Estate Planning, Probate And Asset Protection From A Tax Perspective

"In this world nothing can be said to be certain, except death and taxes."

- Benjamin Franklin 1789

There is an estate upon death consisting of all that a person owns or in which, in some cases, one has an interest. For probate purposes, an estate is only that which is titled in a decedent at his or her death. However, a taxable estate is something different altogether. An estate may be large enough to have exposure to the federal and/or state systems of estate (as opposed to income) taxation. A huge industry has grown up around the notion of "tax planning" for estates. More often than not, this planning involves creating "shelter" from estate taxes to the extent of the credit available to all estates. The shelter is created by setting up a trust for the benefit of a surviving spouse by:

  • Funding it with money or property titled in the deceased spouse's will at death
  • Paying out all income from the trust fund that had been set up during the life of the surviving spouse
  • Upon the death of the surviving spouse, paying the principal to the beneficiaries of the trust.

Of course, estate planning is much more than this. It is a confirmation of the certainty that we shall all leave this life and will not be taking anything with us. If there is money that can be left to loved ones, where it might otherwise be seen as passing to the government, it is appropriate and legal to plan for the receipt of wealth.

Schedule a consultation: Contact Boston estate tax lawyer Theodore L. Craft.

Do You Need A Will Or A Trust?

The Internal Revenue Code does not provide for corrections to estate plans (wills and trusts) after death. It is important to know which estate planning tool is best for you.

WILLS

A will "speaks at death" and cannot be altered after death.

The person who makes a will must have "testamentary capacity." Awareness is the ordinary meaning of capacity. However, an orderly desire as to whom should receive the property is the operative principle upon which a legally sound will is based. When a person is under an undue influence in making a will, dissatisfied beneficiaries (heirs) may resort to litigation to attempt to overturn a decedent's testamentary plan.

Attorney-Client Privilege During Will Drafting And Execution

Typically, no privilege attaches to communications between lawyer and client in the drafting and execution of a will, so the testator's desires can often be introduced through the estate planning lawyer for the decedent in any trial context. This is because courts generally allow declarations and events leading up to the execution of the will into evidence in order to best determine the intent of the will's maker.

TRUSTS

A trust generally is established to hold property transferred to it for the sole benefit whose names are set forth in a schedule of beneficial interest (beneficiaries). A trust created during and for the benefit of its creator during that person's lifetime, over which its creator continues to maintain "strings" of control over property in the trust, becomes irrevocable at death. Its provisions carry on in effect after the event of death.

With a trust, a trustee generally holds real property, which, with cash and other property, consists of the principal, or "corpus" of the trust. The trustee receives the income and all gains and profits thereof for the benefit of the beneficiaries. The trustee then pays over to the beneficiaries the income generated by investment of the principal [all gains and profits generally] pursuant to the direction of the beneficiaries. Much preparation and thought goes into the planning of a trust with beneficial interests transferred at death. This planning is best done when drafting a will and establishing a trust to come into existence at death, with property funding the trust under the terms of the will.

Personal Residence Trusts

A personal residence trust is the most common type of trust. Congress has recognized that many people desire to maintain family ownership of their home and pass ownership to future generations while retaining its use for a period of time. Accordingly, there are sections of the Internal Revenue Code pursuant to which a homeowner may retain an interest in the use and occupancy of a residence during his or her lifetime and transfer the value remaining at his or her death to the family. This is called a "life estate."

Call and ask Boston estate tax lawyer Theodore L. Craft for more information.

Trusts To Reduce Federal Estate Taxation And Massachusetts Estate Taxation

An estate is taxed at the federal and state level over certain threshold valuation amounts includable in the "gross estate." Any trust created during the lifetime of a "settlor" (a person making a trust) which is changeable in any way during the settlor's lifetime causes property in the trust to become included in the gross estate of the decedent for tax purposes. Such a trust becomes irrevocable at death and its provisions carry on to beneficiaries under the trust.

Important Things To Know About Estate Taxes

  • Federal estate tax threshold. If an estate exceeds the "threshold" value for federal estate tax purposes, a federal estate tax is imposed on the event of a transfer of property at death based upon its values.
  • Progressive estate tax rate. The estate tax is imposed at progressive rates. It extends to transfers of economic value inside or outside the scope of the probate administration system.
  • Taxable estate versus probate estate. It is important to distinguish a taxable estate from a probate estate. The former includes all property or rights to property that has/have been given away during the decedent's lifetime (gifts) as well as property owned by the decedent at the time of death. As mentioned earlier, property transferred to trusts during a decedent's lifetime with "strings attached" will be part of (includable in) a decedent's gross estate. Inclusions in a decedent's gross estate generally are beyond the scope of this topical overview.
  • Gifts between spouses, the marital deduction. When a gift is made by one spouse to the other through his or her estate, the donor spouse may claim a marital deduction on a federal estate tax return.
  • Unified credit. A unified credit against an estate's estate tax liability is provided by statute. The unified credit is the equivalent of an exclusion of value from the decedent's estate set by Congress. For tax years 2010 through 2012, the exclusion is based on the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act that was signed into law by President Obama on December 17, 2010. This law is only good for two years and so will sunset on December 31, 2012, meaning that on January 1, 2013 the federal estate tax exemption and rate will default to the numbers that were in effect in 2002. The exclusion in value from estate tax in 2011 and 2012 is $5 million. In 2013, the exclusion will default back to a $1 million exclusion.
  • Valuation of family-owned business interests

For family owned business interests, valuation is an extremely important aspect in the transfer of wealth from one generation to another. Often, discounts may be available on value transferred where less than an entire interest is passed to an heir. Similarly, gifts during a person's lifetime may be subject to a discount for purposes for computing the gift tax. The gift tax is a tax deferred in favor of a unified credit for gift and estate taxes upon the death of a decedent, up to the maximum amount of that exclusion at death.

Experience That Counts

The drafting of proper documents is essential to any estate plan. A tax professional with a working knowledge of the complex statutory interrelationships regarding estate taxation should help draft your estate planning documents.

The management, preservation and distribution of wealth is the primary goal in planning for a person's estate to pass at death in the manner consistent with the person's objectives.

Theodore L. Craft, Esq., LLM, Attorney at Law & Tax Counsel, has extensive experience with estate taxation, including:

  • Form 706 [federal estate tax] and M-.06 [Massachusetts estate tax] preparation
  • Resolving estate questions with IRS and the Massachusetts DOR
  • Wills and estates share contests in Probate Court
  • Appeals of and litigation toward settlement of valuation issues
  • Asset protection - The advanced planning of how one's assets are to be held during one's lifetime - to avoid burdens on the estate anticipated if nothing is done. One phone call is all you need to establish whether we are the right firm for the matter for which you need estate tax compliance resolution or other estate-related representation.

Contact Boston estate tax lawyer Theodore L. Craft today to schedule a consultation.