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Estate Planning

Pepper, Johnstone & Company

Estate Planning

For some, the term “estate planning” conjures up visions of very wealthy people with huge sums of money to deal with—in other words, not us. The truth is everyone needs some form of estate planning, regardless of the size of his or her estate. Estate planning can help preserve and transfer your assets in a tax-efficient manner while potentially enhancing the amount of wealth transferred to your beneficiaries. Because estate planning can be a complicated matter, you should seek the advice of a qualified tax advisor or attorney in conjunction with your insurance/financial advisor. This article is for informational purposes only and is not intended as legal, accounting, financial or tax advice.

Estate planning has two components: the accumulation and efficient management of wealth during your lifetime and the effective distribution of your wealth after your death, all coordinated according to your objectives. Your particular estate planning needs depends on your age, wealth, health, goals, lifestyle, and an infinite number of other factors, all of which change over time. A young, healthy, single person may only need a simple will. An older person in declining health with more wealth, multiple prior marriages, and many children within those marriages will need a more complex set of plans in place.

An estate is essentially anything you own at the time of death, including:

  • Life insurance and annuities
  • Investment accounts, such as stocks, bonds and mutual funds
  • Retirement accounts, such as pensions, IRAs and 401(k)s
  • Checking and savings accounts, and CDs
  • Personal property, such as homes, automobiles, furniture, jewelry or livestock
  • Collectibles, such as paintings, antiques or coin collections
  • Business interests

Below is a brief overview of some of the possible tools involved in estate planning. Let’s begin with a general discussion of probate – a term most people have heard of but few really understand.


Defined simply, probate is the legal process for handling someone’s assets when they die. The probate process includes:

  • Filing a deceased person’s will with a local court
  • Identifying and inventorying the deceased person’s property
  • Verifying the value of specific assets
  • Paying off debts, including taxes
  • Having the will “proved” valid to the court
  • Executing the terms of the will
  • Distributing assets that do not have a beneficiary or are not jointly held

Probate is neither quick nor inexpensive. The process can tie up property for months—sometimes even a year or more. The cost of probate may be set by state law or by practice and custom in your community, and can include appraisal costs, executor’s fees, court costs, the costs for a type of insurance policy known as a surety bond, legal fees, and accounting fees. When you add it all up, probate can cost from 3 percent to 7 percent of the total estate value. And if your estate includes property in more than one state, it may be subject to separate probate proceedings in all applicable states.

Not all aspects of your estate may need to go through probate. Any assets held in a living trust are not subject to probate. If you die without a trust or a will, probate is necessary to determine who is legally entitled to your estate. Any property held jointly with survivorship rights avoids probate, as do the proceeds of insurance policies and retirement plans with proper beneficiary designations in place. You can also arrange for the automatic transfer of bank accounts, securities, and vehicles (in some states) immediately upon death, avoiding probate for those assets (see below for details). Reducing the amount of your estate that is subject to probate can ensure that your heirs receive your gifts sooner and with less cost and hassle than would be required if probate was required for your entire estate.


Wills are the basic cornerstone of any estate plan, and most people should have one. In its simplest form, a will is a legal document that determines how your money, property and personal belongings will be distributed after your death, as well as who will care for your children. If you die without a will, state law (called intestacy statutes) will dictate how those matters are handled. Without a will stating otherwise, the state will distribute your property to your spouse and children or other blood relatives, or to the state’s coffers if you have no relatives. This may not be what you had in mind. Intestacy also includes the possibility that your estate will wind up paying more taxes than might otherwise be necessary.

Powers of Attorney

Giving someone a “power of attorney” (POA) means giving that person (known as the agent) the legal authority to act on your behalf when you can’t. There are nondurable or temporary POAs that terminate when you become legally incompetent and durable POAs, which continue in effect even if you become incapacitated. A durable healthcare POA, healthcare proxy, or advance medical directive names someone to make medical decisions on your behalf when you are unable to do so yourself. It’s important to have a healthcare POA on record so that your wishes can be carried out by a trusted agent and not left to your relatives, the doctors, hospitals, or courts.

Living Trusts

Once considered an instrument only for the rich, living trusts are now a common estate planning tool. A living trust allows your estate to avoid the cost and hassle of going through probate court by passing it directly to your heirs. It’s not much more difficult to create than a will. Almost any asset, including savings accounts, stocks, bonds, real estate, life insurance, and personal property can be placed in the trust by changing the names or titles on your assets to the name of the trust.

A living trust also minimizes estate taxes by fully utilizing every individual’s Unified Credit. While you’re alive, the trust has no effect. But after your death, trust assets can be transferred quickly and easily according to the directions you left in the trust document. Married couples who have both a large estate and children may be interested in a type of living trust called a living trust with marital life estate or AB trust. It allows a couple to pass the maximum amount of property to their children (or other beneficiaries) after both spouses die, avoiding probate and reducing the potential federal estate tax bill, while providing for the financial security and comfort of the surviving spouse during his or her lifetime.

Automatic Transfers-at-Death

These are simple ways to avoid probate for parts of your estate. Any bank account can be turned into a payable-on-death account by signing a form at your bank naming the person you want to inherit the money in your account at your death. Likewise, you can register stocks, bonds, and brokerage accounts with a transfer-on-death registration, which means that your beneficiary’s name is included in the ownership papers. And if you’re lucky enough to own a car in California, Connecticut, Kansas, Missouri, or Ohio, you can include your beneficiary’s name on the certificate of title to inherit your vehicle automatically upon your death. In all cases, you retain complete control over the asset while you are alive. Your beneficiary has no rights over the asset until you die, at which time your beneficiary simply provides proof of death and proof of identity to claim the asset without involving probate.

Joint Ownership

There are multiple forms of joint ownership that all accomplish the same goal of avoiding probate. Real estate, vehicles, bank accounts, securities, or other valuable property can be owned in joint tenancy with right of survivorship so that the asset passes automatically to the survivor when one owner dies.


Another way to avoid probate and estate taxes is to give away property before you die. If you don’t own it at your death, it doesn’t have to go through probate and it can’t be taxed. Current tax law allows you to give away up to $13,000 per person per year without incurring any gift tax, with no restrictions on eligible recipients. And if you’re married, you and your spouse can each give away $13,000 per person per year, for a total of $26,000 per couple annually to each child, grandchild, niece, or dear friend. All gifts you make to your U.S. citizen spouse are tax-free (if your spouse is not a U.S. citizen, there is a gift limit of $134,000 in 2010). Gifts to qualified tax-exempt organizations and direct payment of tuition or medical bills are also exempt from gift tax.

Beneficiary Issues

Bank accounts, IRAs, and employer-sponsored retirement programs all ask you to name a beneficiary(ies) to receive any proceeds at your death. Make sure you keep these designations up to date by reviewing them regularly or at least following major life-changing events (marriage, divorce, children, etc.). The assets in these types of accounts are not subject to probate if an appropriate beneficiary designation is in place at the time of your death.

Life Insurance

If it’s determined that your estate will owe estate taxes, then payment is due within nine-months of your death, and the IRS won't accept a piece of real estate, jewelry or stock in your business for payment. Thus, your Personal Representative or Successor Trustee will be faced with the challenge of determining where the cash will come from to pay the tax bill. Proper estate planning avoids (or greatly reduces) this financial dilemma.

If an estate doesn't have enough cash or assets that can be easily liquidated to pay estate taxes, then the Personal Representative or Successor Trustee will be forced to liquidate or borrow against property such as real estate or stock of a closely held business to pay the tax bill. Given the nine-month estate tax deadline, this can lead to fire sales at greatly reduced prices, in turn significantly reducing the amount going to your beneficiaries. Even if your estate has the liquidity to pay the estate taxes, it makes no sense to do so when there is a much better option.

Life insurance can effectively help meet many estate planning objectives. Once your projected estate tax liability is determined, life insurance is often times the vehicle used to provide liquidity to pay estate taxes. Instead of using a large percentage of your estate assets to pay the estate tax liability, you use a small percentage of your estate assets to pay your life insurance premiums and when you die, the life insurance beneficiary (usually an Irrevocable Life Insurance Trust) uses the death benefit proceeds to pay the estate tax. This estate tax funding strategy allows you to preserve a much greater portion of your estate for your heirs while minimizing the adverse impact of estate taxes on your estate.

Irrevocable Life Insurance Trust

By transferring the ownership of your life insurance policy to an Irrevocable Life Insurance Trust (“ILIT”), the payout to your beneficiaries will not be included in the taxable estate. The reason being that since the policy is owned by the ILIT, you are not the owner, and it is removed from your taxable estate. (It should be noted that this type of arrangement is suited for individuals whose estates will trigger estate taxes).

The IRS has what is known as the “three-year rule” or “three year look back provision.” This rule states that the life insurance policy must be transferred to the ILIT no earlier than three years of your death. If you die before the three years have passed, the policy becomes part of your estate and is subject to taxes. Thus, if you die within the three year period, the IRS treats the ILIT as if it never existed.

Your life insurance premiums still need to be paid on time, even though the policy is in an ILIT. Generally, you make a gift to the ILIT and that money is used to pay the premiums. These gifts can be made tax-free up to $13,000 per beneficiary annually. For a more detailed discussion of ILIT’s, see the article entitled Life Insurance: Your Blueprint for Wealth Transfer Planning.

Why You Need Protection

It’s a complete misconception to think that estate planning is only for the wealthy. It doesn’t really matter how much or how little you have accumulated. Everyone needs some form of estate planning to ensure that the things they have worked for and the people they have cared about will be taken care of according to their wishes after they are gone. Estate planning can help preserve and transfer your assets in a tax-efficient manner while potentially enhancing the amount of wealth transferred to your beneficiaries. As you can see from this brief overview, there are many approaches and options to consider.

Get the protection you need tomorrow, today.

To learn more about our Estate Planning and Life insurance products, speak with one of our experienced professionals today.