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Kelly Ruggles is the author of "The Financial Playbook" for Retirement.
Kelly C. Ruggles, Financial Planner and Educator

Chapter 6- Estate Planning

Countless Americans assume only “wealthy” people need to contemplate any serious form of estate planning. Unfortunately this misconception has brought financial grief crashing down on many middle-income families.

At its simplest, estate planning is merely the process of making sure you leave your assets to the heirs you choose, to minimize their tax burden and the time it takes for them to receive assets.

There are several key elements to estate planning – a few of which are named below 

1. Selecting beneficiaries.
2. Reducing taxes.
3. Giving to your favorite charities.
4. Motivating heirs to be good citizens.
5.   Organizing your estate so as to prevent confusion and family squabbles.

The Estate Tax

       Every year, the IRS collects billions of dollars in estate taxes from families whose parents did nothing to avoid or eliminate the taxes. Think about the following, and then consult with a financial advisor about a personal estate plan:

·     How much will your estate be worth when you die? Is it going to be worth more than the current exemption?

·     Do you have assets that are going to be double taxed through both income and estate taxes, such as IRAs?

·     Estate planning does not mean losing control over your assets.

·     You can use your current exemption amount before you die.

Estate planning options

Types of trusts

         A trust is simply a legal arrangement in which an individual (the trustor) gives authority to make financial decisions and control of property to a person or institution (the trustee) for the benefit of beneficiaries. Most people name themselves as trustor and trustee to maintain control over their assets while they are living and have the (ability) to make decisions for themselves.

       People create trusts to save estate and income taxes and retain control over assets. You can choose the kind of trust depending on what you wish to accomplish. Although there are many kinds of trusts, the most common are listed below.

      An attorney or financial advisor can help you decide which trust is appropriate for you.

Living Trust

The main benefit of a living trust is it avoids probate and transfers assets more quickly than a will. It also allows more confidentiality; probate proceedings through a will are public record while trusts pass to heirs without the need for public record. Trusts are more difficult to contest than wills. A living trust can be either revocable or irrevocable. A living trust is a bit more complicated to draft than a will and may require ongoing maintenance depending on your situation.  

Advantages of a Revocable Living Trust

·     Avoidance of probate and multiple probate proceedings if you own real estate in more than one state.

·     Avoidance of guardianship.

·     Reduces some delays in distribution of your property.

·     Preserves privacy, as there are no court proceedings.

·     No interruption of management of your property after your death or incapacity.

·     For married couples with separate property, separation of those assets from their community property assets.

Disadvantages of a Revocable Living Trust

·     More complicated to draft than a will and usually somewhat more expensive.

·     Most assets must be maintained as trust assets in order to avoid probate. There are many exceptions such as bank accounts and insurance, which can pass directly to your heirs through beneficiary forms.

·     If you are concerned about creditors or litigation, a personal representative for a will may be better able to protect your assets.

·     Revocable living trusts can also raise problems regarding title insurance coverage, real estate in other countries, Subchapter S stock, and other issues.

An attorney or other estate planning professional can tell you whether a revocable living trust is appropriate for you.

Irrevocable Trust

Irrevocable trust cannot be changed or cancelled without the consent of the beneficiary and contributions cannot be removed from the trust by the grantor. Irrevocable trusts may offer tax advantages that revocable trusts do not. Properly assembled assets in an irrevocable trust are not included in your estate taxes. This means it is possible to transfer assets to an irrevocable trust and allow those assets to grow – all the while remaining exempt from estate taxes. Some people place life insurance in this kind of trust.

Advantages of an Irrevocable Trust

·     Probate and court costs are avoided.

·     You can pass property to charity through a trust.

·     You save taxes on the property going to charity on your death.

·     Many irrevocable trusts allow you to receive income during your lifetime and also receive income tax and or capital gains tax deductions.


Disadvantages of an Irrevocable Trust

·     Cost of set-up can be somewhat higher than a simple will.

·     You no longer have control over the property (with most irrevocable trusts).

·     Requires annual accounting and possible tax returns.

·     May require payment of annual trustee fees.

·     Lack of flexibility once assets are transferred to an irrevocable trust.

Qualified Personal Residence Trust

This trust can allow your residence to be passed to your heirs at a discounted rate. You can continue to live in the house for the term of the trust – whatever term you have selected. When the term ends, the house passes out of your estate at a discounted value.

Advantages of a Qualified Personal Residence Trust:

·     The trust is protected from potential creditors.

·     You can still live in the home even if it is not part of your estate.

·     Provides estate tax savings.

Disadvantages of a Qualified Personal Residence Trust:

·     Although it is possible to deal with this uncertainty, there is a potential loss of estate tax savings if you fail to outlive the term of the trust.

Grantor Retained Income Trust

This trust is similar to the residence trust above however assets such as stocks, bonds and other investments are placed into the trust. You receive income and the assets pass to your beneficiaries after your selected term.

Advantages of a Grantor Retained Income Trust:

·     Gift and estate taxes can be saved.

Disadvantages of a Grantor Retained Income Trust:

·     The assets will be included in your estate if you do not outlive the term.

Bypass Trust

A bypass trust is a way to maintain property in the family and protected from creditors and family disputes. In the event a surviving spouse remarries the property cannot be transferred the new spouse but is held for the children and grandchildren, while not allowing their spouses to gain control over the property. This trust can continue for several generations, thus avoiding estate taxes. You can even decide how and when the principal can be distributed.

Whether you need a bypass trust or not depends on several factors, including your net worth, the anticipated increased value of your estate and the anticipated estate tax exemption when you are no longer living.

Not all types of property are appropriate for bypass trusts and not all bypass trusts contain the same language. Different rules may apply to people who are not U.S. citizens. You may consider using the bypass trust as an irrevocable life insurance trust. This ensures tax-free benefits to your heirs.

Many attorneys and financial advisors suggest selecting an independent trustee to manage the assets in this type of trust to avoid hard feelings and misunderstandings.

Dynasty Trust

If you’re concerned about protecting the wealth you’ve painstakingly accumulated throughout your life for the next generations, you might want to consider a dynasty trust.

       When you pass away with a living trust, your assets are generally distributed to your heirs. This means that those assets can now be:

·     Subject to creditors’ claims

·     Split up in a divorce

·     Transferred by your heirs to someone else

·     Taxed by the IRS

These events can be avoided by a dynasty trust. Your heirs will not own the assets and will have only the accessibility you grant to them. Creditors and/or your children’s spouses will not be able to touch them. Then the unspent assets will pass on to the next generations without additional estate tax - (under current law limited to $1 million estate tax exemption per generation per donee).

Scheduled Estate Tax Exemption Per Person

























2503c Trust

These trusts hold assets for minors and allow you to place restrictions on the assets. For example, you can keep the assets in the trust until the minor reaches a specific age or finishes college.

Estate planning mistakes

         Generally holding property as joint tenants with your spouse is not recommended. When the first spouse dies, the remaining spouse does not get a step - up in capital gains basis. This can be avoided if the property is held as community property rather than as joint tenants. If the surviving spouse chooses to sell the property his/her tax basis will be the date of the first spouses passing and not the date of the original purchase.

       Joint tenancy with your children is also not recommended. If they are sued or divorced – this circumstance places your portion of the asset in the same jeopardy as theirs.  

Powers of attorney

Powers of attorney (POA) lets someone you trust act on your behalf if you cannot. This power can be limited to a particular purpose, such as signing checks for you or be all-inclusive.

You should think carefully about choosing someone you trust, such as a close family member, to execute your affairs, pay your bills and transact other business on your behalf. At your incapacity a bank will not allow someone to act on your behalf unless you have provided for this misfortune in advance. Your family will be forced to rely upon the court for permission to act for you. This can be a slow and expensive process.

       Today in addition to a financial POA, a health care POA is essential. This lets another person make medical decisions for you when you cannot. This is not a living will regarding life-sustaining measures. It merely allows someone to make decisions with the doctor about procedures on your behalf when you are unable to do so.


Disclaimers allow for future flexibility. For example, your heir may do well financially and an inheritance may or may not compound his or her estate plan. On the other hand, you do not wish to bypass your child by passing your estate directly to your grandchildren. A disclaimer gives your child a choice.

At the time of inheritance, your child can choose to disclaim the inheritance. The assets would bypass his/her estate and become part of your grandchildren’s estate.


You can take advantage of some of the ways to reduce your estate taxes. For example:

Tax Law: You can give up to $11,000 ($22,000 for couples) a year, free of gift tax, to an unlimited number of people. 

Loophole: No dollar limits apply if you give gifts that cover tuition or medical costs as long as you write the check directly to the school or medical service provider 

Tax Law: The estate tax is being reduced gradually to 45% in 2007 to 2009, is eliminated for 2010 and resumes in 2011 with a 55% top rate and an additional 5% on certain estates over $10 million. 

Loophole: The increased threshold increases to $2 million on 2006 to 2009 and reduces the number of estates subject to tax.

Tax Law: Disclaimers of inheritances must be made within nine months of the donor’s death. IRA and pension account disclaimers require an acceptable contingent beneficiary to have been named before death.

Loophole: When you plan an estate that includes an IRA and the IRA has a trust as a beneficiary, a copy of the trust agreement must be given to the custodian. Where there are multiple beneficiaries who will share in the IRA, you can consider picking a percentage of the IRA or pension you would be comfortable leaving “outright” to each beneficiary and note the percentage on the designation of beneficiary forms instead of fixed dollar amounts.

Next Chapter: Investing

Financial Concerns for Retirement by Kelly C. Ruggles

©2007, Kelly C. Ruggles | Sitemap | Disclosure | Kelly Ruggles Bio
Kelly C. Ruggles, President of American Reliance Group, Inc., is a registered investment advisor. Mr. Ruggles is the author of "The Financial Playbook" for Retirement.

Mr Ruggles does not intend to provide personalized investment advice through this publication and does not represent that the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.