An Introduction to Estate Planning - Dinnie Sloman

Executive Director, Catskill Forest Association, PO Box 336, Arkville, NY 12406.   (914) 586 - 3054


Death is too complicated these days. Transferring assets without paying high taxes takes too much effort. "Someday I’ll figure out what to do." But what if you die suddenly without planning? Better to face the fears and complexities now and put your affairs in order. You will gain a greater sense of control by doing so.

This presentation is a potpourri of estate planning concepts to help you begin the process. It is not a blue print for you to follow. Each person has different facts and circumstances, and a cookbook approach could very easily harm your situation. Rather, this presentation will familiarize you with some terminology and methodology involved in estate planning. I have purposefully written this presentation in a familiar, non-legal manner, which by necessity, is superficial. Once you decide to develop an estate plan, your next step should be to schedule an appointment with your lawyer and accountant. They will help you to craft an estate plan specific to you.

Of Chickens and Eggs

Two issues struggle against each other in estate planning. The first relates to transferring assets to the right people and places. The second relates to estate taxes. Both must be considered together to find the right plan for you. On the one hand, wills and trusts must be written to take advantage of estate tax rules. On the other hand, estate taxes can only be addressed once the basic transfer scheme is established. Which comes first?

As a starting point, pull together a list of all your assets. These include tangible things like cars, homes and furniture. They also include stocks, bonds and other securities, life insurance proceeds, powers of appointment and anything else you own or control. In another list record all of your outstanding debts and obligations. You do not have to be extremely specific. For instance, paper clips need not be listed. The essential items should be your major assets and those things, regardless of value, that you want to give in a particular way.

Using your list, in your own words, write down your wishes. "I want all my jewelry to go to my husband." "I want the house to go to my wife if she survives me, otherwise I want it to go to my best friend Sidney." Remember the paper clips? All of those remaining items can be lumped together in one statement: "everything else should go to my husband, but if he already is dead, then it should go to my two sons in equal shares." A list of all the people will help, also: parents, spouse, children, grandchildren, siblings, cousins, nephews and nieces, friends, charities, etc. Now that you have a basic plan, your lawyer and accountant can put together the complicated documents that accomplish your intent. If following your plan will create a significant estate tax problem, they can suggest alternatives. Thus, by developing your thoughts before you meet with them, you will save time and money, and prevent headaches.

Documents, Documents, Documents

The basic document used in estate planning is a will. The law of wills has evolved over centuries through court cases and statutes. Using the right words in the right place and executing the will using the right procedure is critical. In addition, to transfer the assets at the right time, to the right person and with the least tax consequences may require trusts, partnerships, powers of appointment and powers of attorney. Directing your health care after a debilitating injury or illness may require a health care proxy. Some of these documents can be drafted together and some may need to be separate documents. For example, some trusts can be included in the will, while others must be drafted separately. While the lawyer’s fee to draft these documents may seem high at first, think of the fees involved in contesting a will or trust. Getting the documents right should be well worth the money.

You may be thinking, "I don’t need all those trusts and partnerships. I just want to leave everything to my spouse, or if she is already dead, to my daughters. Can’t I just keep it simple?" This desire is understandable, but not practical. A will with a trust may actually be simpler and more reliable than a will without one. Since a will may be around for a long time, it should be written broadly so that predictable, changing circumstances do not require an amendment. For instance, generally speaking, a direct gift to a minor child is not advisable. Usually a will should account for minors, even if not in existence now, by giving the minor’s gift to a trust formed upon the giver’s death. A simple trust written into a will may only require one or two paragraphs.

Simple trust language can significantly reduce taxes, too. A trust can shelter assets from inclusion in your or your spouse’s estate. Dispel any notion that trusts only help the rich. Even small estates need to consider them.

Assets Arrive in Different Ways

Some assets are given through the will and others are not. If an asset passes through the will, then the language of the will tells to whom the asset will go. However, the recipient may not get the asset immediately. Sometimes months or years may pass before the recipient gets a gift that passes through the will. Since the will is a special legal document, it is reviewed in a special legal process called probate. Only after probate is concluded and all challenges to the will are resolved will the assets be distributed. Often the process is quick and easy, but not always.

Some assets do not pass through the will, but immediately transfer to the intended recipient. For instance, most of the time life insurance proceeds are paid immediately to the beneficiary. Similarly, property held jointly immediately becomes the property of the surviving owner. So joint ownership can be used to ensure that survivors have access to assets before the will is processed. Sounds great, but joint ownership can create problems, too. First, think of the hassle of changing everything you own to joint ownership. Buying and selling as joint owners becomes difficult. And besides, a will is still necessary for transferring all the small things not held jointly. Second, estate tax avoidance may be hindered by joint ownership. A portion of the asset value still will be included in your estate for tax purposes, and strategies to shelter assets in trusts may not be possible if you own them jointly. The overall estate plan should look at these issues, making adjustments in ownership to balance the need for immediate, continuous availability of assets with estate tax avoidance.

Not Everyone Pays Estate Taxes

You may think that the value of the assets in your estate is so small that you will not have to pay taxes. Maybe you’re right. Until 1997, estates valued at less than $600,000 were exempt from federal estate taxes. Since then, the ceiling has been rising and will level off at $1,000,000 in 2006. For 1999, the amount is $650,000. Formerly this amount was called the "unified credit," but now it is called the "applicable credit amount." Therefore, if the value of your estate is less than the applicable credit amount, you will not pay federal estate tax. If your estate exceeds the applicable credit amount, then you pay tax on the amount of your estate exceeding the applicable credit amount. So, if your estate is valued at $700,000 in 1999, then you will pay states tax on $50,000. Estate tax rates range from 37% to 55%.

Some people in this situation breath a sigh of relief and conclude that they do not need to complicate their will with trusts and other strategies to avoid estate taxes. Such a decision should not be made lightly. First, is your estate really under the ceiling? Many people forget to consider mutual funds, life insurance and other assets when calculating their estate. Assets can accumulate fast: a life insurance policy paying $300,000 upon your death, a house worth $150,000, rural forest land worth $100,000, equipment and other assets in your business worth $50,000, two cars, snowmobiles and ATVs worth $100,000, furnishings, appliances, computers, clothes, lawn equipment worth $50,000. That quick list adds up to $750,000. And, remember that the taxes will be calculated at your death, not now. You have to plan for growth in the value of your assets. Before you assume that you have a small estate, be realistic about your current and future asset value.

Second, your situation could change before you die. Long lost Aunt Glenda could pass away and leave you her villa in Italy. You might win the lottery or hit the jack pot at Turning Stone Casino. You invested in the next Intel, and the stock has risen in value 100 fold. Of course you should update your estate plan after one of these dramatic events, but for the period of time between the windfall and the update, having basic tax saving provisions in your will makes sense.

Basic Schemes for Reducing Estate Taxes

In the end, your heirs will pay estate taxes if your estate is worth more than the applicable credit amount. Thus, the basic way to avoid estate taxes is to reduce the value of your estate. Short of spending your assets before you die, you can give value away during your lifetime without necessarily giving away all of your control of the asset. The following three schemes are examples. Others may be available to you, based on your situation.

The Credit Shelter Trust. Married couples have a great way to transfer assets to the surviving spouse without paying estate taxes. For the most part, the marital deduction postpones estate taxes until the surviving spouse dies. This only works for assets transferred directly to the surviving spouse. So, the will could provide that all assets be given to the surviving spouse, and no tax would be due. Then, when the surviving spouse dies, tax will be paid on the total, combined estate owned by the surviving spouse.

Hold on, though. The first spouse to die is entitled to use the applicable credit amount described above. If, in 1999, the first passing spouse bequeaths $650,000 to a friend, and everything else to the surviving spouse, using the applicable credit amount would eliminate the tax on that $650,000. The marital deduction would postpone tax on the surviving spouse’s share until the surviving spouse passes. Now compare this strategy with the one described above where the couple relies exclusively on the marital deduction. In both cases, no tax is paid when the first spouse dies. But now, since $650,000 has been given away, the surviving spouse’s estate is smaller. The heirs of the surviving spouse get to use another applicable credit amount after the surviving spouse’s death. In the end, by not giving the surviving spouse everything, both spouses took advantage of the applicable credit amount. In the first example, everything is given to the surviving spouse, so the applicable credit amount for the couple, after both pass, is $650,000. In the second example, since the surviving spouse did not get everything, the applicable credit amount for the couple, after both pass, is $1,300,000. So, if your combined estate is bigger than $650,000 but smaller than $1,300,000, you can still avoid estate taxes through smart estate planning.

"Great," you say, "but I want my spouse to get everything and still double the applicable credit amount for both of us to $1,300,000." Have no fear, using a trust will solve your dilemma. Trusts are curious things. The law treats them just like a person. If you give something to a trust, the trust owns it. The person who created the trust does not own it. The trustee does not own it. The beneficiary does not own it. Therefore, a trust can be the object of a "non-marital" gift, just like a friend can. If the first spouse to pass gives $650,000 to a trust, rather than the surviving spouse, the first spouse can use the applicable credit towards that $650,000, and the surviving spouse can take a marital deduction with respect to the rest. In addition, the surviving spouse can be the trustee and the beneficiary of the trust. Since the trustee makes the decisions for the trust property and the beneficiary gets the benefits of the trust assets, for the most part the surviving spouse may use the assets as he or she wishes, even though the surviving spouse does not directly own the assets. This classic scheme has been used for decades, is perfectly legal and approved by the Internal Revenue Service.

Conservation Easements. If most of your estate value is derived from land or a farm, then paying estate taxes can be a disaster. If insufficient liquid assets are available to pay the tax, then the land must be sold to pay the tax. So much for passing your tree farm on to your heirs. Conservation easements provide one way to resolve this situation. Basically, an easement is the transfer of some of your property rights to another person. For instance, as a property owner you have the right to keep people off your land. If you want to, you can transfer the right to pass across your property to another person. Then, you no longer have the right to keep that person off your land.

You also have the right to subdivide your property and build shopping malls and condominiums on it. The right to do these things is called "development rights." We all know that you never intend to develop your tree farm that way, but you have the right to if you wish. In some cases, development rights can be very valuable, amounting to half or more of the value of your property. Therefore, if you sell or give away your right to develop the property, then you diminish the value of the property for estate tax purposes. Even so, since you never intend to develop the property, you get to use it exactly as you have.

Since this is not a workshop on conservation easements, I will refrain from going into great detail about the benefits and burdens of conservation easements. Nevertheless, I will point out the main ones. Benefits include the estate tax benefit mentioned above, a charitable deduction for a gift of a conservation easement, current income from the sale of a conservation easement, and protecting the property from ever being developed. Burdens include finding someone willing to hold the conservation easement, and permanently (that means forever!) restricting the use of your property. Conservation easements only work if you carefully craft the restrictions to meet your needs, but they are useful to some people.

Family Limited Partnerships. You can reduce the size of your estate by giving it away to family members before you die. Generally speaking, each person can give up to $10,000 per year to anyone, free of gift tax. Thus, a couple can give $20,000 to each of their children every year. If the couple can afford such gifts and they start early, they can significantly reduce the size of their combined estate. Giving real estate, like a tree farm, in this manner can cause problems. First, title is recorded in the county records, subjecting each transfer to document preparation, transfer taxes, mortgage restrictions and the like. In addition, how do you determine what part of the property to give to keep the gift under the $10,000 limit? In short, annual gifts of property can be difficult.

A family limited partnership can help. First, you form a partnership between you and your spouse and transfer the real estate to the partnership. The transfer requires a one-time transaction between you and the partnership. At first, each of you hold 50% of the partnership interests. The partnership value equals the value of the real estate. Then, each year you transfer the equivalent of $10,000 of partnership interest to your children. These transfers will not be as cumbersome as transferring actual title to the children. Over time, the children will control the majority of the partnership interests as limited partners. You and your spouse maintain control of the property as managing partners. And since, after the gifts to your children, your partnership interests are small, the value of your estate is reduced.

Life Insurance

As a property owner, you may be faced with significant illiquid assets. Although you may adopt strategies to reduce estate taxes, such as the ones described above, you may not be able to eliminate them altogether. If you want to avoid the possibility of selling your land to pay estate taxes, acquiring life insurance may help. Even though life insurance proceeds become part of your estate for estate tax purposes, they are immediately available and can be used for paying the estate tax. However, premiums rise as you grow older, so only buy life insurance after careful review of your situation. Your lawyer and accountant can help with this decision.

Power of Attorney

During a debilitating injury or illness, especially at the end of your life, you may not be competent to handle your affairs. Nevertheless, action may be required to protect your assets, or to allow your spouse to use your assets. For instance, if you have your own, separate bank account, your spouse would not be able to withdraw funds. For most couples in a stable relationship, legal authority to act on behalf of the other can be granted through a power of attorney. Waiting to grant a power of attorney can be risky, because an incompetent person cannot agree to such an arrangement. To avoid being caught off guard, execute the power of attorney now. Working with your lawyer, you can draft a general one, allowing your spouse to take any and all actions in your place, or you can limit the spouse’s authority to specific actions under specific circumstances.

Health Care Proxy

In New York, you have the right to designate a health care proxy allowing someone else to make medical decisions. You determine the circumstances under which you will allow your proxy to decide for you, and the limits of what they can decide. In this way, you control the process even when you are incompetent to act on your own behalf. New York has a statutory form and procedures for designating a health care proxy, and your lawyer can help you set up one.


Estate Planning is an area of the law that requires years of dedicated, focused education and experience to master. Through this presentation, we have hopped on stepping stones above the stream of estate planning issues. We have looked down to see some of the issues as they flow by, but we only caught a glimpse. If you are motivated to adopt an estate plan, talk to experts who see the little details as well as the big picture. If you already have an estate plan, remember to review and update it at least every five years, or when your situation changes. Be active to avoid, as best you can, surprises at the difficult time of a loved one’s death. You have a retirement plan, an education plan and a forest management plan, now consider an estate plan.

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