Estate Planning in a Nutshell

INTRODUCTION

The purpose of this is to provide an overview of the com­plex subject of estate plan­ning.  It should be noted at the outset that this is only the briefest of outlines -- it barely skims the sur­face of the sub­ject.  With this information, however, it will be possible to un­derstand the task of planning an estate and to ask pertinent questions as to applica­tion to one's own situa­tion.

ESTATE PLANNING
Es­tate plan­ning is the process by which one plans for the distribu­tion of the wealth accumu­lated over a lifetime to succeeding gener­ations (or other "objects of one's bounty") while mini­mizing, to the extent possible, the tax bite exacted at death by the federal and state taxing authorities.  From the attorney's point of view, the planning of an estate is a multi-faceted process.  Several areas of law are involved: the law of descent and distribution, the law of trusts, property law, income tax law, estate tax law, and gift tax law and, sometimes, also family (di­vorce) law, busi­ness law and pension law.  The sources from which these laws spring are diverse as are the purposes which they are designed to serve.  For ex­ample, the law of descent and distribution (wills and intestate succession [no will]) and trusts comes from the English Common Law as revised by state statute with an overlay of judicial inter­preta­tion.  The three tax laws and the pension law noted above are primarily feder­al in nature with a state tax law overlay.  Family and busi­ness law are basically creatures of the state statute, but they also interact with the income tax provisions of the Internal Revenue Code. 

 WHAT IS A WILL?
A will is a written document, signed with the appropriate formali­ties, which instructs the survi­vors as to how the decedent's proper­ty is to be treated after his or her death.  A valid­ly exe­cuted will supersedes the plan outlined in state stat­ute which decrees how the property is to pass if there is no will. A person who dies without a will is said to have died "intes­tate", and the rules surround­ing the state-sanctioned distribution of the deceased persons property are called "intestate suc­cession".  The rules of intestate succes­sion vary somewhat from state to state.  In Wiscon­sin, if there is a surviving spouse, the spouse gets all of the property; if there is a spouse and children of a prior marriage of the deceased, the property is divided be­tween the spouse and chil­dren; if there are children only, they split the property.  Additional provi­sions cover situa­tions where one of several chil­dren has pre­deceased leaving surviving grand­children; where there is no spouse or chil­dren living; and so forth. 

A will supersedes the statutory plan as to the decedent's individu­al property and his half of the marital property and allows almost total flexibility as to how that property is to be dealt with after death.

A will can be simple or complex but it will have four fundamen­tal parts: a part (always the first) which identifies the maker of the will -- the "testator" -- by name and declares that the docu­ment is his or her will; a part which describes how the testator's property is to be dealt with after death; a part which names the person or insti­tution to be charged with carrying out the testa­tor's instruc­tions (the "executor" or "personal representative") and describes the powers which the personal representative is to have in per­form­ing his/her/its duties; and a part which is signed by the testator and two or more witnesses with the formalities required by statute.  A will must be in writing to be valid in Wisconsin. While all of the foregoing ingredients are necessary to a will, the heart of the document are the provisions dealing with how the testator's property is to be distributed.  It can be a sim­ple, one line sentence ("all to my wife" or "all to the Easter Seal Soci­ety"), or it can be many pages in length, with multiple trusts, marital deduction provisions, powers of appoint­ment, dis­claimer provi­sions and the like.  There is no standard formula: rarely are two documents exactly alike.  Just as each person is unique, so, too, is the will which he or she leaves be­hind.

WHAT IS A TRUST?
The trust is a creature of English common law.  It arose in medi­eval England as a device to avoid the rule of primogeniture (which required that all property pass the first-born male).  Today, the trust can be most easily under­stood in terms of a con­tract to which there are three parties:  the "settlor" (the per­son who, at the outset, is the owner of the property), the "trustee" and the "bene­ficiary" (or beneficiaries -- there can be more than one).  In es­sence, the set­tlor says to the Trustee:  "Here, take this property (stocks, bonds, cash, CDs, real estate).  This is the "principle" of the trust.  Trans­fer it to your name and then adminis­ter it according to the following instruc­tions as to pay­ments of the income and principle to the benefi­ciary."  All of this is contained in a written document which is found either in the testa­tor's Will (a "testa­mentary" trust), or in a writ­ten agreement signed by the settlor and the trustee (an "inter­vivos" or "liv­ing" trust). 

In the most common situa­tion, the terms of the trust require that the trustee pay the income (dividends, interest, rent, etc.) arising from the trust property to the settlor's spouse during his or her lifetime, and after the spouse's death to the children until a certain age at which time they receive the trust principle and the trust goes out of existence.  The trustee holds title to the prop­erty (but doesn't "own" it) and is required to follow the detailed in­structions in the trust docu­ment.  The trust­ee is also required to adhere to certain rules set by statute and court decisions which require scrupulous honesty and fairness in deal­ing with the proper­ty held in trust and the persons who are the beneficiaries of the trust.  The trustee can be either an individu­al or a bank or Trust Company.

TAX PLANNING
Another important use of a trust is to minimize taxes.  Tax plan­ning is a complex task.  Some of the most inven­tive minds of the legal and accounting professions are pitted against equally bril­liant individuals in the IRS and the staffs of the House and Senate Finance Com­mittees.  The result has been an ever more complex series of tax laws and countervail­ing "tax plan­ning" devices.  There are, thankfully, a few acknowl­edged "safe harbors" which cover many of the more common situations:

(1)  An estate of $2,000,000 (in 2007) or less will pass free of any federal estate tax.  ­ Wisconsin has enacted an estate tax (effective October 1, 2002) that taxes estates of resident decedents beginning at $675,000; this law ‘sunsets’ on December 31, 2007 unless extended.

(2)  Under both federal and Wisconsin rules, gifts to a spouse pass tax free, so at a mini­mum, a properly planned estate can pass $4,000,000 to the next genera­tion without any federal estate tax.  Note that in order to pass the maximum tax free under the federal rules, a Wisconsin tax will be due.

(3)  The "unlimited marital deduction" allows one to pass any amount, regardless of size, to one's surviving spouse free of tax.  In the usual case, the husband, having built up a sizable estate during his lifetime, passes it on to his wife who survives him.  If the estate is planned properly, there will be no federal estate tax until the wife dies, at which time a tax may be due.  The tax brackets start out at 45% on amounts over $2,000,000). 

Another tool which is useful in planning for incapacity is the Durable Power of Attorney for Health Care.  The DPAHC is a rela­tively new concept.  It grants to a person the power in writing to make health decisions for another.  A "living will" serves a simi­lar purpose but is substantially narrower in scope.  Both are now supported by Wisconsin Statute.  The DPAHC is a much more versatile tool, however.  A statutory form is available.

WISCONSIN'S MARITAL PROPERTY ACT
Wisconsin's Marital Property Act provides yet another facet to the already complex estate planning equation.  In essence, it says that the property acquired by a married couple while they are married is owned half-and-half regardless of whose name is on the title or whose money was used to consummate the purchase.  Complex rules classify property as individ­ual property, marital property, termi­nable interest marital property, predetermination date prop­erty, mixed property, and de­ferred marital property.  Most married cou­ples will have some property fall in each classification.  This presents an administrative problem at death because each item of property must be classified so as to determine what property was owned by the decedent (and passes under the will) and what property is owned by the sur­viving spouse.

Happily, the Act allows married couples to clear away the confusion through the use of mar­ital property agreements.  A marital property agreement can be used to reclassify any part or all of the property of a married couple.  Usually, however, the couple will either decide to classify all property as marital property (an "opt-in" agreement) or as individual property (an "opt-out" agreement).  Either way it vastly simplifies the planning process and makes the estate adminis­tration a much smoother process as well.

The "opt-in" approach is particularly useful to couples who have a stable relationship:  it pro­vides a tax benefit (a "double step-up in basis") to both spouses on the death of the first spouse and allows the use of a single revocable trust (a "joint revocable trust").  The "double step-up in basis" simply means that all assets held by the spouses have their cost for tax purposes bumped up to date of death values; the potential capital gains tax on any apprecia­tion which occurred prior to the death of the first spouse is forgiven.  The "joint revocable trust" com­bines what otherwise would have been two separate trust documents, thereby increasing efficiency and reducing the cost and complexity of administration.  It also makes it possible to achieve the optimum estate tax marital deduction results in the modest estate.

THE ESTATE PLANNING PACKAGE
The ideal estate planning package for the married couple in a stable relationship will use a joint revocable trust, an opt-in marital property agreement, pourover wills (to assure all assets are swept into the trust), durable powers of attorney (for finan­cial affairs) and durable powers of attorney for health care.  The cost of the package will vary from attorney to attor­ney and also with the amount of tax planning involved.

CONCLUSION
It should be noted again that the foregoing is just the briefest of summaries of what is a most complex area.  Hopefully it has been helpful and will stim­ulate questions as to specific issues of interest.