estate planning

What is estate planning?

Estate Planning starts with an analysis of:

  • Your assets
  • Your liabilities
  • Your present and future needs and desires
  • The present and future needs and desires of your family and relatives
  • Your and their future prospects.

Estate planning consists of planning and structuring your assets to meet those needs and desires. Some of the considerations are:

  • Determining who is to get your assets
  • Naming the executor of your will
  • Naming the trustee of any trusts you may create
  • Naming the guardian of your children, if both you and your spouse die
  • Naming someone who will care for you and your assets if you are disabled.

Wealth building

  • Providing for your children’s education
  • Providing insurance coverage for illness, disability or death
  • Providing for investment and management of your assets after your death
  • Tax planning to reduce income and estate taxes
  • Avoiding probate


This term has a variety of meanings. For estate tax purposes it means all property owned or controlled by a decedent at the time of death. Lifetime gifts are also included (and the tax paid on them is deductible from the tax.)

For probate purposes the estate generally means any asset owned by the decedent to the extent a will or statutes of descent and distribution are needed to tell who gets it. The probate estate does not include any assets merely controlled, but not otherwise owned, by the decedent that would be included in the estate for estate tax purposes.

Examples of assets in the probate estate and estate tax estate are:

Probate Estate Tax
Life insurance owned by decedent with beneficiary designation No Yes
IRA with beneficiary designation No Yes
Bank account Yes Yes
Life estate created for decedent by someone else No No
Life estate retained by decedent on a transfer of assets to someone else No Yes
Power to appoint who gets property on decedent’s death No Yes

In any event the probate estate is a less inclusive concept than the estate for estate tax purposes.

Estate can also refer to types of ownership of property. For instance there is a life estate. The holder has a right to the use or income of property during the owner’s lifetime. There are also an estate for years and estates for other periods of time.

This is a system of classification of types of ownership based mainly on the duration of the rights. What is commonly called outright ownership is called an estate in fee simple in this system. It means forever. Naturally the owner does not live forever, but this concept of ownership encompasses passage of ownership to heirs of the decedent and to their heirs after their death and so forth. There are other terms in this system but the most commonly used are life estate and an estate in fee simple or an estate in fee.

Civil Unions and Same Sex Marriages

In Illinois, couples of the same or opposite sexes can enter into a civil union. This provides them with the same rights, responsibilities, protections and benefits marriage provides under state law. Civil unions, marriages between persons of the same sex, or any other similar arrangement other than common law marriages entered into and valid in other states are recognized in Illinois. Civil unions can be dissolved under the Illinois act providing for divorces.

In Illinois, same sex marriages are also allowed. However, the legal effects of civil unions are not the same as same sex or opposite sex marriage. For example, civil unions are not recognized in many states. In addition, they do not entitle the parties to each other’s benefits under many Federal programs or the property rights of spouses. In particular, domestic partners (the parties to a civil union) are not treated as spouses by IRS, although same sex married couples would be.

Couples in a civil union should plan and document their affairs as if they were not in the union because they cannot rely on this status in all states. Also, Federal law generally does not recognize civil unions.

An example is the marital deduction under the estate tax. Illinois recognizes it for domestic partners, but Federal law does not. For instance, the tax free amounts in 2014 were $5,340,000 under the Federal estate tax and $4,000,000 in Illinois. For example, assume the first to die of a married couple has $6,000,000, which goes to the spouse. There is no U.S. or Illinois tax because of the marital deduction. However, if they are domestic partners instead, there is no Federal marital deduction, so over $5,340,000 is taxable under the Federal tax, while there is no Illinois tax.

Another example of the differences between civil unions and marriage involves children. The Illinois law makes both domestic partners parents of the child of one. However, this is not recognized in all states, so the non-partner should also adopt the child.

In some cases, civil union status may be inadmissible. For instance, if either person depends on public assistance or is a foreign national without permanent U.S. residence.

How civil union members are treated is also affected by definitions outside of statutes. For instance, a civil union member or his or her biological descendants may not qualify under the definition of spouse or heir in someone else’s estate planning documents or a life insurance policy.

Civil unions still exist because some people may not want the mutual rights and responsibilities of marriage.

2503(c) Trusts for Minors

Gifts in trust usually do not qualify for the annual gift tax exclusion unless the beneficiary has a right to withdraw the funds. Under Section 1503(c) of the Internal Revenue Code, the annual exclusion can be had without withdrawal rights. There must be a single beneficiary. The funds must be available for withdrawal by the child at age 21. The trustee must have unrestricted discretion to distribute principal and income for the benefit of the beneficiary.

If the trust continues after the beneficiary reaches 21, the gift tax annual exclusions are no longer available.

In Terrorem Clause

This is language that says if a beneficiary of a will or trust contests the will or trust, then any gift in the will or trust to the beneficiary is void. Beneficiaries sometimes contest documents that give them something because they can get more if the document is void.

These clauses are treated in a variety of ways in different states. For example, in Illinois, these clauses are theoretically valid and enforceable. However, that is only what the courts have said. Moreover, while saying such clauses are valid, the courts have found various ways to say they were not applicable in the particular cases involved.

Estate Tax Status

There was no Federal or Illinois state estate tax or generation-skipping tax in 2010. However, the gift tax was still in effect. Therefore, estate and generation-skipping taxes have been reinstated for 2011 and 2012. After that, there are no provisions.

In 2010 there was a carryover basis. When someone takes an appreciated asset from a decedent, they realize gain or loss when selling it. The gain or loss is usually determined by deducting the basis of the asset (usually its cost with certain adjustments) from the amount of proceeds realized on the sale. But when an asset was acquired from a decedent, the basis was defined differently. Up until December 31, 2009, and after January 1, 2011, the basis used to compute gain or loss was and will be the date of death value. In 2010 basis was the decedent’s basis (cost) or the value on the date of death – whichever was less. There were certain exceptions. For each estate, the basis could be increased by up to $1,300,000 of estate assets, in addition to property passing to the surviving spouse qualified for a basis increase of up to $3,000,000.

The new law allows you to select the 2010 tax treatment or the 2011 tax treatment for a decedent dying in 2010.

The new law makes some other significant changes as of January 1, 2011. Among other things:

  1. The tax-free amount under both the gift tax and estate tax is $5,000,000.
  2. The tax-free amount is “portable.” The amount that the first spouse does not use to die can, under some circumstances, be used by the second spouse, so it is easier for both together to pass on $10,000,000 tax-free.
  3. The top estate, gift and generation-skipping tax rates are 35%.

Many estate plans give the maximum tax-free amount to a family trust in which the surviving spouse has restricted or no rights. All the rest goes to a marital trust benefitting the surviving spouse. For a decedent dying in 2010 with $5,000,000 or less under these plans, the whole trust estate will go to the family trust, and nothing will go to the marital trust. Modification of these plans is usually desirable.

Family Trust/Credit Shelter Trust

This is a trust created to contain no more assets than those that escape tax under the unified credit. In other words, it usually has no more than the tax-free amount. To avoid including in the surviving spouse’s estate, this sum cannot be given outright to the surviving spouse. Instead, the surviving spouse can be given a life interest in its income and even a right to principal to be paid out according to an ascertainable standard outlined in the trust. Since the children are also often made beneficiaries, the trust is sometimes called the family trust.

The need for this type of trust is lessened because now, any part of the unified credit not used by the first spouse can be added to the credit of the second spouse.

The Illinois estate tax has a lower tax-free amount, and the family trust is still helpful to defer Illinois estate tax to the second death.

Dynasty Trust

This is a trust that is held for the benefit of successive generations for a very long time. The trustee holds the assets with a direction to pay the income to children, then grandchildren, then great-grandchildren and so on.

Since each person only has a life interest in the trust, the trust assets would not be in his or her taxable estate. However, the trust would be subject to generation-skipping taxes, so the value of such trusts on creation is usually limited to the exemption under the generation-skipping tax.

In the past, the duration of a trust was limited by the rule against perpetuities. A trust could last only so long as a life in being upon the creation of the trust plus 21 years. The “life in being” refers to all the current beneficiaries. Certain states now allow you to opt-out of this rule.

What is an A-B Trust?

The terms of an A & B trust provide that after the person’s death who created the trust, the assets will be split between two sub-trusts, the A Trust and the B Trust. The A Trust benefits the surviving spouse. The B Trust supposedly benefits the children. A formula is outlined in the trust to determine how the assets are split. The reason for this device is to minimize estate taxes by placing the amount upon which there is no tax in the B or children’s trust. This trust is structured so that when the surviving spouse subsequently dies, the children’s trust is not in his or her taxable estate. Everything else goes to the A Trust, which is structured so as to qualify for the marital deduction. The A Trust will be in the surviving spouse’s estate when he or she dies later.

By using this type of trust, parents can pass double the tax-free amount to their children. If the first to die merely left everything to the surviving spouse, then only one tax-free amount would pass to the children on the surviving spouse’s death. Everything else would be subject to tax.

Naturally, this type of device is useful only for taxable estates. And it works only if the assets are split between both spouses so that the first to die has the tax-free amount to pass to the children’s trust.

The surviving spouse can be the income beneficiary of the children’s trust.

The A Trust is often called a marital trust, and the B Trust is often called a family trust.

When the surviving spouse’s rights to the A Trust are limited to income and the estate’s executor is given an option to select how much of the trust will be used for the marital deduction, it is called a Q-Tip Trust.

Who is the Executor of an estate?

An executor is a person appointed in a will to settle an estate. However, if a probate estate is opened for someone who has no will, the person appointed by the court to settle the estate is called an administrator.

What is a trust beneficiary?

This term refers to someone who gets something, such as a person to whom a will gives something or who has the right to the income from a trust or who gets life insurance proceeds.


A disclaimer is a refusal to accept an interest in property. A qualified disclaimer is a disclaimer that complies with the requirements outlined in the Internal Revenue Code. When a person who is supposed to receive an interest in property disclaims it, the result is usually that someone else gets the property.

The same result as to disposition of the interest could be achieved if the person who is to receive the interest just accepted it and then made a gift of the interest to the person or persons who would get it if a disclaimer was made. The consequences of using this procedure could be much different from using a disclaimer because of the tax laws. First, giving the interest away after it has been accepted is a gift subject to the gift tax. If a large amount is involved, a gift tax return must be filed and either the tax must be paid, or part of the donor’s credit must be used. Second, the person to whom the interest is supposed to pass may be in a category that creates adverse tax consequences. For instance, a taxable estate may be willed to a child, or if the child is not alive to XYZ Church. The parent then dies, and the child, who has left everything by will to the grandchildren, dies soon thereafter. There are two taxable estates here. A disclaimer by the child’s executor would result in the first decedent’s (the parent’s) estate passing to the XYZ Church and bypassing the child’s estate. Therefore, XYZ Church may qualify for the charitable deduction. Note that the church rather than the grandchildren gets the property, and for this reason, the disclaimer may not be made. If the child’s will gives everything to the XYZ Church instead of the grandchildren, then a disclaimer by the child’s estate would make perfect sense and avoid estate tax.

The fact that the donee is undesirable for tax purposes is a very common reason to use disclaimers. For instance, in the above example, a parent wills property to a child, but if the child does not survive to XYZ Church. Instead of this, assume the parent’s will provides that if the named child does not survive, the property shall pass to the named child’s children (grandchildren) and, if they do not survive to the brothers and sisters of the named child. The parent dies, and the named child dies soon thereafter. To avoid having two taxable estates, the child’s executor or administrator could disclaim. Still, the named child’s children, who are grandchildren, would take, which may generate generation-skipping tax. To avoid this, the grandchildren could disclaim as well, and the property would then pass to the other children of the grandparent. Note once again that the grandchildren may not have an incentive to do this.

There are many reasons for using disclaimers besides the examples given above. They can change an estate plan after death and are often used to repair defects in the plan. For instance, property may be given to a person in trust with the income to be paid to that person (the beneficiary) along with the principal as he demands it. After the beneficiary’s death, the trust provides that other persons get the property. The right to withdraw principal is a general power of appointment which means the property is in the beneficiary’s estate for tax purposes when he or she dies. A life interest without the power to withdraw principal would not ordinarily be in the beneficiary’s estate. For this reason, the right to withdraw principal, the power of appointment, might be disclaimed.

Disclaimers are also often used to defer decisions in estate planning until after death, when the situation may be clearer. For instance, conventional estate tax reduction planning for the smaller taxable estate utilizes two trusts – one for the marital deduction and one for the tax free amount. Theoretically, one trust is for the surviving spouse and the children, although the surviving spouse can get the income from both. This works very well if the decedent has $4,000,000 cash in his or her own name and the tax free amount is $2,000,000. $2,000,000 goes to each trust. The $2,000,000 for the kids’ trust is tax free. The other $2,000,000 passing to the marital trust qualifies for the marital deduction. When the surviving spouse dies later, the $2,000,000 marital trust is in his or her taxable estate. Since it does not exceed the tax free amount, there is no tax. The $2,000,000 in the kids’ trust is not subject to tax when the surviving spouse dies because it is not in the surviving spouse’s taxable estate who had only a life interest in income. The result is that even though the tax free amount is $2,000,000, a married couple can pass $4,000,000 tax free to their kids. The key is for each to give $2,000,000 to the kids.

If the decedent has $4,000,000 in an IRA instead of his or her own name, the situation is different. Any distribution from the IRA will usually be subject to income tax. The way to defer this as long as possible is to give the IRA to the surviving spouse, who can roll it over to his or her IRA. The entire transfer will qualify for the marital deduction and be free of estate tax. This means there is no gift to the kids’ trust, and the entire $4,000,000 is subject to estate tax when the surviving spouse dies (ignoring other factors which might result in a reduction of the $4,000,000 while the surviving spouse is alive.)

There are two competing considerations here. One is deferral of income tax, which requires the wife individually to be beneficiary of the IRA, and one is the reduction of the estate tax, which requires the kids’ trust to get part of the IRA. The decision as to what to do with the IRA will be easier to make after the holder of the IRA dies. At that time, the facts will be clearer as to life expectancies, tax rates and other laws, and the relative needs of the beneficiaries will be clearer. Deferring the decision can be done by naming the spouse as beneficiary of the IRA and the children’s trust as contingent beneficiary. The surviving spouse can then take the IRA or disclaim part or all of it. The part disclaimed would go to the trust.

Suppose there is a qualified disclaimer of an interest in property under the Internal Revenue Code. In that case, the Code applies as if the interest had never been transferred to the disclaiming person. To be qualified, a disclaimer must be in writing and delivered to the transferor of the interest of the holder of legal title within nine months of the later of the day on which the transfer creating the interest is made or the day on which the disclaiming person reaches 21. The disclaimer must be irrevocable and unqualified, and the disclaiming person cannot have accepted the interest or any of its benefits. The person making the disclaimer cannot designate who will take the interest, and it must pass either to the spouse of the decedent or to a person other than the person making the disclaimer. Under federal law, a transfer by the person who would otherwise disclaim to the person who would receive the interest as a result of the disclaimer can also qualify.

The Federal law only governs the Federal tax effects of disclaimer. State law governs whether there is any disclaimer, to begin with. For example, under Illinois law, unless specified to the contrary in the instrument transferring the property or creating the interest, disclaimed property descends or is distributed as if the disclaimant had died before the decedent or before the date on which the transfer is made or the interest is created or before the takers are determined.

An entire interest in property can be disclaimed or only part of it. Undivided portions of an interest may be disclaimed. The disclaimer of a partial interest can specify a fraction of the interest (such as half) or a specific monetary amount (such as $100,000.)

Disclaimers can be made by persons specified to take an interest and by trustees, executors, administrators, guardians and agents under powers of attorney. All except the person directly named are fiduciaries. They act for someone else and have legally enforceable duties to act only for the persons for whom they act. This means they can disclaim only if it is in their beneficiary’s best interests. Also, in many cases, they could disclaim only if the trust, will, or power of attorney appointing them gives them specific authority to do so or if they have court approval.

These requirements often make disclaimers by trustees difficult because they are supposed to get property for the trust’s beneficiaries, not disclaim it. The same applies to other fiduciaries. The beneficiaries could approve the disclaimer, but some trust beneficiaries are often not ascertainable until the future, so beneficiary approval is impossible to get. For this reason, a trustee who has the power to disclaim may not want to do so.


The Illinois Trusts and Trustees Act allows a trustee to distribute trust assets to another trust under some circumstances. This essentially allows some changes to be made to an irrevocable trust.

To the extent a trustee has absolute discretion to distribute the principal of a trust for the benefit of one or more of the current beneficiaries of the trust, the trustee can transfer the trust assets to a successor trust. Absolute discretion includes the power to distribute to one or more beneficiaries guided by a standard of their best interests, welfare or happiness.

Suppose the trustee’s discretion is not absolute. In that case, the trustee may still decant to a second trust with the same current and remainder beneficiaries. The same distribution language for income and principal generally has the same language as the first trust for determining who gets the income and principal and when.

Court approval is unnecessary, but the trustee must give prior notice to interested parties, and they must not object. A court can determine any objections.

Decanting can sometimes be used to make some changes that may avoid tax issues or other problems that have arisen.

Disability and Health Insurance

Part of estate planning involves providing for the event of your illness or disability. In fact, for most people, the odds of becoming disabled and unable to work for at least a short period are higher than the odds of dying. Disability insurance provides a monthly income if that happens. And many more people incur high medical expenses at one time or another without becoming disabled. So both types of insurance are a desirable part of any estate plan.

What is a Charitable Deduction?

A deduction from the taxable estate is allowed any gift to a qualified group organized and operated exclusively for religious, charitable, scientific, literary or educational purposes. A gift to a trustee for the benefit of any such organization also generates the deduction. A gift of a remainder interest also generates the deduction. A gift of a remainder interest also qualifies. For instance, if you will assets to a trustee on your death to be held for your spouse’s benefit while he or she is alive and then to be paid to a charity. The value of that interest at the time of your death is deductible. Actuarial tables provided by IRS are used to do the valuation.

Disclaimer: The site is for educational purposes only, as well as to give general information. This blog is not intended to provide specific legal advice. The site should not be used as a substitute for legal advice from a licensed professional attorney in your state.

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George Meszaros is the editor and co-founder of Success Harbor where entrepreneurs learn about building successful companies. Success Harbor is dedicated to document the entrepreneurial journey through interviews, original research, and unique content. George Meszaros is also co-founder of Webene, a web design and digital marketing agency.

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