Where to keep estate planning documents?

To help you better understand the estate planning process, once a month I provide answers to a frequently asked estate planning question. People often ask:

"Where is the best place to keep my signed original estate planning documents?"

Once all the paperwork is signed it is a good idea to keep it in a safe deposit box protecting these important documents from theft, fire, accidental loss, etc.. There is sometimes a problem getting it opened after your death though so if you do decide to keep your estate planning documents in a safe deposit box, you might want to name a joint holder on the box; perhaps a a family member or your Personal Representative or trustee.

Another idea would be to keep your original estate planning documents at your attorney's office. Our firm holds your originals at no charge just remember to provide your new contact information.

A home safe is yet another option. However thieves entering a home will often take the whole safe thinking they'll find cash and jewelry. So, make sure the safe is bolted to the foundation of your house or cannot be somehow carried out. Some people keep original Wills and other estate planning documents in their freezer, using an air-tight plastic bag to protect them. Well insulated and heavy, freezers can often withstand fires, hurricanes and tornadoes and they are not often stolen.

Be sure to call me on any questions you may have on estate planning or check out our website for more information on the subject.

Five Most Commonly Used Trusts

The terminology used to describe the types of estate planning Trusts is often confusing. There are five basic types of estate planning trusts. Of course, attorneys make variations to each type. The following is a very general description of the five most commonly used trusts.

1. Inter Vivos or Testamentary

One may implement the trust during life (inter vivos), or it can become effective at the time of the maker’s death (testamentary). The inter vivos trust is a “trust” which comes into effect during the maker’s lifetime. A testamentary trust is created in a will and only comes into effect at the death of the maker.

2. Living, Loving, or Revocable Trust

These terms are used interchangeably to define a trust created and effective during the maker’s life, which can be amended or revoked at the pleasure of the maker during his or her lifetime. At the maker’s death it becomes irrevocable. This type of trust is often thought of as a will substitute. The property which is titled in such a trust during the maker’s lifetime is within the maker’s estate at death for tax purposes but avoids formal probate proceedings.

3. A and B Trusts or QTIP trust

This generally refers to an inter vivos or testamentary trust that establishes within the trust two (2) separate trusts. The A trust, or “marital trust” is a trust created for the surviving spouse. All gifts to the marital trust by the spouse who is the maker of the trust, pass tax free. There is no gift or estate tax on transfers between spouses. If it is defined as a QTIP trust, the maker of the A trust can put certain limitations on the use of the trust assets during the life of the surviving spouse and the conveyance of the remaining assets at the death of the survivor. The B trust, “family trust”, “bypass trust” ,“credit shelter trust”, or “exemption trust” is formed to use the first spouse to die’s estate tax exemption. The B Trust is used to deplete the decedent’s remaining applicable exclusion amount ( 2009-$3,500,000, 2010- no estate tax, 2011-$1,000,000).

4. Irrevocable Trust

A irrevocable trust is one that, once made, cannot be revoked by the maker. A transfer to an irrevocable trust can be a gift subject to gift tax limitations or an incomplete gift. An incomplete gift remains in the estate of the maker. To constitute a completed gift it must be a gift of a present interest, not a future interest. The donor must release the present dominion and control of the asset.

5. Charitable Trust

The basic purpose of a charitable trust is to, at the end of the day, gift assets for qualified charitable purposes. A charitable trust is deductible for tax purposes, to the extent that the IRS deems it to be charitable.

Destin Chamber News

Arnett & Kerrigan, P.L. partner, Jane Kerrigan is on the second page of the Destin Chamber News "Progress" in a member spotlight. As a firm, we believe in community involvement. Look for Jane and me at both the Destin and Walton County Chamber events.

Have Your Estate Plans Reviewed

NOW is the time to have your estate plans reviewed. There are significant changes in tax laws effecting estates.

In 2009, one could pass $3.5 million at death tax free. For all amounts above $3.5 million there was a 45% death tax imposed. As of January 1, 2010, this rule has changed. This year there is NO death tax no matter how much the estate is valued.

In 2009, the property that passed at death transferred to the beneficiary with a basis of the fair market value of the property at the decedent’s death. For example, if a farmer purchased a farm in 1940. The farm had a basis of $100,000. When he died in 2009, he left the property to his son. At that time it had a fair market value of $2,000,000. His son would have received the property in 2009 with a basis of $2,000,000. If the beneficiary later sold the farm for $2,000,000, he would pay no capital gains tax.

For deaths occurring in 2010, this rule also changed. If the farmer died in 2010, his son would receive the property at the $100,000 basis. There are 2 exceptions to this rule. The personal representative can allocate up to $1,300,000 to increase the basis of assets in the estate. If the personal representative wished to apply all of this allocation to the farm, the basis of the farm could be stepped up to $1,400,000 ($100,000 + $1,300,000). If the son sold the farm for $2,000,000, he would be required to pay capital gains tax on $600,000.

The second exception applies when the descendent has a spouse that is a beneficiary. The personal representative can allocate up to $3,000,000 in addition to $1,300,000 to increase the basis of property inherited by the spouse. If the farmer had 2 farms, one with a basis of $100,000 and the fair market value at death of $2,000,000 and a second one with a basis of $1,000,000 and a fair market value at death of $4,500,000, the distribution of the increase in basis could be significantly changed. If the wife was the beneficiary of the second farm, she would receive the $3,000,000 increase in basis that can only be used by a spouse. She could also be allowed to use any and all of the $1,300,000 general increase of basis allowed for an estate. Therefore, in the example, the wife could have the basis of the second farm increased from $1,000,000 to its fair market value, $4,500,000. She would use the $3,000,000 allowed only to spouses and $500,000 of the general increase in basis allowed to an estate. This would leave $800,000 in basis to be allocated to the farm left to the son ($1,300,000 - $500,000). The son’s farm would then have a basis when he received his inheritance of $900,000. If he sold the farm at the fair market price of $2,000,000, he would pay capital gains on 1,100,000.

No one knows what the Congress will do to change the law. If Congress does nothing, in 2011 the law automatically changes again. Only $1,000,000 will pass at death tax free. For all amounts above $1,000,000, a 55% death tax will be imposed. However, the basis for the property that passes at death will return to the fair market value of the property at the time of the decedent’s death.

Your estate plan needs to address these changes in the law.

Make A Will

To help you keep the resolution to Make A Will, on January 28, 2010 at 5:30 p.m., I am hosting a seminar about Wills and other basic estate planning documents. The seminar will be held at our law office, Arnett & Kerrigan, P.L., 600 Grand Boulevard at the Sandestin Town Center. The seating is limited so if you are interested in attending this seminar or knowing about upcoming seminars, pleas contact Tammy for more information at 850-502-4373 or via email at info@arnettlegal.com.