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A Simple Estate Plan (Structure #1)

By Bonner & Partners on January 20, 2012

Executive Summary

The “simple” estate plan applies to your family if you have children who are minors. Typical concerns are: Who will take care of your children when you pass. Where will your children live? And how can your assets be managed for the benefit of your children while they are still minors? The simple estate plan that follows answers these questions.

The Structure

The version of the “simple” estate plan that follows assumes you have a total net worth of less than $5 million and that you use something called an “outright marital gift” to your surviving spouse (as explained below).

If your total family net worth is between $5 million and $10 million, you are more and more likely to use a marital trust plan. This is dealt with in Structure #2

What follows is a version of the “simple” plan that is generally a “middle of the road” solution. That said, you may prefer another variation of the structure. (Please see paragraph #4 below for the questions you have to answer to best determine what version of the “simple” estate plan you should use.)

Let’s assume we’re dealing with a typical family, John and Jane Smith, who have minor children.

1. Financial and Family Context

(a) The total net worth of John and Jane Smith is less than $5 million at this time. But see paragraph 3(b)(ii) and (iii) below for additional comment.

(b) John and Jane have minor children.

2. Key Estate Planning Issues

(a) Flexibility and financial convenience for surviving spouse.

(b) Guardianship and living arrangements for minor children.

(c) Terms of descendant’s trust for children.

3. Explanation of Flowchart #1

(a) Overview of structure

(i) John’s and Jane’s wills are reciprocal and identical. John provides for Jane, if Jane survives John. In exactly the same way, Jane provides for John, if John survives Jane.

(ii) All net worth is left to the surviving spouse in an OUTRIGHT MARITAL GIFT. This achieves the goal of flexibility and financial convenience for the surviving spouse.

(iii) [But the wealth now in the hands of the surviving spouse is exposed to the personal creditors of the surviving spouse. If creditor protection is a key goal, consider a MARITAL TRUST instead of an outright marital gift to the surviving spouse. A MARITAL TRUST PLAN is illustrated in Structure #2.]

(iv) After the first spouse dies, all the family’s net worth is owned by the surviving spouse. But when the surviving spouse dies, his or her will first sets up a “FAMILY TRUST” for the period of time until the youngest then living child achieves the age of 22 (as explained below).

This is a single undivided fund coordinated with the minority years of the children. When that 22-year-old point is reached the FAMILY TRUST ends and subdivides into equal shares for each child. And each share is held in a DESCENDANT’S TRUST for the benefit of that child. The descendant’s trust terminates as each child reaches certain ages.

(b) Tax Results

(i) There is no federal estate tax due and owing because the net worth of the surviving spouse at the time of his or her death remains below $5 million. And $5 million is the amount of federal estate tax exemption. There is, therefore, no tax disadvantage in having the net worth on the first death pass outright to the surviving spouse. No federal estate tax is paid at the generation level of the parents.

(ii) Structure #1 “works” to yield a “no federal estate tax” result even if the total net worth of John and Jane exceeds $5 million all the way to $10 million. “Portability” under current law (a complex topic) allows the $5 million estate tax exemption of the first spouse to die to be “allocated” to the taxable estate of the second spouse to die, thereby sheltering as much as $10 million from all federal estate tax liability.

(iii) [But as the net worth exceeds $5 million and approaches $10 million, it is more common for the estate plan to use MARITAL TRUST PLANNING, rather than an outright bequest to the surviving spouse. See Structure #2 for Marital Trust Planning.]

(c) Guardianship Arrangement

(i) This is the most important estate planning topic for parents who have minor children.

(ii) John and Jane have selected Jane’s sister to be the guardian of the minor children. And since the sister’s house is not large enough to accommodate the minor children, John and Jane have decided to let Jane’s sister live rent-free in their personal residence until the youngest child attains the age of 22.

(iii) See the detail of this living arrangement on the left side of Flowchart #1.

(iv) The FAMILY TRUST therefore coordinates with this guardianship arrangement, keeping the net worth together in a single undivided fund for the benefit of the children and to facilitate the guardianship arrangement. See the detail for the family trust on the right side of Flowchart #1.

(d) DESCENDANT’S TRUST

(i) When the guardianship living arrangement is fulfilled the FAMILY TRUST ends, and the fund is divided into equal shares for the children, with each share held thereafter in a separate DESCENDANT’S TRUST for that child. See bottom right-hand corner of Flowchart #1.

(ii) John and Jane have chosen to provide a gradual payment of income to each child from that child’s equal share of the trust – with 50% of the income earned by that share being paid to the child starting at the age of 22 and 100% of the income from that share being paid to the child starting at the age of 30.

(iii) John and Jane have chosen to have each trust end as to that child 1/3-1/3-1/3, as that child attains age 30, 35 and 40.

(iv) If the child dies before reaching the age of 40, the child has the power to say in his or her own will how the property is held or distributed thereafter. If that power is not exercised by the child, the child’s share in trust continues for the benefit of that child’s own descendants, repeating the pattern. (If the child has no descendants, that share continues for siblings of that child.)

4. Questions to Be Answered

(a) Who is the guardian for the minor children? Who is the back-up guardian for the minor children (if the guardian first named is not able to serve or continue to serve)?

(b) Where will the minor children live until they reach adulthood or until they graduate from college? Is the home of the guardian large enough? Does it make sense to have the guardian move into your home? What are the financial arrangements for the guardian?

The guardian is always reimbursed by the FAMILY TRUST for all out of pocket expenses incurred in raising the minor children. This can be done after the fact as reimbursement or before the fact as an advance (with a subsequent reconciliation).

A small percentage of families also make a monetary gift to the guardian – with the amount depending generally on the number of children, the number of years until adulthood, the size of the family’s net worth and the existing wealth level of the guardian. This gift is not taxable income to the guardian.

(c) If the guardian moves into your home, for how long does this arrangement last? Until the youngest living child reaches age 18? Or age 22? Or age 25? Even though children become adults technically at the age of 18, and therefore no longer have a “guardian” after that date, almost all families choose to continue the “home” arrangement until the youngest living child attains age 22 (most often) or age 25 (frequently).

(d) What are the terms of the DESCENDANT’S TRUST for the benefit of the children? At what age or ages are they entitled to the income from their equal share? At what age or ages are they entitled to withdraw the principal from their share and therefore terminate the trust? Are all the children treated the same in that regard?

(e) Who are the trustees of the FAMILY TRUST and then the DESCENDANT’S TRUST? Is it a single trustee or is it co-trustees? See bottom left-hand side of Flowchart #1.

(f) Many families choose co-trustees, on the theory that a single person may have an unreasonable opinion about finances or distributions. But two individuals who have to work together and agree offers a better structure for achieving a reasonable outcome.

(g) Ideally, the guardian is not a trustee or a co-trustee. Having different people in these key roles establishes a “check and balance” structure, in which how the minor children are raised by the guardian is “overseen” by the trustees through the process of the reimbursement procedure.

(h) See the upper right-hand corner of Flowchart #1 with regard to suggestions for the disposition of tangible personal property (household furnishings, jewelry, etc.).

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