Estate Planning

Is There More To Estate Planning Than Wills, Trusts and Durable Powers of Attorney?

By guest author Ben Utley CFP®

When you hear the words "estate planning," what pops into your head?

I'll bet the thought is "dying." But the next thing is probably "will" or "trust" or "power of attorney" Estate planning definitely involves paperwork, but there's more to the equation.

There's also process and people.

Since Susan's blog is full of great stuff about the process of estate planning, please allow me to fill you in on the people-side of estate planning.

The Givers And The Getters

The Givers are exactly the people you might imagine them to be: you, and your spouse or significant other. As a Giver, you're probably concerned about "your stuff" and the taxation of your stuff. Givers often think about how their stuff will be used, whether someone will take care of their stuff, and how long their stuff might last.

The Getters have a completely different perspective. For the most part, Getters are not at all concerned about your stuff. They're concerned with two questions.

1.    How much? and

2.    When?

No. They're thinking about their imminent life; the life they could have if only they had your stuff.

How should you hold title to your home?

For California homeowners, I generally recommend holding your property in a living trust or a limited liability company (llc).  However, if you don't have a trust or llc, there are a number of ways in which you may hold title, each with its own tax and other consequences.

If you are married assets earned by either you or your spouse while married and while a resident of California are community properties. As a married individual, you may continue to own certain separate property as well property which you owned prior to the marriage. A gift or inheritance received during the marriage would be considered separate property as well.

CPAs as Trust Protectors

Helping clients build flexibility and additional oversight into their trusts is a manageable, meaningful new niche.

by Michael B. Allmon

Clients who want their beneficiaries to avoid probate often place assets in trust. Many CPAs are reluctant to take on being a trustee, which is a time-consuming responsibility. An alternative is to be a third-party “trust protector” alongside a professional trustee. CPAs are highly qualified for the trust protector role because they have the client’s confidence, the right skill sets, a tax background and an understanding of the client’s family dynamics.

What Does Estate Planning Involve?

When you begin to consider your estate plan, you should ask yourself the following questions:

       What are my assets?

       What is the estimated value of my assets?

       Whom do I want to receive those assets - and when?

       Who should manage those assets if I cannot, either during my lifetime or after my death?

       Who should have the responsibility for the care of my minor children if I become disabled or die?

       If I cannot take care of myself, who do I trust to decide about my care and welfare?

What is Estate Planning?

Estate planning is not a one time event, it is a process. It involves people - your family, other individuals and often charitable organizations of your choice. It also involves your assets and all the various forms of ownership and title that those assets may take.

As you plan your estate, you will consider:

       How will your assets be managed if you are unable to manage them yourself?

       When will certain assets be transferred to others, either during your lifetime, at your death, or sometime after that?

       To whom those assets will pass?

Estate planning also addresses your welfare and needs, planning for your personal and health care if you are no longer able to care for yourself. Like many people, you may at first think that estate planning is simply the writing of a will. But it encompasses much more. As you will see, estate planning may involve financial, tax, medical and business planning. A will is one part of that planning process, but you need other documents to satisfy your estate planning needs. The purpose of this writing is to provide a brief explanation estate planning and how it can address and meet your goals and objectives.

Estate planning is ever changing. Just as people and assets and laws change, it may well be necessary to adjust your estate plan every so often to reflect those changes.

Save Transfer Tax Costs When Transferring a Vacation Home

Qualified Personal Residence Trust (QPRT)

A qualified personal residence trust (QPRT) can be an effective tactic for transferring vacation property at a reduced transfer tax cost. A QPRT is an irrevocable trust set up for a set number of years to hold an interest in residential property. The settlor keeps the right to occupy the property for the term of the trust. At the end of the term, the property passes to the named beneficiaries.

A QPRT works as an estate-freezing device. The value of the residence for tax purposes is its discounted value at the time of its transfer to the trust. All appreciation is removed from the settlor's estate. A discounted value can is available because a QPRT is one of the allowed exceptions to the zero valuation rules of Internal Revenue Code (IRC). The IRC determines the value of a transfer by subtracting the value of the transferor's kept interest from the value of the property transferred and assigning a zero value to the kept interest. The statute applies to any transfer of an interest in trust to a family member of the transferor. However, transfers to that entity are valued by subtracting the value of the transferor's held interest; this will be a number other than zero, from the total value of the property.

Lifetime (Inter vivos) Gifts; Why Wait?

Lifetime gifts may also have the following potential tax benefits:

·         Lower tax rates. Although gift tax rates are the same as estate tax rates, gift tax rates are effectively much lower. This is because the estate tax is imposed on the entire amount of property transferred at death ("tax inclusive"), whereas the property used to pay the tax is not included in calculating the gift tax unless the gift was made within 3 years before the donor's death ("tax exclusive").

·         Freeze values. For tax purposes, lifetime gifts can "freeze" the value of transferred property as of the time of transfer. For example, it is ordinarily better to make a gift of an asset with a value of $100,000 than to pay estate tax on it after it has appreciated to $200,000 or has produced income that has similarly increased the value of the estate.

·         Structure estate. Lifetime gifts also allow the donor to structure the character of what will comprise the donor's estate at death. Illiquid assets or assets difficult to value may be removed from the estate. Carefully planned lifetime gifts may enable the donor's estate to take advantage of special use valuation, the installment payment of estate tax, and stock redemption provisions by removing nonqualifying assets from the estate so that the percentage tests set by these sections will be met.

·         Use of life insurance gift. An lifetime gift of life insurance can achieve significant tax benefits because life insurance generally has a relatively low current value in the hands of the insured and for gift tax purposes, but may become a significant asset in the hands of the beneficiaries.

·         Income tax savings. Lifetime gifts can offer income tax savings because they generally relieve the donor of income tax liability attributable to the gifted property. Further savings can be achieved by shifting the taxation of income generated by the gifted property to individuals in lower marginal tax brackets. On the other hand, an increasingly popular estate planning tool is the irrevocable grantor trust, which permits transfer of property and the income generated by that property to the younger generation, while the income tax on the income is paid by the donor/settlor. The payment of the income tax is a transfer of wealth to the trust beneficiaries, but it is not treated as a taxable gift for gift tax purposes.

Estate Planning and Asset Protection Can Have Conflicting Objectives

People have used trusts to protect their assets for generations. The key to using a trust as an asset protection tool is that the trust must be irrevocable and become the owner of your property. Once given away, these assets are no longer yours and are not available to satisfy claims against you.  However, for estate planning purposes, a revocable trust may be the better choice.

Trusts can also protect trust assets from potential creditors of the beneficiaries of the trust. The extent to which a beneficiary's creditors can reach trust property depends on how much access the beneficiary has to the trust property. The more access the beneficiary has to the trust property, the more access the beneficiary's creditors will have. Thus, the terms of the trust are critical.

There are many types of asset protection and estate planning trusts, each having its own benefits and drawbacks. 

What is a Small to Mid-Sized Estate?

Estate planners understand that there is no hard and fast definition of small, mid-size, and large estates. One common measure is that a large estate is one that will result in an estate tax. However, in the recent past and continuing at least until 2009, the actual value of an estate that meets this definition has been an increasing amount ($2 million in 2006). In 2010, there will be no estate tax. In 2011, the estate tax will apply only to estates of more than $1 million. Between now and 2010, most likely Congress will pass legislation changing or "permanently" fixing the size of an estate that will be subject to the estate tax.

Independent Contractor or Employee?

FACTOR 1— INSTRUCTIONS

Independent Contractor: Not required to follow instructions on how to perform services.

Employee: Can receive instructions concerning the means and methods of achieving a result.

FACTOR 2—TRAINING

Independent Contractor: Possesses the skills necessary to perform the task and does not need additional training; a contractor can "hit the ground running."

Employee: May receive training from the employer.

FACTOR 3— INTEGRATION INTO THE PRINCIPAL'S BUSINESS

Independent Contractor: Services are:

(1)   Not essential to the principal's business; or

(2)   Not incorporated into the product or services sold by the principal.

Employee: Provides the services essential to bringing the employer's product or services to market.

Ask whether the independent contractor is doing the work that an employee normally would do.

FACTOR 4—SERVICES PERSONALLY PERFORMED

Independent Contractor: Should be able to subcontract all or a portion of the project.

Employee: Cannot delegate his or her responsibilities.

FACTOR 5—HIRING, SUPERVISING, AND PAYING ASSISTANTS

Independent Contractor: Can hire and supervise its own employees, but should not supervise, or be supervised by, the principal's employees.

Employee: Deals with subcontractors and other employees only within the framework of the employer's directions or policies.

FACTOR 6— CONTINUING RELATIONSHIP

Independent Contractor: Generally works on one project and moves on, accepting additional projects when and if he or she is available.

Employee: Enjoys a continuing relationship with the employer for an indefinite period of time.

Review and monitor use of independent contractors regularly as this factor will change over time.

FACTOR 7—HOURS OF WORK

Independent Contractor: Sets his or her hours of work, working as necessary to accomplish the end result.

Employee: Employer can dictate the hours that an employee works.

If the company dictates the work hours, it may be controlling the method of performing services, not just the end result.

Exception: The principal may require contractors to observe certain work hours for legitimate business reasons, e.g., coordination of contractor with other workers, security.

FACTOR 8—FULL TIME REQUIRED

Independent Contractor: Usually has the right to work simultaneously for the principal and others, as long as the end result is achieved.

Employee: Usually must make a time commitment to the employer.

FACTOR 9—JOB LOCATION

Independent Contractor: Should be able to choose where to perform some, if not all, of the services.

Employee: Must perform services at the location chosen by the employer.

FACTOR 10—ORDER OR SEQUENCE OF WORK

Independent Contractor: Can control the manner and method of performing the services.

Employee: Is subject to the employer's control over the sequence of tasks.

FACTOR 11— REPORTS NOT REQUIRED

Independent Contractor: Being responsible only for the end result, is not required to submit interim reports.

Employee: An employer can require interim reports.

FACTOR 12— METHOD OF PAYMENT

Independent Contractor: A flat-rate payment for the project is most consistent with independent contractor status, since the contractor is responsible for producing a completed project and the flat rate may affect the worker's profit or loss. See factor 16.

Employee: Usually paid on an hourly or salary basis.

Method of payment should ideally reflect that the worker is paid for results, not the time spent.

FACTOR 13— PAYMENT OF EXPENSES

Independent Contractor: Is expected to assume the burden of business expenses.

Employee: Is usually reimbursed for business expenses.

FACTOR 14—TOOLS AND EQUIPMENT

Independent Contractor: Should have the tools and equipment necessary to perform the services independently.

Employee: Employer provides the tools that its employees need.

If tools or equipment are reasonably necessary for the industry, the independent contractor should own them.

FACTOR 15— SIGNIFICANT INVESTMENT IN BUSINESS

Independent Contractor: Makes an investment in tools, business equipment, publications, and supplies appropriate for his or her business.

Employee: Is not required to invest in the employer's business.

FACTOR 16— REALIZATION OF PROFIT OR LOSS

Independent Contractor: Accepts both the benefits and risks of a business transaction; has the opportunity to profit from the project price; and risks a loss if the end result is unacceptable or costs exceed the project price.

Employee: Is paid for his or her time and bears no risk of wage loss if the employer's product is unprofitable.

FACTOR 17— WORKING FOR MULTIPLE COMPANIES

Independent Contractor: Can and does work for multiple firms simultaneously.

Employee: Although employees may hold more than one job, an employer can require loyalty and preclude some alternative jobs.

FACTOR 18— SERVICES AVAILABLE TO THE PUBLIC

Independent Contractor: Offers his or her services to the general public.

Employee: Does not perform services directly for the public, but only for the employer.

An independent contractor can market to a target audience and still offer his or her services to the public.

FACTOR 19—RIGHT TO DISCHARGE

Independent Contractor:

(1)   Principal can terminate an independent contractor relationship only according to the terms of an agreement.

(2)   If the principal's termination is outside the scope of the agreement, the principal will be liable for breach of contract.

Employee: Can be discharged at will.

Always consider this very important factor when analyzing whether an independent contractor relationship exists.

FACTOR 20—RIGHT TO QUIT

Independent Contractor: Has an obligation to complete the work under contract.

Employee: Absent special circumstances, an employee may quit his or her employment at any time, without incurring liability to the employer.

Remember, this is not a balancing test, you don’t have to meet all the criteria, just enough of the criteria, to be considered an employee.  The most important factor is Factor 1, the right to control, in determining independent contractor status.

Also, simply drafting an independent contractor agreement does not convert a would-be employee into an independent contractor.

The information contained here is provided as a service to the Internet community, and does not constitute legal advice.  I try to provide quality information, but we make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in or linked to this web site and its associated sites.  As legal advice must be tailored to the specific circumstances of each case, and laws are constantly changing, nothing provided herein should be used as a substitute for the advice of competent counsel.