Estate Planning: The Next Level

October 20, 2014

A previous Axley article gives a brief background on simple estate planning documents. If your individual net worth – less outstanding debts – is under $5.34 million, the documents referenced in the prior post are adequate. Your individual net worth includes:

  • Life insurance face amounts
  • Cash, stocks, bonds and personal property
  • Fair market values of retirement assets, real estate and business interests

If you have a net worth above that, particularly if you have a closely held business which comprises the bulk of your net worth, a more complex approach is necessary. We often talk about a net worth of $5.34 million as the threshold for more complex estate planning. What effectively happens is each spouse has a lifetime exemption amount of $5.34 million. Essentially, that gives a married couple a combined exemption up to $10.68 million, provided the right mechanisms are in place or completed to take advantage of the combined exemption amount.

If an individual passes away with an estate – including marital property interest – that exceeds $5.34 million, then for every dollar over that amount, there will be a 40% estate tax collected (this is the maximum estate tax rate for 2014). Therefore, if the combined estate at the time of the surviving spouse’s death is valued at $7 million, the estate would pay $664,000 in estate tax without the proper estate planning documents or elections in place. In most instances, the documents we suggest are a revocable trust, will, marital property agreement and powers of attorney along with a comprehensive transfer document. A brief description of these documents is given below. In instances where the expected combined estate is greater than $10.68 million, we will also suggest an irrevocable life insurance trust and other lifetime gifting programs.

Revocable Trust

A revocable trust is a document in which all the assets of the spouses are transferred into the trust. The spouses are the sole beneficiaries and trustees of the revocable trust. On the death of the first spouse, the trust is split into two trusts. The survivor becomes the trustee of what is known as a survivor’s trust and may be the trustee of a family trust. Upon the death of the first spouse, all the property in trust transfers automatically to the survivor’s trust. The surviving spouse would then have the task of disclaiming the assets he or she chooses to place into the family trust. We generally use disclaimer trusts because they allow the surviving spouse to pick and choose assets they want to place into the family trust (as opposed to a formula trust where the first dollar up to the unified credit amount of $5.34 million goes into the family trust). Using a disclaimer trust also allows the surviving spouse to determine what the estate tax exposure is at that time. Alternatively, a formula trust is often incorporated into the estate plan when one or both spouses want to preserve assets for children outside of the current marriage.  Once the family trust is funded, all income from the family trust goes to the surviving spouse and principal may be distributed under certain circumstances.

The survivor’s trust can be amended or revoked any time and is completely accessible to the surviving spouse during his or her life; however, the family trust cannot be amended after the death of the first spouse. Once the surviving spouse dies, the assets of the survivor’s trust (absent any other designation by the survivor) transfer to the family trust, and the family trust is then distributed to the spouses’ children or other designated beneficiaries. The family trust can designate when children receive these assets, such as one-half at age 25 and the remainder at age 35. Absent a designation, children are entitled to assets when they attain 18 years of age, which is the age of majority for Wisconsin law.

Pour Over Wills

We generally write wills to accompany revocable trusts, and they are often referred to as pour over wills. They contain general language stating all the assets not initially transferred into the trust will automatically transfer to the trust upon the death of the surviving spouse. If your children are under the age of 18, you should name a guardian of the children in your will. That will remain effective until the youngest child reaches the age of majority.

Marital Property Agreement

In addition, we complete a marital property agreement. A marital property agreement simply states all Wisconsin property is marital property, with the exception of retirement and life insurance assets. The marital property status allows the surviving spouse to receive a step-up in basis to fair market value of marital assets on the death of the first spouse; in Wisconsin, this is what is known as a double step-up because both spouses are allowed the step-up for their marital interest and not just the deceased spouse’s marital interest. For instance, with a share of stock that was purchased at $10 and now has a fair market value of $100 – if sold at this price when both spouses were alive – there would be a $90 capital gain. However, if that same share of stock was still owned at the date-of-death of the first spouse, the basis would increase to $100 and, when sold at $100, there would be no capital gains incurred. This double step-up can allow the surviving spouse to sell off assets and move the assets into better income-producing assets, if needed. It is also beneficial for highly depreciated assets, such as rental real estate, by resetting the basis and starting the depreciation schedule over.

Durable Powers of Attorney

Additionally, we use durable powers of attorney for health care and finance that coordinate with the revocable trust.

Comprehensive Transfer Document

Finally, as part of the process, we complete a comprehensive transfer document. One of the advantages of the revocable trust is that it is treated as a separate legal entity, but still operates under your social security number for reporting purposes during life. All of your assets are transferred into the trust when it is formed, thus avoiding probate upon the death of the surviving spouse. All of the assets of the spouses are listed in the transfer document, and a statement is made that all assets are being transferred into the trust on a specific day. If an issue arises where one of the spouses passes and did not transfer an asset into the revocable trust, we can oftentimes use the comprehensive transfer document to accomplish the transfer.

If your net worth is not liquid, we would suggest an irrevocable life insurance trust. An irrevocable life insurance trust can provide liquidity for payment of taxes on the death of the surviving spouse, as well as remove assets from your estate during life. Essentially, you use the irrevocable trust to purchase life insurance on both your lives to be paid out on the death of the surviving spouse. You purchase as much insurance as your children need to pay the taxes on your estate when the survivor dies. The trust is not an asset of your estate because you gifted the trust the premium amounts to pay the insurance.

If you have a very liquid estate, you may want to consider gifting, as each spouse has the right to gift up to $14,000 per year per child. For instance, if you have two children, each spouse can gift $28,000 ($14,000 from the husband and $14,000 from the wife) to each child, thereby transferring up to $56,000 of value per year. At a tax rate of 40%, that would save $22,400 worth of potential estate taxes for each transfer. This annual exclusion amount is over and above your lifetime exemption amount of $5.34 million, and is often used to fund the irrevocable life insurance trust described above. Obviously, a gift is a gift, and once made, cannot be retrieved. A serious discussion should occur with children in order to ensure gifting does not lead to other inter-family problems.

In closing, this is meant to be a brief overview of more complex estate planning concepts for individuals over the unified credit amount for federal estate taxes as well as methods of preserving assets for children born prior to the current marriage. Although it may not be reliable in terms of applicability to each person’s unique situation, it is a good discussion in a working relationship of the next level of estate planning beyond a simple will and/or trust and powers of attorney. This type of planning is particularly important for people who are heavily invested in real estate, who own closely held business interests or other assets that are not easily liquidated, or who may be subject to the vagaries of the economy. The goal is to take advantage of the step-up in basis for these assets at date-of-death so your beneficiaries can escape some, if not all, of the capital gains tax upon the sale of these assets.

We encourage (and work with) business owners to develop succession plans for their businesses to take advantage of the gifting rules, as well as remove these larger assets from their estates, while passing the torch to the next generation.


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For more information about "Estate Planning: The Next Level," contact Donald J. Murn at dmurn@axley.com or 262.409.2277 or Nancy L. Wilson at nwilson@axley.com or 262.409.2281.