Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

SOME MORE THOUGHTS ON ESTATE PLANNING
(Part 4 of a 5-Part Series)
(3/24/02)

During the past few weeks, I've tried to cover a very broad and complex topic, estate planning, with just a few strokes on the written page. This week, I'd like to continue this series with a discussion of what happens if you become disabled or die with a Revocable Trust in place.

What happens if I become incapacitated?

Let's look at some different scenarios. First, let's assume you have named someone else as your Trustee or to serve as Co-Trustee with you. In the former situation, your Trustee will continue to manage your affairs as before. In the latter, it depends on the language of the Trust. If the Trust allows the Co-Trustee to serve as sole Trustee if you become disabled (or provides for someone else to be appointed as Co-Trustee in your place), the Co-Trustee(s) will continue to manage your financial affairs for as long as necessary.

If you are the Trustee or Co-Trustee and you subsequently recover, you will automatically resume control of your Trust.

If you are the only Trustee or your Co-Trustee is unable to act, your hand-picked Successor Trustee or Trustees will step in and act for you. That's how you keep control within your family or friends.

What happens when I die?

Your Trustee or Co-Trustee has much the same duties as a Personal Representative. He or she collects any income or benefits, pays your remaining debts, sees that tax returns are filed, and distributes assets according to your Trust's instructions. If estate tax planning is involved, he or she will work with your team of professionals to make sure everything is done properly. All of this can be done efficiently and privately - with no court interference. Your Successor Trustee will perform these duties if you are the only Trustee or if your Co-Trustee is unable to act.

So Who should I select as my Successor Trustee?

You can select anyone you want as your Successor Trustee. You can name your spouse, one of your adult children, another relative, or anyone who you feel you can trust to carry out your intentions. You can also name a bank trust department to serve in this capacity.

If you name a friend or family member, you should be sure to name one or two others to serve as alternate successor trustees in case the first is unable or unwilling to accept this responsibility.

You can always name two or more individuals or an individual and a corporate entity to serve as Co-Trustees. If you do, be sure to spell out in the trust document what happens if they do not agree. Also, specify whether they must act together or if either of the Co-Trustees has authority to act alone.

I've appointed my Successor Trustee, but I want to be sure he will carry out my wishes.

I can understand your concerns, but they are probably unfounded. The trust agreement is a contract and your Trustee can only do what it says. If you want money paid to your nephew, the Trustee has to pay him. If he doesn't, your nephew can sue him for breach of fiduciary duty.

A fiduciary is legally obligated to follow the instructions in your Trust. If he fails to carry out his duties, he can be held individually liable for his breach.

What effect does a Living Trust have on my income taxes?

There is a common misperception that a Trust will reduce your taxes. There is nothing magic about a Living Trust. It will not affect your income taxes. It may help reduce or eliminate estate taxes if it incorporates tax planning, but nothing you couldn't accomplish in a Will. In our practice, we routinely use Trusts for estate tax planning, but usually because we are also addressing other issues, such as continuity of asset management and transition of responsibilities, which cannot be handled effectively in a Will.

I thought Congress and the President eliminated Estate Taxes?

That's another erroneous perception fostered by TV sound bites. Unfortunately, it is beyond the scope of this article. If you want more information on this topic, please visit our web site at http://www.brownlaw-ok.com. A number of "From a Financial View" articles there address this topic in detail.

What you really need to know is that if you die in 2002 or 2003 worth more than $1 Million, your estate may have to pay estate taxes. The tax is a progressive one starting at 41% and climbing to 55%. The first dollar in your estate over $1 Million is taxed at 41¢, leaving 59¢ for your heirs. If all you have is tied up in a farm or business, your assets might have to be sold to pay the taxes. This is why it's important to consult with an estate planning professional and make sure you have done everything possible to avoid imposition of this confiscatory tax.

Plan Now.

If you have a "taxable estate" (over $1 Million after debts have been deducted), start planning now. If you are married to a U.S. citizen, take advantage of marital deduction planning. By this, I mean that at your death, you can leave an unlimited amount to your spouse absolutely tax-free.

But this doesn't necessarily mean you should leave everything to your spouse. Why not? Because in 2002, each of you can leave $1 Million to other beneficiaries without incurring any estate tax. If you leave everything to your spouse, you waste this $1 Million "exempt amount."

Let me explain. If you have a $2 Million estate and you leave it all to your wife, she doesn't pay anything at your death. But when she dies, the extra $1 Million in her estate will be taxed. Wouldn't it be better to leave $1 Million to your wife (as a marital deduction) and the other $1 Million to your children (as an exempt amount")?

BUT-your wife wants the other $1 Million, right? Stay tuned next week for ways to give her what she wants without paying Uncle Sam an extra dollar of tax.

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