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Philanthropy is almost the only virtue which is sufficiently appreciated by humankind.
-HENRY DAVID THOREAU

What is an Estate?
An estate plan is like a structure you plan to build. You spend your lifetime gathering materials - tangible possessions like your home and intangible assets like stocks. You find tools - a will, trusts, a life insurance policy - to work with. You develop blueprints to guide you - strategies that provide for the needs of your beneficiaries and save taxes. Building a good estate plan may also require the skill of an attorney, an accountant, a financial advisor and a gift planning officer.

While this information alone cannot layout a blueprint for you, it will provide information about tools and strategies available to help you build an effective estate plan.

A Valid, Up-to-Date Will
A will is probably the single most important document for ensuring that your wishes are carried out after your death. Without a will, the distribution of your estate is determined by the law of your state, a situation known as dying intestate. Dying without a will means you give up your right to determine who receives what, how and when. Assuming that the intestacy law will do a satisfactory job for you is very unlikely for a simple reason: the law has general rules that apply to every situation, regardless of special circumstances.

Potential problems can be illustrated by some examples. In the case of a man survived by a wife and minor children, state law may give a substantial portion of his estate to the children -- instead of all to the wife with responsibility for caring for the children. Or, upon the death of one spouse with no children, a portion of the estate may go to the decedent's parents instead of all to the surviving spouse.

Probate and Its Alternatives
Probate is the judicial process that begins at your death.
The validity of your will is verified, and the handling of your estate is supervised. Probate does have some costs and takes a period of time, and its terms cannot be kept confidential.

A will is always subject to probate. You can transfer assets to your heirs
by several means that avoid probate, including:

You can use a living trust as the main device for transferring assets to your heirs. But it's not practical to attempt to put all of your property into a living trust. Typically, it works better to have a "pour-over" will. In this situation, any property that is neither in trust nor transferred contractually (i.e., by title, life insurance, or P.O.D. designation) is placed into the trust at your death and distributed under its terms.

Trusts as a Planning Tool
Trusts are simply contracts by which you can obtain specified management services from another person or corporation. The parties to a trust are the grantor (or trustor or settlor), the trustee, and one or more beneficiaries. The grantor places property or cash in the trust to be managed by the trustee for the benefit of the grantor or other named , individuals or organizations.

A trust established during the grantor's lifetime is called a living, or inter vivos, trust. If incorporated into a will to become effective at death, it is a testamentary trust. The trustee's function can be shared by cotrustees, such as a family member and a trust institution or bank trust department. If an individual is to be trustee, a corporate successor trustee can be named to serve should the person become unwilling or unable to serve.

Title to Property
Title to real estate, bank accounts and securities can be in a single name for single persons or, when it is desired, in a single name of a husband or wife in order to balance the estate assets between spouses (for reasons to be noted later).

A title "in joint tenancy with right of survivorship" is held in both your name and your spouse's, with automatic title transfer to the surviving spouse at the death of the first spouse. This is a contractual transfer that takes precedence over any provisions the will might contain dealing with the property.

This joint tenancy is useful for certain assets (such as a shared home, bank account or automobile) that need to be transferred quickly at your death or your spouse's death.

For married couples, joint tenancy is generally satisfactory if your combined estates' value, now or likely in the future, is less than the value sheltered by available estate tax credits. In 1997, Congress voted to gradually raise this amount
from $600,000 until it reaches $1,000,000 by the year 2006.

One-half the value of property in joint tenancy will be in the first estate, passing to the surviving joint tenant with a cost basis reflecting current market value. (The other half is already an asset of the second joint tenant and retains its previous cost basis.) Because the first half ends up in the surviving joint tenant's estate, the full value is subject to tax in the estate of the survivor. But too much value jointly held --that is, more than $650,000 in 1999 -- can result in unnecessary taxation of a combined taxable estate.

Parents should exercise caution in placing title to a residence or other property in joint title with a child or any other person. This may be considered a taxable gift, and
if it becomes necessary to sell the property for any reason, agreement of the co-owner(s) must be obtained. It may be preferable to transfer the residence to children by bequest.

Another form of joint ownership is "tenancy in common." Each CO-owner (tenant) owns a specific undivided fractional interest in the entire property. This form of ownership can occur when siblings inherit the family house or farm. For instance, each of three children may receive a one-third interest. Tenancy in common also can be used to balance the estate assets of a married couple. In this form of title holding, a deceased tenant's share passes independently by will, trust provision or intestacy statute.

Life Insurance
Life insurance can be a valuable tool in the estate planning process. Its most basic uses are to provide an "instant estate" when the insured is relatively young and to increase the estate in later years. It can also provide liquidity for paying taxes and other expenses at death.

Cross-ownership of life insurance between spouses is no longer needed as a tax-saving technique, thanks to the 100% marital deduction for gift and estate taxes. But, for families facing estate taxation, and where children or grandchildren will be the beneficiaries, an irrevocable life insurance trust can be very useful.

In connection with significant charitable giving, the income tax savings from the charitable deduction can, in some circumstances, be used to purchase added life insurance to replace for heirs the value given to charities. Properly structured, policy proceeds can pass to heirs estate tax free.

The Federal Transfer Tax System
Everyone who works is familiar with the federal income tax. Most people, however, are less knowledgeable about federal gift and estate taxes. Together, they form a transfer tax system that affects more affluent individuals and families. A transfer tax is a tax on the value of assets that a person or estate is transferring to others, as opposed to an income tax, which taxes the income a person receives.

The federal gift tax applies to lifetime transfers given during a year in excess of $10,000 ($20,000 for married couples) to anyone person. In 1997, Congress decided to index this exemption amount for inflation, so check with your financial advisor to verify the current amount.

Even if larger gifts result in a taxable transfer, every person has a unified federal estate and gift tax credit that can be used to avoid paying the tax. Using the credit for lifetime giving, however, reduces the amount of credit available to shelter transfers at death from the estate tax.

A tax credit is a direct subtraction from the amount of tax otherwise payable. The first dollar above the amount sheltered by the credit is taxed at between 37% and 41 % (depending on the current exemption amount), and the rate progresses to 55% on amounts above $3,000,000. So, the gift and estate tax increases with the size of the estate, both in percentages and total dollars.

Further, the generation-skipping transfer tax imposes the top 55% rate on any amount over $1 million (after estate taxes have been paid) going from a grandparent to grandchildren, great-grandchildren or what the laws call other "skip" persons. This amount is also indexed for inflation. These are sufficient incentives for considering the inclusion of charitable arrangements.

Cost Effective Planning
Sound estate planning can benefit both single individuals and married couples. But, because of the unlimited marital deduction and the availability of two estate tax credits, the biggest savings typically are available to married couples.

It's common for a husband and wife to have complementary simple wills, leaving all owned assets to the surviving spouse at the first death and everything to children at the second death. Say a couple's total assets are $1,300,000, all owned by one spouse. "When that spouse dies leaving everything to the other spouse, there is no estate tax because of the marital deduction. But then, at the second spouse's death, only the exempt amount is sheltered from tax. So in effect, only one spouse's credit was used.

A basic planning strategy for married couples involves a testamentary trust, called a credit shelter or bypass trust. To be sure both credits are used, with the estate tax avoided regardless of order of death, a first step is required: Ownership of half the total estate (or ownership of assets equal to at least the amount protected by the credit, if this exempt amount is lower than half the estate) must be transferred to the non-owning spouse during their joint lifetimes. This is easy to accomplish with no tax consequences, since interspousal transfers qualify for an unlimited gift tax marital deduction.

Now each of the spouses' wills can provide that $650,000 (half of their total estate) will be placed in a credit shelter trust for their children or other heirs, paying income to the surviving spouse, thus using the credit of the first spouse to die to eliminate any estate tax on this amount. The other $650,000 passes as a marital share to the surviving spouse, tax-free by use of the marital deduction. At the second death, the second spouse's credit shelters another $650,000 passing to heirs, and the assets of the first spouse's credit shelter trust are not even in the estate of the second spouse.

The QTIP Trust for Married Couples
Another estate planning option available for married couples is the "QTIP" trust. The acronym stands for qualified terminable interest property. This refers to property that will continue to support a surviving spouse, although he or she has an income that terminates at death and may not have the power (other than certain limited rights) to determine the beneficiary of the trust at the second death. If the personal representative elects QTIP status for such a trust, it qualifies for the marital deduction at the first death, even though the survivor does not receive a general power of appointment over all trust assets, as was once required.

The primary legislative intent had two objectives for a second marriage situation -- (1) maximum financial support for the surviving spouse, with (2) ultimate passage of trust principal to children of the prior marriage-both to be accomplished without losing the marital deduction.

Estate Planning for Single Persons
Although estate planning for single persons offers fewer opportunities for tax savings -- with no marital deduction and only one credit with which to work -- it is still an important responsibility. A living trust can provide financial management of one's choosing in the event of incompetency. Combined with a durable power of attorney that authorizes someone to handle your affairs, the trust can be the primary source of financial security, without the need for a court-appointed conservator.

Another decision to consider is the use of all or a portion of available estate and gift tax credits by making lifetime transfers for the benefit of heirs now. The annual exclusion is $10,000 (indexed for inflation) per donor per recipient. By making gifts now instead of at your death, you avoid possible future situations, such as your assets growing in value beyond the unified credit amount.

Benefits of Charitable Options
If you have charitable interests, and the value of your estate exceeds the needs of your heirs, you have the rewarding opportunity to include some significant philanthropy in your financial and estate planning.

Charitable gifts result in considerable tax savings, because there's an unlimited estate tax charitable deduction for gifts to qualified charities. The benefits also include income tax deductions, avoidance of capital gains tax, an improved rate of return on assets, tax-free income, and reduction or elimination of the estate tax otherwise payable.

Our representative would be pleased to discuss your plans with you and provide you with additional information, at no obligation, of course.

The information in this publication is not intended as legal advice. For legal advice, please consult an attorney. Figures cited in examples are based on current rates at the time of printing and are subject to change.