Important Concerns

Estate planning prepares for the orderly handling, disposition, and administration of an estate. A well-designed estate plan allows you to decide the outcome. It can preserve more of your assets and allow you to pass them to the people and causes you care about most.

Basic Estate Planning Tools

There are two primary instruments used for estate planning: a will and a revocable living trust. Both are discussed below.

The Will

The will is the most basic part of every estate plan. By definition, it is a legal declaration of a person's wishes regarding the disposal and distribution of his or her estate after death. The will is the legal document, drafted during your lifetime, that addresses numerous issues:

Final testimony of your Christian faith
Property and asset distribution
Naming a personal representative
Naming a legal guardian for minors
Reducing estate tax liability

In the absence of a will, the state will resort to a formula. A judge will name an executor, bond may have to be posted, the court will name a guardian for any minors, and a formula will determine asset and property distribution.

Every state has different laws and regulations when it comes to the execution and validity of a will, and they are often strict. Be sure to retain a competent lawyer who is familiar with the laws of your state of residence to draft your will.

The Revocable Living Trust

The revocable living trust (RLT) contains language to distribute assets at death, just like a will. Here, however, you set up a trust during your lifetime and transfer essentially all of your assets into the trust. These assets are then managed and controlled by you. Just like a will, an RLT can contain language to set up other trusts, should these be desired. The RLT has many advantages over a will: most notable it allows you to avoid probate.

The RLT also has the advantage of being private: none of it is subject to public record. In addition, it is much harder to contest successfully. The disadvantage of RLTs is that they are more expensive to draft and more difficult to maintain than wills. Since the RLT is probably the lesser-known option, we include below a brief explanation of how the trust would work for a married couple.

Essentially, the revocable living trust works as follows:

An attorney prepares the trust. It contains language to direct the disbursement of funds at the death of the second spouse, exactly as you desire.
Upon creation of the trust, ownership of all of your assets, except qualified retirement plans and life insurance policies, is generally transferred to the trust.
A simple will is prepared for both spouses, which at death merely transfers any assets to the trust that were previously overlooked.
If estate taxes are a concern, the revocable living trust can also contain language to create a second trust called a bypass trust. This trust would not be funded initially, but could be funded at the death of the first spouse to reduce future estate taxes.

Both spouses would serve as trustees of the revocable living trust during their lifetimes, managing the estate. At the death of the first spouse, the surviving spouse would serve as sole trustee of the surviving revocable living trust, and could also serve as personal representative of the estate under the will.

Will vs. Revocable Living Trust

In deciding whether to use a will or a revocable living trust as the primary instrument of your estate plan, it is important to assess the importance you place on the various advantages of the revocable living trust. For most people, the overriding factor in this determination is the importance of avoiding probate. Only a specific review of your assets and the rules in your state can determine the likely probate costs for your estate. The costs of probate varies significantly from state to state; in many states, the costs are quite limited, but in others, they can be substantial.

As a general rule, our experience is that individuals residing in states with low probate costs typically opt for wills in their estate plans. Conversely, individuals residing in states where probate costs are high tend to use revocable living trusts. To reduce the cost of probate, many states have adopted the Uniform Probate Code.

Provisions for Children

Selecting Guardians

One of the most important things families need to address, regardless of estate size, is the question of who will take responsibility for raising minor children if Mom and Dad die prematurely. Deciding whom to name as guardian for your young children is critical.

The estate plan of a parent should provide for two contingencies: 1) the surviving parent's death or incapacity to make decisions before the children reach the age of financial maturity, and 2) the simultaneous death or incapacity of both parents. Most people would agree that the two primary concerns for the estate plan in such situations are naming a suitable guardian for the children and administering the estate's assets in a way that will prudently provide for the children.

We recommend that you select as guardians a couple who share your spiritual values, first of all, and who will raise the children using the same godly principles that have guided you. It's also important that they be in the same stage of life as you; couples who have already raised their children (including your own parents) may not welcome the challenge of starting afresh to raise the children you may leave behind.

Another important consideration has to do with the location of the guardians. We recommend that you choose guardians who live nearby, if possible, so your death does not also mean that the children will be uprooted from their neighborhood, their church, their school friends, etc., and moved to another city or state. The trauma of losing Mom and Dad could be dramatically magnified if a cross-country relocation is required.

Obviously, the choice of a guardian for your children is a very critical and personal decision, deserving careful consideration. Choosing a guardian and setting up a children's trust (outlined next) are paramount for a parent's complete estate plan.

Children's Trust

It is critically important that the estate planning process addresses the needs of minor children, both in terms of their upbringing (guardianship) and in terms of financial requirements. Ensuring that all children are protected financially is usually accomplished through a children's trust.

To provide for a children's trust, married couples will typically incorporate language into their wills or RLTs stating that if the youngest child has not attained a certain age at the death of the second spouse, assets will be held in trust for the protection of the children. By holding the funds collectively in trust in this manner, you can ensure that funds remain available to meet the needs of all your children.

In conjunction with providing for a children's trust under certain circumstances and determining how this trust should be structured, you must also consider how to supply adequate funding for this trust. As we have discussed, a good estate plan provides for the contingency of Mom and Dad leaving behind minor children.

For the children's trust to fulfill its purpose, it must contain sufficient funds to address the needs of minor children. This is typically addressed by including life insurance in your estate. When preparing an estate plan, parents should ask the question, "If we both died prematurely, would sufficient funds be available for our children?" It is also important to ask the same question should either parent die prematurely. As you address these questions, if there are shortcomings, we strongly recommend that you consider adding life insurance for the protection of your loved ones.

Health Care Considerations

To prepare for the possibility that you might at some time become unable to make decisions for yourself, you may wish to execute a durable power of attorney for health care and an advanced health care directive.

Health Care Power of Attorney

We recommend that during the estate planning process, you consider granting durable power of attorney for health care decisions to a trusted individual. This will enable that individual to make health care decisions for you, should you become unable to make them on your own.

Generally, married couples will name their spouse for this duty and an alternate in case the spouse is unable. In addition to the durable power of attorney for health care, many people wish to establish a physician's directive, which sets forth directions for providing critical health care.

Advance Health Care/Physician's Directive

Advance directives are for physicians, caregivers, and family, so that everyone can understand what kind of care you want should you become unable to communicate or make medical decisions. Laws are different in each state, and we encourage you to seek professional counsel who can advise you of the laws in your state.

Christian Medical & Dental Associations (CMDA) has published a guide to understanding the advance directive. With permission from CMDA, we have posted links below.

The Christian Medical & Dental Associations (CMDA) provide resources, networking opportunities, education, and a public voice for Christian healthcare professionals and students. Founded in 1931, CMDA currently serves more than 17,000 members.

The CMDA Advance Directive Kit will assist you in identifying and discussing topics like:

What is an advance directive?
How do most Christians view having an advance directive?
Do I have a right to refuse treatment?

These questions and more are answered in the two-part CMDA Advance Directive Kit. This will help you and your family discuss your wishes, should you become unable to communicate or make medical decisions.

Download a free electronic version (click here)

Durable Power of Attorney

We recommend that during the estate planning process, you consider granting durable power of attorney for property management to a trusted individual. This will enable that individual to manage the assets in your estate if you become incapacitated before death. Generally, married couples will name their spouses for this duty and an alternate in case the spouse is unable.

Personal Items

As a part of your estate plan, you may wish that certain of your personal items be given to specific people. Personal items may include family heirlooms, personal letters or correspondence, articles of jewelry, collections, photographs, etc., that you believe will be of special value to the recipient.

By directing the distribution of these personal items through your estate plan, you can greatly relieve others of the burden of making these decisions in the future. Your directions for distribution of personal assets are probably best handled by a separate document, which can be easily updated from time to time. However, you should consider the laws of your particular state when making that decision.

Letter of Encouragement

Your estate documents can be a wonderful opportunity to leave behind a written testimony of your faith in Christ. D. L. Moody's will contained this great passage as a lasting expression of his eternal confidence in Christ: "You may have heard that I died. Nothing could be further from the truth. I am alive and well, enjoying the presence of God for eternity. It's my hope that you will take great joy in my recent promotion. It's also my prayer and request that if you haven't discovered the truth about God sending His son to die on the cross so that none should perish, you will seek His truth with great urgency as a personal favor to me."

Another enduring, clear statement was left by Patrick Henry, one of America's Founding Fathers, who said, "If I had all the goods this world can offer but had not faith in Christ, I would amongst all men be poor indeed."

Whether you use a will or a trust, you can include a love letter to your loved ones, affirming and encouraging them. Consider joining the countless Christians who have made such statements, either by incorporating them into the text of their documents, or in letters to be found with their documents following their deaths. Such statements will indeed be treasured by those you leave behind.

Tax Planning and Charitable Trust Tools

Generally, we are concerned about two types of taxes in estate planning: estate taxes and income in respect of decedent (IRD) tax.

Estate Taxes

Federal law imposes taxes on an individual's estate. However, there are three permissible deductions/credits that can provide relief:

For married couples, at the death of the first spouse, there is an unlimited marital deduction for qualifying property left to the surviving spouse.
The law allows a full deduction from the estate for amounts distributed to a charitable beneficiary.
The law permits individuals, or in marriage, each spouse, a credit against taxes payable against their estate. This federal estate tax credit presently allows individuals to distribute $2 million tax-free to personal beneficiaries. In other words, in the absence of any estate planning, at the death of the second spouse (or at death for singles), federal law permits $2 million to be distributed to heirs free from estate taxes. Amounts above the $2 million threshold are taxed at a rate starting at 41%. In the case of married couples, this impact can be reduced substantially with appropriate estate planning, through the creation of a bypass trust. For more information on the bypass trust, (click here).

Please note that legislation enacted in 2001 incrementally increases this exemption from $2 million in 2007 to $3.5 million in 2009. This legislation would eliminate all estate taxes in the year 2010. However, this is subject to what is called a "Sunset" rule, and therefore, unless Congress revises the law prior to 2011, the exemption will revert back to the $1 million level per spouse. It is our opinion that reinstatement is unlikely, as the incremental impact of the repeal would be a tax benefit to only an estimated 1 out of every 500 voters. Therefore, at this time, we encourage individuals to be conservative in their approaches and for the longer term (10 years or more), assume an exemption in the range of $1 - $3.5 million.

Income Taxes

Certain estate assets carry with them adverse income tax implications for personal beneficiaries, in addition to any estate tax obligation. For estate planning purposes, it is very important to identify these tax-encumbered items. They are summarized below:

Tax-deferred retirement funds, such as traditional IRAs (not Roth IRAs), 401(k)s and 403(b)
Series EE and HH Savings Bonds (to the extent that income has not been reported annually)
Stock options (those which have not expired at the time of death)
Deferred income and other accrued but not realized income such as partnership income, royalties, etc.
Accounts Receivable from a trade or business

In the list above, the first item, tax-deferred retirement accounts, deserves special consideration. This is because the ramifications of income tax on these accounts can be significant. As you are probably aware, any withdrawals made from these accounts during your lifetime are taxed as ordinary income. Moreover, if death occurs before funds are withdrawn from these accounts, any distribution to personal beneficiaries is subject to an income in respect of decedent (IRD) tax. Basically, the funds are taxed as ordinary income before distribution to your beneficiaries, with a deduction given for any estate taxes paid. Because of this, we recommend that any charitable giving in your estate plan be funded first through these assets.

To accomplish this, at the time of death, tax-deferred retirement assets (or any tax-encumbered assets in the list above) can be given outright to charity or distributed to charity through a testamentary charitable remainder trust agreement. These two options are detailed below:

Outright Gift of Retirement Assets

If retirement assets are given to a charity at the time of death of the surviving spouse, the IRD tax is eliminated, since the charitable organization is tax-exempt. Further, because the retirement assets are gifted directly to charity, a full estate tax deduction can be taken for the amount of the assets. In this arrangement, assets are distributed directly to charity instead of to personal beneficiaries. To accomplish this, you need only designate your spouse as primary beneficiary on the accounts and your charitable organizations as the secondary beneficiaries. If you are single, you may name charitable organizations as the primary beneficiaries.

Testamentary Charitable Remainder Unitrust

A testamentary charitable remainder unitrust (TCRT)eliminates the IRD tax on retirement assets and a portion of the assets from the estate for federal estate tax purposes, while at the same time providing income for heirs. When retirement assets are used to fund a TCRT, the assets benefit personal beneficiaries for a term of one or two lives or a specific term of years, and then the remainder passes to charity.

With a TCRT, the donor selects the payout percentage (5% or more) and a period of time for the unitrust to make distributions to personal beneficiaries. Actual payments are determined by this payout percentage and the value of the assets in the trust. Many donors choose to pay the unitrust amount to family members for a period of time that would pay out an amount equal to the initial value of the property. For example, a trust that pays 7% for fifteen years will pay family members a total income equaling approximately the initial fair market value of the property. In this way, the donor is able to double the total benefits from the property: once to the family through income payments, and once to the charities through distribution of the principal after all income payments are completed.

One advantage of the testamentary charitable remainder unitrust is that the amount remaining in the trust grows tax-free. For example, if a person selected a 6% payout trust and the trust investments earn 8%, there would be 2% growth tax-free each year. This tax-free growth could substantially increase the value of the trust over time, and since the selected 6% payout is based on this value, distributions to personal beneficiaries would increase proportionally. The ability of the unitrust to increase both in principal and in income payments over a period of years is frequently referred to as an inflation hedge. However, please understand that this benefit does not come without risk. In the above example, if the growth in the trust falls short of the payout (6% in this instance), income payments to beneficiaries will actually decline with time.

In assessing the utilization of TCRTs, we generally recommend that this option only be considered if at least $100,000 is available to fund this trust; otherwise administrative expenses will likely negate much of the benefit.

Information on this site is NOT intended for legal advice. See Disclaimer.