficult decisions to make when it comes to estate planning and estate taxes. Understanding estate taxes is essential to estate planning, and estate planning requires making choices about who should inherit and who should implement your estate plan. And the sooner you start planning your estate, the better the outcome.

Here is an overview of current estate taxes:

  • For 2011, and for at least the next two years, Congress has set the exemption amount—the amount of money you can pass tax-free to your family—at five million dollars. For the next two years, a married couple can pass up to ten million dollars to their heirs by taking advantage of “portability,” which basically allows a surviving spouse to use any exemption amount not used by the deceased spouse. If you are single, with planning, you can also “double” your exemption in this way, if you want to leave your estate to a loved for his or her lifetime. All of this means that for most people–for at least the next two years– estate taxes are not likely to be a problem. If your estate exceeds these amounts, the estate tax rate starts at thirty-five percent.
  • If you are lucky enough to have an estate that exceeds five million dollars, you should seriously consider some tax planning. I frequently recommend to clients that they can set up an estate plan so that the surviving spouse can put money into a new trust, called a “disclaimer trust,” when the first spouse dies. (It’s called a disclaimer trust because the surviving spouse puts the money into it by “disclaiming” a certain amount—saying that he or she doesn’t want the money directly but wants it to go into a separate trust for his or her benefit.) Married couples should consider this even with the current law on “portability.” The disclaimer trust gives you flexibility in the future if Congress does not extend the portability feature.
  • For a wealthier couple with ten million dollars in an estate, including bank accounts, retirement accounts, real estate and life insurance and so forth, the survivor can decide to put up to the exemption amount (or less!) into the disclaimer trust. This passes estate-tax free, because an individual can bequeath up to five million dollars under current law.
  • The surviving spouse does not technically “own” the money in the disclaimer trust, because a trustee decides how the money in it is spent. This is true even if the surviving spouse acts as the trustee of the disclaimer trust. Regardless of who serves as trustee, the surviving spouse gets the benefit of the money—the trustee can spend it on his or her health and welfare.
  • The surviving spouse gets the other five million dollars of the estate directly. She does “own” this money. When she later dies, she can use her personal exemption of five million dollars to pass the rest of the estate to her heirs. Because she does not technically “own” the other five million dollars in the disclaimer trust, this is not counted in her estate for computing the estate tax. In this way, the married couple has passed a total of ten million dollars without paying any estate tax.
  • Rather than using a disclaimer trust, you can also set up these trusts so that the tax-saving trust is funded automatically—the surviving spouse does not have to make a decision about whether or how much to put into the disclaimer trust. I often recommend use of the disclaimer trust for two reasons. First, the surviving spouse may not want to put the entire exemption amount into the tax-saving trust. Rather than dealing with the hassle of having a trustee and filing tax returns for the trust, he or she may want to own the money outright. Second, the estate tax exemptions and rates are moving targets. In the year that the first spouse dies, the exemption amount may be 5.0 million, 1.0 million or some other figure. If the tax-saving trust is funded automatically, the surviving spouse may have “too much” money in that trust.
  • Congress has to revisit this issue in two years, and it looks like this uncertainty could continue for years to come. With the disclaimer trust, the surviving spouse can make a decision about an estate-tax savings trust when her spouse dies and she has all the facts before her.
  • Even a couple with a more modest estate should consider the estate-tax savings available through a disclaimer trust. Your estate can grow over the years, and Congress could always make the exemption amount low enough that you are covered when one of you dies.
  • Single people can also use these tax-saving trusts, provided they are willing to leave some of their estate to someone for life, with any balance going to other people when that person dies. These mechanisms also work well for married couples with children, because they often want to leave the estate to the surviving spouse for life, with any balance to their children when the survivor dies.

Regardless of changes in the estate tax in the years to come, and even if you never have to pay estate taxes, you should have an estate plan. Families need estate planning to avoid family conflict and the need to go to court. For example, if you become disabled without a plan, your family members will have to go to court to decide who will manage your affairs. And they may not agree on who should do this. Going to court can be expensive, can be time-consuming and can create conflicts within families.

It is important to remember that if you are sick and unable to make decisions, your family members will already be under considerable stress. You don’t want to give them the added stress of having to go to court to make decisions.

The same logic applies to handling your affairs upon death. When family members fight over an estate, they all believe that their view of matters is what their deceased loved one would have wanted. You don’t want them to have to guess about what you want! Make it clear, and put it in writing.

You should seek legal advice before drafting an estate plan. This synopsis cannot take into account the many factors that may affect your estate plan, so you should use it as a starting point only for discussion about estate planning.

Michael Larsen, Esq. is a wills, trusts and estates attorney with offices in Santa Rosa and San Francisco. Contact Michael at 707-573-3901 or 877-246-2317 and at Michael@larsenlaw.net. He received his JD from the University of Chicago in 1985; his website is www.larsenlaw.net. Michael specializes in estate planning, probate and trust administration for families with assets and family in California and France.