Is Your Estate in Order?

Check the best answer for each statement: Yes, No, Don't Know, Not Applicable, Needs Action.

Glossary

Because of the legal nature of the subject, much of the terminology in this publication may be unfamiliar to you. Therefore, a thorough review of this glossary is recommended before you read the publication.

• adjusted gross estate. For federal and state estate tax purposes, this refers to the gross estate less funeral expenses, expenses of administration in probate, debts of the estate and casualty losses suffered during settlement of the estate.
• administrator (male)/administratrix (female). A person granted authority by the proper court to administer the estate of a deceased (collect assets of estate, pay debts, distribute residue to those entitled to it).
• annuity. Periodic (usually annual) payment of a fixed sum of money for life of the recipient or for a fixed number of years.
• beneficiary. A person or institution receiving a benefit or advantage from a will or other legal transaction.
• bequeath. To give personal property by will.
• bequest. A gift by will, usually of personal property.
• bond. An instrument that obligates a person, his/her heirs, executors and administrators to pay a specified sum of money to another person on a specified day.
• codicil. An addition (or supplement) to a will that explains or changes provisions in the will. It must be signed, witnessed and dated in the same manner as a will to be legal.
• corporation. A legal entity that can take, hold and transfer property, and carry on business in its own name.
• decedent. The deceased person.
• donor. One who makes a gift or creates a trust.
• donee. One to whom a gift or bequest is made.
• escheat. Reversion of property to the state when one has no legal heirs and has no will.
• estate. All property, both real (land, buildings) and personal (automobiles, clothing, money, etc.), that one owns.
• executor (male)/executrix (female). One named in a will to carry out provisions.
• fee simple. Absolute title to property with no limitations or restrictions regarding persons who may inherit it.
• fiduciary. A person or institution who manages money or property for another. The fiduciary must exercise a standard of care imposed by law or contract. If this responsibility is broken, the fiduciary may be liable to beneficiaries for damage caused by the breach.
• grant. A grant is a transfer of property by deed or writing.
• grantee. A grantee is one to whom a grant is made.
• grantor. The person who makes a grant.
• gross estate. The total fair market value of all property and interests, real or personal, tangible or intangible, that a decedent had beneficial ownership of at the time of death before subtractions for deductions, debts, administrative expenses and credits.
• guardian. A person legally empowered and charged with the duty of taking care of another person who, because of age, intellect or health, is incapable of managing his/her own affairs. The guardian manages the person, rights and/or property of the incompetent.
• heir. One entitled to inherit the property of an intestate.
• intestate. One who dies without leaving a will. His/her property passes to his/her heirs by intestate succession determined by state law.
• joint tenancy with right of survivorship. A type of property ownership where two or more individuals have an undivided interest in property. Full title passes to surviving joint tenant(s) upon death of first-to-die.
• liabilities. The aggregate of all debts and other legal obligations.
• life estate. An estate, created by law or by individual, that terminates upon the death of the person holding it, or upon the deaths of one or more other persons.
• lineal descendants. Direct descendants of ancestors, such as children to parents.
• marital deduction. The amount of property, real and personal, left outright to the surviving spouse.
• net worth. The sum of the current market value of your assets (liquid assets, investment assets, real property and personal property) minus the sum of the outstanding balance on all of your debts.
• partnership. A voluntary contract between two or more persons to pool some or all of their assets into a business, with the agreement that they shall proportionally share profits and losses between them.
• personal property. Any interest a person owns that is not real property (land or buildings).
• probate. To prove a will's validity to the court and to secure authority to carry out its provisions; also used in a broad sense to mean administration of a decedent's estate.
• real property. Land, buildings and other immovable property.
• remainderman. One entitled to the remainder of an estate after a particular reserved right or interest has expired.
• sole ownership. Type of property ownership where one individual holds legal title to property and has full control of property.
• tenancy in common. Type of property ownership where two or more individuals have an undivided interest in property. At the death of one tenant in common, the fractional percentage of ownership of the property passes to the deceased person's heirs rather than to surviving tenants in common.
• testator (male)/testatrix (female). One who dies leaving a will.
• trust. An arrangement where one party (the trustee) holds legal title to the property for the benefit of one or more beneficiaries.
• trustee. The person or institution named by a person making the trust, or appointed by the court, to carry out the terms of the trust.
• will. The legal declaration of your intentions for the distribution of your property at death.

Chapter 1: Introduction to Estate Planning

Have you ever said, "Why should I be concerned about estate planning? I don't have enough property to amount to anything." If you've said that, you may want to do a little more exploring before you toss the idea of estate planning aside.

To stimulate your thoughts concerning your need for an estate plan, here are some questions to reflect upon:

A carefully structured estate plan can help you answer these important questions. Estate planning involves more than just the dollar value of the things you own. The purpose of an estate plan is to:

Every estate plan is different. Yours is unique to you. If your estate is modest, perhaps the main issue you will be concerned about is whom you want to get your things at your death. If your estate is large, you will also need to be concerned about economic issues. When you actually calculate the value of your gross estate, you might be surprised at its size.

State law defines how your property will be distributed if you don't have a will. The state's plan may not be the same as what you would prefer. Your own estate plan allows you to express how you want your property distributed at your death. If you have not taken care of this vital phase of your financial plan, there is no better time than NOW!

This publication introduces tools and techniques that may be used in planning your estate. It gives an overview of what you need to know to work with your estate planning professionals to design your estate plan. The purpose of this material is not to teach you to write your own legal documents. It is recommended that you seek legal counsel for that service.

Misconceptions Associated With Estate Planning

Some common misconceptions need to be dispelled before proceeding.

1. "Estate planning is needed by elderly and wealthy people only."

Now the wealthy part has two sides. First, if you have not estimated the value of your estate, you might be surprised at its size. You might live poor and die rich. The components of your estate and how they are valued are presented later. See Appendix I. If the value of your adjusted gross estate is more than $675,000, you need to be concerned about minimizing or eliminating estate taxes.

If you have a modest estate, you want to preserve what you have so you can pass it to those people you wish to have it. You need to periodically review your estate plan regardless of age or economic status.

2. "A simple will lasts a lifetime."

The size of your estate, the composition of your family, your personal preferences, the general economic environment and tax laws change overtime. Adjusting your estate plan as things change is important. A will prepared several years ago could possibly grossly contradict your current wishes for the distribution of your estate. You need to have a well-designed estate plan and keep it current.

3. "The state has laws to protect my estate."

4. "Joint ownership with my spouse is a practical substitute for an estate plan."

5. "Estate planning is too expensive."

Establish Objectives for Your Estate Plan

You should consider several objectives in developing your estate plan. They may include the following:

1. Plan for mental or physical incapacity.

2. Dispose of your possessions according to your wishes.

You have an unrestricted privilege to select the executor/executrix who will handle the settling of your estate. This privilege should not be ignored or taken lightly.

3. Appoint a guardian of your minor children.

You want to appoint a guardian for two reasons. First, the guardian will take your place as a parent in rearing the child. Second, the guardian will be responsible for managing the money and property left to the children and distributing it to them as you wish. The personal guardian and the financial guardian may or may not be the same person. You may prefer to appoint a guardian to rear the children and someone else to manage the financial assets. However, one person might fulfill both roles.

4. Minimize settlement costs and estate taxes.

You can avoid extra costs and lengthy court procedures by having a well-thought-out estate plan. You can relieve your executor from posting bond, taking inventory and making reports to the court if you desire. An executor with good management skills and integrity can save your estate considerable dollars and time.

5. Provide for continued operation or orderly termination of a business enterprise.

If provisions aren't made for continuing the business, it may be forced into liquidation. You want to avoid liquidation in an emergency environment if at all possible. If family members, co-owners or key persons are associated with the business, proper estate planning can allow them to continue the business. This might be through a planned gift strategy or by selling the business.

In addition to providing for management, you should plan to have liquid assets to meet the anticipated needs for continued operation or orderly closing. Liquid assets may be needed to pay estate taxes, to pay outstanding debts and to maintain the family at its current economic level.

Several sources of liquid assets may be considered. Life insurance is probably the most common and most practical. Other sources might be savings, stocks, bonds or other investments that could be sold or mortgaged without interfering with the principal portion of your estate you wish to protect.

6. Make provisions for retirement needs.

When planning your estate, consider the amount of income that you will need during your retirement years. Then arrange your resources to meet your income needs during retirement and to minimize economic loss at your death. Before you give property away, try to determine if you will need the property to maintain your standard of living in retirement. Some financial planning techniques can provide income for you during retirement and can also provide income tax and estate tax advantages. Examples include charitable remainder trusts and pooled income funds.

7. Provide family members information that will be useful in their long-range planning.

The Estate Planning Process

You need to answer several important questions to get the estate planning process started:

You need several pieces of financial information to prepare or update your estate plan. You need a copy of your most recent will and other estate planning documents, tax returns, financial statements you have given to financial institutions and a list of who owns the property.

If you have never made a will, you should make one. If it was made several years ago, you may need to revise it. You need to revise your will if:

You have had substantial changes in your financial status, business interests or lifestyle (marriage or divorce, birth or death of a family member, move from another state).

The executor named in your will is deceased or can no longer serve effectively.

You need to name a guardian for your dependents or if a new guardian should be substituted.

Worksheet A: Net Worth Statement*

* To calculate your net worth, list the fair market value of your assets. List the outstanding balance on your debts. Total assets. Total liabilities. Subtract liabilities from assets to get net worth.
** Identify how property is owned (sole ownership [husband or wife], joint tenancy with right of survivorship, tenancy-in-common)

Estate planning is more than just writing a will to say how you want your property transferred at your death. You may get sick and not be able to make decisions about your physical or financial well being. Because your will only takes effect at your death, consider other tools that can meet your needs during your lifetime. You may have some property you want to transfer during your lifetime. A will would not be an appropriate transfer technique to meet this need.

When planning your estate, consider how your physical person and your financial assets will be managed if you become physically or mentally incapacitated during your lifetime. Also consider how you want your property transferred during your lifetime or at your death. A variety of techniques can be used.

If You Are Physically or Mentally Incapacitated

If you become physically or mentally incapacitated and have not done advance planning, a guardian or representative payee may be appointed to represent your interest. If you do not have a plan for managing your assets, a court-ordered, court-supervised guardian may be appointed to make personal, health care and property management decisions for you in the event you become incapacitated. Consulting an attorney is generally wise for assistance in petitioning the court for a guardianship.

Under programs administered by federal agencies, a representative payee may be designated by the federal agency to receive government benefits on behalf of a person who is determined by the agency to be incapable of managing the benefit. Social Security, civil service retirement and veterans benefits can be paid to a representative payee, who manages these funds but has no decision-making authority over your other affairs. A representative payee can be appointed over your objection. Someone who feels you are no longer able to manage your affairs usually initiates this action.

Advance-planning Tools ó Your Physical Person

Advance-planning tools allow you to have a say in what will happen to your physical person if you are physically or mentally incapacitated. Two tools can be used to carry out your wishes for managing your physical well being if you are unable to do so yourself. These tools protect your family and health-care professionals from stress and potential conflict of making decisions if you are unable to do so yourself. These tools are the living will and durable power of attorney for health care.

A durable power of attorney for health care allows you to name someone to make decisions about your health care if you are not able to make those decisions yourself. It gives some direction about the kinds of medical treatment you want. This can include whether to admit or discharge you from a hospital or nursing home, what treatments you want given or not, who can have access to your medical records and even how your body is disposed of after death. The document can also be used to limit authority to make decisions. See Appendix III for a sample durable power of attorney for health care.

Advance-planning Tools ó Your Finances

Several financial tools can direct how you would like your financial affairs to be managed if you are physically or mentally incapacitated. These include joint tenancy with right of survivorship, durable power of attorney for finances and living trust.

Two issues bear noting here. One is the ease of managing financial affairs while the owner is alive. The other issue is what happens to the property at the owner's death. "Or" accounts are joint tenancy with right of survivorship property that passes to the joint survivor. "And" accounts are tenancy-in-common property. With tenancy-in-common property, each tenant will own a fractional percentage of the property. At the death of the owner, it does not automatically pass to the surviving joint tenant. At the death of one joint owner, the decedent's portion will pass according to his or her will or according to the law of intestate succession.

A revocable living trust has several benefits. It is flexible. You can remain in control of the assets. You can change the terms if you aren't happy with the way it is working. You can alter, amend or revoke the trust after it is created if it no longer meets your needs. You can choose another person and/or financial institution to act as trustee. Or you can act as trustee yourself and name someone else to take over if you become incapacitated. A durable power of attorney for finances becomes void on your death, but a trust does not have to. A revocable living trust can be structured to manage your assets to provide income for you during your lifetime even if you aren't able to make financial decisions for yourself. Then at your death, the property can pass to your designated beneficiary(ies). The primary disadvantage is that the assets placed in the revocable living trust are included in your gross estate. The power to change the trust causes it to be subject to income taxes and estate taxes. A gift tax does not incur because it is not a completed gift.

With an irrevocable living trust, you give up title to property placed in the trust. You cannot have control of the assets. You have no power to alter, amend or revoke the terms of the trust, even in the event of an emergency. The primary purpose of this trust is to remove assets from your estate to reduce your estate tax liability. If you give up all control over the assets, the assets in the trust are not included in your gross estate. You are not subject to income tax but may have a gift tax liability.

Probate is a court procedure in which the estate of a deceased person is administered. This legal process involves collecting the deceased's assets, liquidating the debt, paying necessary taxes and distributing property to heirs. The executor or administrator of the estate carries out these activities. The probate court supervises this process.

An estate needs to be probated if the estate includes any probate assets. Probate assets include:

Assets that are not subject to the probate process are as follows:

The probate process is an orderly distribution of property from the deceased to beneficiaries. It includes the following steps:

Your estate goes through court to protect your creditors and beneficiaries. Court proceedings allow time for both to prove their claims.

Year's Support

A "year's support" is an award of money or property for the estate of a deceased to his or her spouse and minor children. The award is an amount that will keep the family for 12 months in the manner and style in which they lived before the deceased's death. The property awarded is free of claims of any creditors of the deceased, except for taxes and mortgages.

The deceased's spouse is not entitled to a year's support if he or she remarries, dies or does not file the application within the 24-month period after the deceased's death. The deceased's minor child is not entitled to a year's support if he or she marries, dies or reaches the age of majority before the application is filed.

After an application is filed, the probate court will issue a citation and publish notice of the application in the county's legal newspaper once a week for four straight weeks. The notice will request any "interested" person to give reasons why a year's support should not be granted. The probate court also will notify the executor or administrator of the estate that the application has been filed.

If no objection to the year's support is filed, the probate court will grant the year's support listed in the application. If an objection is filed, the probate court will decide what year's support to award.

A will may require that the testator's spouse elect between taking under the will and receiving a year's support. The will must clearly show the intention of the testator to require election; otherwise, a spouse may receive a year's support as well as take under the will.

Property is everything of exchangeable value that makes up your estate. For estate planning purposes, property is generally of two types: real and personal. Real property, commonly referred to as real estate, is land with attached improvements. Personal property includes all items of property that aren't fixed on the land. Machinery and livestock are classified as personal property in estate planning. Intangibles such as stocks and bonds are also classified as personal property.

Property ownership refers to the way legal title to property is held. The most common forms of property ownership in Georgia are sole ownership, joint tenancy with right of survivorship and tenancy-in-common. Common forms of business ownership are sole proprietorship, partnership and corporation.

Sole Ownership

Sole ownership is a form of property ownership in which one individual has absolute ownership and control of the property. At the death of the owner, the property passes to the owner's heirs. If the owner dies without a will, the property passes according to the law of intestate succession. If the owner has a will, the property will go through probate and be distributed according to instructions in the will. The entire value of the property is included in the owner's gross estate. Lifetime gifts that exceed $10,000 are subject to gift tax and taxable to the donor. Income received for the property is taxable to the owner while the owner is alive.

Joint Tenancy With Right of Survivorship (JTWROS)

Joint tenancy with right of survivorship is a form of ownership in which two or more people own the asset. If one of the joint tenants dies, the asset automatically becomes the property of the surviving joint tenant(s). You can't will your share of a jointly held asset to another person. It passes to the other joint tenant(s) by law.

JTWROS property is excluded from probate because it automatically passes by law to the surviving joint owner. If the joint tenants are married, one-half the value of the property goes into the calculation of the value of the gross estate of the first spouse to die. If the joint tenants are not married, the entire value is calculated in the gross estate of the first-to-die unless the joint tenant can prove contributions.

Several people can own tenancy-in-common property simultaneously. Each person owns an undivided interest in the property. Shares under tenancy-in-common may be unequal. Upon the death of one of the tenants in common, that decedent's fractional percentage of ownership passes to the decedent's heirs rather than to surviving tenants in common.

Life Estate

A life estate in real property gives the holder, known as the life tenant, a right to use the property during life. The person(s) holding a remainder interest receives title to the property at the death of the life tenant.

With a deed, you convey legal title of property to someone else, such as your children. Gift and possible income taxes must be considered. A disadvantage is that you may need the property before you die. At your death, a title insurer will not insure the property title for sale until records show the title has been properly cleared of liens and transferred through proper legal procedures such as probate or joint tenancy termination.

Community Property

Community property is a form of property ownership used in nine states:

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. All property acquired by the spouses during their marriage is regarded as owned in equal shares by the spouses. Each spouse has a vested interest in one-half of the community property. The one-half interest is acquired while the spouses live in a community property state and continues even though the couple subsequently moves to a noncommunity property state.

Property acquired by the spouses during the marriage is divided equally between them if one spouse dies or if the couple divorces after acquiring the property. Separate property generally consists of property a spouse owned at the time of marriage, property acquired separately by gift or inheritance, and property purchased with individual funds. Separate property remains separate after divorce. The owner-spouse can deal with it as he or she chooses.

States that do not have community property laws distribute property according to common law. Georgia is a common-law state. In common-law states, property may be held in one of the following ways: sole owner, joint tenancy with right of survivorship, tenancy-in-common, joint bank accounts and joint savings accounts.

Sole Proprietorship

In a sole proprietorship, business ownership is in one name. It is normally the simplest method of ownership and gives the holder the most complete ownership possible. Property transfers are relatively easy because the holder of title to the property has the absolute right to dispose of it under most circumstances. At death, solely owned property passes under provisions of the will or according to the law of intestate succession. The property is subject to the probate process. Income tax is reportable on the owner's individual income tax return during his lifetime.

General Partnership

A general partnership is an association of two or more persons, as co-owners, formed to operate a business for profit. The value of your portion of the partnership business is included in the valuation of your estate. Your portion of the partnership business passes through probate according to the terms of your will or the law of intestate succession. If your partner wishes to carry on the business or limit the transfer of units, you need a buy-sell business continuation agreement.

Corporation

A C corporation or S corporation is an entity that does not terminate when one of the shareholders dies. Upon death of a corporate shareholder, only the corporate stock owned by the decedent is subject to probate and transfer. The stock must be valued for estate tax purposes, but operation of the business may be continued without interruption. Corporation property can be divided into easily transferred shares of stock so that the gift or sale of stock translates into a proportionate share of property.

Property may be transferred from your estate to your beneficiaries during your lifetime or at your death. Property transfers during your lifetime may be by gifts or living trusts. Property transfers at your death may be:

Wills

A skillfully prepared will is the foundation of an estate plan. It provides instructions for distributing your property after your death. If you don't have a will, the state determines how your property will be distributed.

If you have never made a will or if your will was made several years ago, consider writing or revising your will. If you need to make changes in your will, two basic ways exist to make the changes. For minor changes, your attorney can attach a codicil to your will. The codicil explains or changes provisions in the will. The second way is to have your attorney draft a new will.

What Is a Will?

1. States your residence
2. Revokes prior wills
3. Provides for paying debts and funeral expenses
4. Specifies how you want property distributed and when
5. Names beneficiaries
6. Specifies charitable bequests. You leave a specific amount of money, a specific asset, or a specific percentage of your estate to the charity.
7. Names executor
8. Names personal and financial guardian for minor children

• Joint tenancy with right of survivorship property
• Life insurance with a beneficiary other than your estate
• Retirement plans with beneficiaries other than your estate
• Property transferred to a living trust before death

The laws of each state establish the formal requirements for a valid will.

3. A will has no legal effect until the maker's death. It may be revoked, changed or added to at any time before the maker's death, provided the changes are made strictly in accordance with the requirements set by law. A will's provisions cannot be changed by simply writing something in or crossing something out after the will is executed.

Why Should You Make a Will?

Does a Person of Moderate Means Need a Will?

Do Both Spouses Need a Will?

Waiting until she is a widow to write a will is running a risk. Both spouses could die simultaneously, she could die first, or she could become incompetent and unable to make a will. If she neglects to make a will now, she may neglect to make one then.

YES. She needs a will if she owns property. As the owner of property, a wife has the same problem that her husband has of disposing of it in the most effective manner. A wife is a potential owner of property through her husband's estate.

Is Life Insurance a Substitute for a Will?

Is Joint Tenancy With Right of Survivorship a Substitute for a Will?

If You Don't Have a Will, Who Gets What?

Concerns Associated With Dying Without a Will

Couples with minor children need a will. If one spouse owns property as sole owner, predeceases the surviving spouse and dies without a will, the children would inherit a portion of the property. If the surviving spouse wanted to sell the property, he/she would have to get court permission to sell the children's portion of the property.

The executor or administrator makes application for letters testamentary (authority to act). The probate court issues such letters and publishes a notice of appointment in a newspaper published and distributed locally. This notice tells all creditors of the deceased to file their claims within a given period of time or be forever barred from collecting them. Such notice is published once a week for four weeks.

Unless provision is made in a will to the contrary, upon the receipt of letters testamentary, the executor posts bond, makes an inventory and has the property appraised. Periodic accounting to the court is required of the executor until he or she files for final settlement. If the court approves the settlement, the executor will then distribute the estate according to the terms of the deceased's will. If no will exists, the administrator named by the court follows this same procedure for settling an estate. Through your will, you can relieve your executor of much of this procedure, if you so desire, to save time and expenses.

How Should You Prepare for Making a Will?

GET PROFESSIONAL HELP. No matter how simple the document, it should be drawn up in the precise language of the law and executed according to the provisions of your state's law. If you secure expert help in writing your will, your wishes are less likely to be misinterpreted.

If you have a regular attorney, consult him/her. If he/she does not do this type of work, he/she may be able to direct you to one who does. If you do not have a regular attorney, a friend may be able to suggest one.

You want the best person you can get, just as you do for any other specialty job. If you have a large and/or complex estate, choose an attorney that specializes in estate planning.

When you have made your selection, visit the attorney. Most attorneys do not charge for the initial visit. Charges begin after you ask him/her to write your will.

Your attorney's time is valuable. You will save time and money if you have a general idea of how you want to distribute your property.

Where Should You Keep Your Will?

Gifts

If you have enough money to satisfy your present and future financial needs, you might consider gifts as a means of property transfer. Gifts are a simple and effective way to reduce the size of your estate. Lifetime gifts allow you to transfer property to your spouse, children, relatives, friends or charity(ies) before your death.

The unified credit exemptions increase in stages from $675,000 to $1 million by the year 2006. The exemption and unified credit amounts are as follows:

Cost Basis

Basis is the figure used to determine how much gain (or loss) is incurred when property is sold. Basis is the amount a person paid for property. For depreciable property, basis is the price paid for property minus depreciation that has been taken over the ownership period. When property is gifted during lifetime, the donor's basis is transferred to the donee. For example, Gary's dad gave him 10 acres of land. When Gary's dad originally purchased the property, he paid $8,000 for it. At the time of the gift in 1996, the property had a fair market value of $20,000.

Before the gift, his dad had a basis in the property of $8,000. At the time of the gift, the $8,000 basis is transferred to Gary. If Gary receives the property with the $8,000 basis and sells the property for $20,000 within 12 months, how much taxable gain for income tax purposes would he have on the sale of the property? Assume Gary is in the 28 percent tax bracket. Gary would have a $12,000 taxable gain subject to the 28 percent capital gains tax.

If the property were not transferred until Dad's death, the cost basis would be the fair market value of the property at date of death. This is commonly referred to as stepped-up basis. The recipient of a gift could have a large gain if he/she sells property with a low original basis, as shown in the above example. If the property is passed as an inheritance at death, the stepped-up basis reduces gain, which reduces taxable income. To conserve your estate, consider giving high-basis property during lifetime and low-basis property at your death when it will get a stepped-up basis. This will minimize income taxes for recipients.

Let's assume that Gary inherited the 10 acres at the time of his dad's death. At his dad's death, the fair market value of the property is $20,000. Gary's basis in the property is $20,000. If he sells the property for $20,000, he would have no taxable gain.

The income tax is deductible on the minor's tax return. Earned and unearned income of a child over 14 is treated at the child's rate, usually 15 percent. Unearned income in excess of $1,300 per year for a child under 14 is taxed at the parent's rate, usually 28 to 36 percent. The unearned income of a child under 14 is taxed as follows:

You can give cash, securities, real estate or proceeds from life insurance policies. Current gifts are made in the current year for the charity to use now. Current gifts include:

• Cash
• Securities (appreciated stocks or bonds)
• Real estate
• Tangible personal property (rare books, art, antiques)
• Income from trust assets for a period of years, at the end of the period the trust assets are given back to the donor or named beneficiaries
• Paid-up life insurance policies

Deferred gifts are arranged for now, but the charity will not realize the benefit until some years in the future. Deferred gifts are divided into two categories: life income gifts and estate gifts.

A life income gift gives income back to you. You give cash, securities and/or real estate to the charity. You and/or your spouse or other beneficiary receives income from those assets as long as you live. At your death and/or the death of your last remaining beneficiary, the charity receives the remaining assets. Life income gifts include pooled-income funds, charitable remainder trusts and life estate agreements. With life-income gifts, you can benefit your favorite charity, avoid tax on capital gains, receive a current charitable deduction and remove assets from your estate while retaining income.

• It provides income for life for you and/or your spouse.
• You avoid capital gains on appreciated stock.
• You remove the donated assets from your estate.
• You receive an income tax deduction based on your age, about 40 percent of the amount donated.
• You benefit your favorite charity.

Annuity Trust

The assets given to a charitable remainder annuity trust are valued on the date the trust is created. An annual payout is determined then. You receive this same dollar amount each year for life. Any named beneficiaries will also receive this same amount for life. Once created, you can not put additional gifts into the trust. After your death and the death of any beneficiaries, the remaining principal is given to the named charity.

The assets given to the charitable remainder unitrust are valued each year. An annual-income payout is made based upon a fixed percentage. This allows for a variable payout from year to year, in contrast to the fixed-dollar-amount payout from the annuity trust. The unitrust is always used with gifts of real estate. Unitrusts may allow additional gifts in future years. At death, the remaining principal goes to the named charity.

A bequest is a gift made through your will. Bequests may be restricted or unrestricted, to be used where the need is greatest.

Bequests may be specific, residual or contingent. Specific bequests are most common. You leave a specific amount of money, specific asset or a specific percentage of your estate to the charity. Residual bequests go to the charity only after all debts, expenses, taxes and other bequests have been paid. Contingent bequests take effect only when all other bequests fail. For example, if your child predeceases you, you leave your entire estate to the charity.

You can name a charity as a beneficiary of your retirement plan to receive an outright distribution from your retirement plan after your death. If you wish to leave retirement plan money to your spouse, and charity, you should create a separate IRA for the charity. You can also name a charitable remainder trust to receive retirement plan money.

The donor may control the entire operation of the foundation, such as disbursements of grants and investments of assets. However, some legal constraints apply. Many experts advise that people consider other alternatives before creating a private foundation with less than $5 million. Private foundations can be terminated under certain conditions.

The income tax deduction limits for appreciated property gifts to private foundations is limited to the donor's basis, and the maximum deduction is 20 percent of the donor's adjusted gross income. The tax laws change over time. During some periods of time, publicly traded securities that are contributed receive a full fair-market-value deduction. The percentage limitation for the maximum deduction for cash gifts is 30 percent of AGI.

A 2 percent excise tax is applied on net investment income. The foundation cannot own more that a 20 percent interest in any business along with foundation trustees and officers. The foundation must make grant distributions to public charities of at least 5 percent of the fair market value of the foundations assets. The private foundation is responsible for all administration.

The primary purpose of a community foundation is to manage and distribute charitable gifts of numerous individuals to a broad range of charities and organizations. Small and large gifts are managed by the community foundation. Most community foundations charge an annual administration fee of 1 percent to 1.5 percent of assets.

The income tax deduction limits for cash gifts are 50 percent of AGI and 30 percent of AGI for appreciated property. Appreciated property receives a full fair-market-value deduction. The community foundation handles all administration. The donor can serve in an advisory role.

Trusts

A trust is a legal arrangement in which a person, called a trustee, controls and manages property for the benefit of beneficiaries. You transfer assets to the trust, which is managed by the trustee. Money or property (real or personal) is placed with another person for "safekeeping" for the benefit of named beneficiaries.

Two kinds of trusts exist: living and testamentary. A living or intervivos trust is created and takes effect while you are living.

A testamentary trust is established under the provisions of your will. The testamentary trust does not become effective until the will has passed through probate.

Trusts may be either revocable or irrevocable. The revocable trust can be terminated or altered and offers no special estate tax advantages. But it can be used to provide income or management of assets. An irrevocable trust cannot be revoked by the grantor in the grantor's lifetime and can offer special estate tax advantages.

A trust may be used to:

A trustee is the person you choose to hold legal title to property for the benefit of your beneficiaries. The trustee manages trust property, accumulates or pays out trust income, and ensures that beneficiaries receive property in the proper manner.

Your choice of a trustee is very important. The trustee has discretion to make decisions regarding your property. If the trustee is believed to mismanage trust assets or treats beneficiaries unfairly, the trustee may be liable for any harm that can be proven. The trustee can be a relative, business associate, a bank trust department or an attorney.

Family Limited Partnership (FLP)

A family limited partnership, or FLP, is a legal entity to manage family assets. The FLP is supposed to engage in some business or financial activity. It exists between members of the same family unit. For tax purposes, a family includes an individual's spouse, ancestors, lineal descendants and any trusts established primarily for the benefit of such persons.

When the partnership is created, assets are placed in the partnership and are given a value. Assets such as a farm, family-owned business, marketable securities, rental property or personal residence are placed in the family limited partnership. An appraiser needs to be hired to determine the value of the partnership interests and the valuation discount(s) that will be used.

The family limited partnership divides the ownership of business assets or real estate to take advantage of valuation discounts, which can significantly reduce transfer taxes. The partnership interest is eligible for these valuation discounts because of lack of control and lack of marketability. These discounts may range from 25 percent to 40 percent or perhaps higher. Because the assets are in the family limited partnership, the value of an FLP interest is worth less than direct ownership of the same percentage interest in the underlying assets of the FLP.

The family limited partnership has two classes of partners: the general and the limited. The general partner or partners are given management responsibility and assume personal liability for debts and other liabilities that are not satisfied from the assets of the FLP. The general partners have a voice in management by percentage vote. The limited partners do not have management responsibility or control over the assets of the FLP.

The personal liability of the limited partners generally is limited to the amount of capital in their name in the partnership.

The family limited partnership is a technique to shift the income tax burden from parents to children or other family members, except for children under 14 who are taxed at the parent's top marginal tax bracket. The FLP is a pass-through income-tax entity. Each partner must pay income taxes based on his or her share of partnership income.

The family limited partnership is a way to reduce the value of an estate for transfer tax purposes. The value of the general or limited partnership holdings is included in the valuation of the estate.

The family limited partnership allows parents to give limited partner interests to children and other family members without parents having to give up control. It can also be used to provide continuous ownership of assets within the family unit for several generations. The general partners receive a general partner interest such as 1 percent. If the general partners are the husband and wife, they might each receive a 1 percent general partner interest totaling 2 percent. A trust could hold the remaining 98 percent partnership interest, which allows the parents to gift portions of the limited partnership interest to the children over time. The annual gift exclusion of $10,000/$20,000 may be used each year to make annual gifts of limited partner interests to the limited partners.

Death Benefits Through a Contract

Life insurance is important in estate planning. It may be used to:

• Provide liquidity. It pays cash promptly at a time you need it most if you need to pay estate taxes, debts, administrative costs and other estate expenses.
• Provide income for family expenses
• Pay for college expenses, mortgage balances or other large financial needs
• Secure debts during your lifetime; can be used to pay off debts at death
• Fund trusts at your death. Proceeds from the life insurance policy can be paid to your trustee who invests and disperses income and principal according to your specifications. If you wish to name minor children as beneficiaries of your insurance policy, create a life insurance trust to hold the insurance proceeds for the benefit of the children. Otherwise, a guardian will have to be appointed to manage the proceeds until the child reaches the age of 18.

Life insurance benefit proceeds are exempt from income tax. If the survivor chooses a life-income installment option, the life insurance proceeds are received income tax free. But the annual interest income is taxed.

The amount of the life insurance proceeds will be included in the deceased's gross estate if:

Retirement Plans

If a retiree (plan participant) has elected a life only retirement income, the income stream stops at the retiree's death. Because the income stream stops at the participant's death, there is no value to include on the estate tax return. However, if the retiree has selected an income option, such as period certain or joint and survivor, that would provide income past the retiree's death, then an estate value calculation must be made. If the income stream is for a fixed period, then the present value is calculated based on discount rates provided by the IRS. If the income stream is for the life of a surviving spouse, then the present value is determined by both the life expectancy of the spouse and the discount rate. The IRS maintains both mortality and discount tables for these calculations. The present value generated by these calculations is then entered on the estate tax return for purposes of determining the estate tax liability.

Chapter 6: How to Determine Estate Tax Liability

Before you can determine if you are facing an estate tax problem, you need to know what is included in your estate and how it is valued for estate tax purposes. The uncertainty of when your estate will be valued creates a problem, especially in inflationary times. Property subject to estate taxes includes the following:

Value your assets at current fair market values. Periodically review your estate plan because the amount of property you own and the property values change.

Gross Estate

To determine your gross estate, compute the value of all the property you own, both business and personal. Use current market values except when electing to use the special-use valuation for farm and closely held business real estate. Your gross estate includes:

1. Real or personal property you own as sole owner at death
2. Joint tenancy with right of survivorship property passing to your surviving spouse or children (one-half of property value if jointly owned with spouse; total value if jointly owned with children unless you can show children's contribution)
3. Your portion of property held as tenants in common
4. Face value of contracts such as life insurance proceeds, pensions and annuities.

Real or personal property includes savings, checking accounts, stocks, bonds, jewelry, cars, personal residences, furnishings and business property. The value of insurance proceeds you own at your death is included in your taxable estate even though your spouse receives the proceeds as the beneficiary. This assumes that you have ownership rights in your insurance policy at the time of death. Such rights include cancellation privileges, right to borrow on cash value, or right to change the beneficiary. If you wish to exclude the value of insurance proceeds from your estate, you must transfer the ownership to another party to remove yourself from all "incidents of ownership." If you retain ownership, or incidents of ownership, in the policy, such as the right to borrow on it, to surrender it (cancel it), to assign it to someone else so they can receive the policy benefits or to change the beneficiary, the policy proceeds are included in your taxable estate. You should discuss this with your attorney and insurance representative before taking action.

Special-use Valuation

Special-use valuation is a method for valuing farm and closely held or family-owned business property. If the executor elects this method, significant estate tax savings may result. This allows the real estate to be valued at its actual use rather than its highest value. The gross estate value can be reduced by as much as $750,000. The $750,000 ceiling on special-use valuation is indexed annually for inflation beginning in 1999. To receive approval of this method by IRS, several conditions must be met. The major ones are:

If the heirs of the property valued by the special-use method sell to a nonfamily party or change the use within 10 years, the estate tax benefits resulting from the special-use evaluation will be recaptured. If the heir dies before the sale or changes the form of use, no recapture is exercised. A possible disadvantage of the special-use valuation is that the property will have a lower basis, resulting in a larger gain when it is sold.

Family-owned Business Exclusion

The family-owned business exclusion excludes up to $1.3 million of the value of a family-owned business. The new $1.3 million exclusion is not in addition to the unified credit, but rather part of the unified credit. In other words, an additional $625,000 of credit is available. Special estate tax treatment can be elected with respect to a family-owned business if the aggregate value of the descendant's interests in the business that pass to qualified heirs exceeds 50 percent of the decedent's adjusted gross estate and certain other requirements are met.

To summarize the computation of the gross estate, the following assets are valued at current fair market value at date of death with the exception of the special-use valuation:

The sum of these values equals the value of your gross estate.

Estate Tax Liability

After the value of the gross estate is calculated, these steps may be used to determine estate tax liability:

Adjusted Gross Estate

Deduct the following from the value of the gross estate:

The sum of the above items is subtracted from the value of the gross estate. The balance is the adjusted gross estate.

Taxable Estate

The taxable estate is determined by subtracting the following deductions from the adjusted gross estate:

If the balance is less than $675,000, you do not have a taxable estate. If your balance is $675,000 or greater, the balance after these deductions is the taxable estate.

Tentative Tax

The Federal Unified Estate and Gift Tax Table is used to determine the amount of the estate tax you owe. Calculate the dollar amount of your taxable estate. That figure is the amount used to calculate your estate tax liability if you have already used your unified tax credit when making lifetime gifts. If any or all of your unified tax credit is still available, then the amount of your taxable estate is the tentative tax used to calculate your actual estate tax liability. If some or all of the unified tax credit is available at your death, the remaining amount of credit will be subtracted from the tentative tax before calculating the actual tax liability.

The unified credit is a federal estate tax credit that offsets estate tax liability. It applies to lifetime gifts and testamentary transfers. The unified credit amount decreases the amount of gift tax liability on lifetime gifts of more than $10,000/$20,000 per year per person and the amount of estate tax liability on testamentary transfers.

In 2000, the unified credit amount was $220,550. This was equivalent to a taxable estate of $675,000. If none of the credit has been used to offset gift tax on lifetime transfers, an estate of $675,000 can be transferred without any estate tax being owed.

The unified credit exemptions will increase in stages from $675,000 to $1 million by the year 2006. The exemptions are as follows:

Generation-skipping Tax (GST) Exemption

Every individual is allowed a generation-skipping tax exemption of $1 million per individual; $2 million per couple. The exemption is indexed for inflation beginning in 1999. Generation skipping is a generation that is two or more generations below that of the donor, such as grandchildren or great-nieces and -nephews.

The assets are placed in a trust for the benefit of the children, rather than passing to the children outright. The assets are valued as of the date they are placed in the trust. The transfer from donor to the child's trust is not exempt from gift or estate taxes. The $675,000/$1.3 million exemption equivalent may be used to reduce the gift/estate tax liability.

The subsequent transfer from child to the following generation(s) is exempt from gift, estate and generation-skipping tax. The purpose of this exemption is to prevent the estate from being cut in half by estate taxes at each generation.

Case Study I: Determining Estate Tax Liability (See Table 1)

In Case Study I, the husband dies, leaving his wife one-half of his adjusted gross estate by instructions in his will. His gross estate is $1,570,000. His last expenses are $142,000, leaving an adjusted gross estate of $1,428,000.

He has two estate deductions totaling $789,000, of which charities receive $75,000 and his wife receives $714,000. He receives an unlimited marital deduction for the one-half of his adjusted gross estate ($1,428,000/2 = $714,000) that goes to his wife.

His taxable estate is $639,000. If the unified tax credit is used, there is no estate tax liability. Refer to Table 1 and Appendix I. Here is how the calculation is determined:

Table 1. Estate Tax Liability Computation

Case Study II: Estate Planning Illustrated

Table 2. The Estate Tax Results With Varying Estate Planning Techniques

Tasks Performed by the Executor or Administrator

The terms "executor" and "administrator" are not interchangeable, although the duties are similar.

An executor is the person named in a will to settle the estate of a deceased person. If the representative of the deceased person is a female, she is known as the executrix.

An administrator is a representative appointed by the probate court to handle the estate of a deceased person who either failed to make a will or failed to name an executor in the will. If the administrator is a female, she is known as the administratrix.

The following list of tasks will be similar for an executor or an administrator. The freedom of an executor to operate without direct court supervision depends upon the powers granted him in the will. The administrator is bound to fairly close court supervision because a will has not granted him such freedom. Appropriate powers granted to an executor can often save more money than the cost of having the will drafted to grant the executor such powers.

Some of the major tasks performed by an executor or administrator are as follows:

As this list shows, the duties of an executor or administrator are many and varied. Clearly they are complex enough to require legal assistance in the majority of cases. Reasonable legal fees are one of the expenses of administration that can be deducted for estate tax purposes.

Estate Planning Checklist

If you gather the following information, you can reduce the amount of time needed for handling basic data.

You should not feel uneasy in making such a large amount of information available to your attorney. The Code of Professional Responsibility requires that the attorney not breach the confidential relationship of the client.

Prepare a Letter of Instruction

Your "letter of instruction" gives your family members the facts they need to handle your personal affairs efficiently if anything happens to you. Prepare this in addition to your will.

The Estate Planning Team

Estate planning can range from a simple will to a complex estate plan. Your estate plan may be relatively simple and require only an attorney. If your estate plan is complex, your attorney may work with your other financial professionals to develop your estate plan. Other professionals include your accountant, trust officer, life insurance agent, broker and/or financial planner. Generally your attorney will coordinate your overall plan. If your estate plan is complex, consider using an attorney who specializes in wills and estate planning. Your estate planning team can work together to develop an estate plan that will achieve your estate planning objectives, reduce tax liability and ultimately transfer property to your intended beneficiary(ies).

Before meeting with your attorney, here are some important questions to consider:

1. What do you own? What are your assets and your liabilities?
2. What is the value of your assets today? What will be the value of your assets at your death?
3. How are the assets titled? Who owns what ó you, you and your spouse, your spouse, you and others?
4. How do you want to distribute your assets? Will you distribute them during your lifetime or at your death?
   1. Who do you want to receive your assets (spouse, children, charity(ies), others)?
   2. How much do you want them to get?
   3. When do you want them to get it?
   4. How do you want them to get it (income only, principal only, income and principal)?
5. Whom do you want to manage the administration and distribution of your estate?
   1. Who do you want the executor, trustee and successor executor or successor trustee to be?
   2. Who do you want the guardians (personal and financial) and successor guardian(s) for your dependents to be?

Your attorney may find the following documents useful when preparing your estate plan: most recent will and other estate planning documents, tax returns, financial statements given to lending institutions and a list of who owns property.

Complete Your Estate Plan

When your will and/or other estate planning tools are in place, complete your estate plan. Change ownership or transfer assets to be consistent with the instructions in your estate planning documents such as your will or trust.

Summary

A well-designed estate plan gives instructions regarding what will happen to your physical person and finances if you are physically or mentally incapacitated, transfers your property as you desire, meets the needs of your beneficiaries and minimizes or eliminates economic loss. Maintain a current estate plan to protect the assets you have acquired.

Appendices

Acknowledgments

The author expresses special thanks to the following people who reviewed the manuscript and shared their comments and suggestions, Robert L. Brannen, Gwinnett County Extension agent; Terence J. Centner, JD, professor, agricultural economics; Katherine B. Dozier, former Terrell County Extension agent; and George A. Schuler, Ph.D., late professor, food science. All are or were faculty members of the University of Georgia College of Agricultural and Environmental Sciences.

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