Wills
A will is a legal document that allows you to distribute your property based upon your wishes.

Pros

• A will is a flexible document and can be changed as often as needed, so long as you are deemed competent.
• A will allows you to designate guardianship of your children upon your death.

Cons

• If you own property in more than one state, then probate needs to be held in each state.
• A will still has to go through probate, which can incur fees of 3%-10% of your gross estate.
• A will only applies to property in your name. Property held in joint tenancy will not be disposed of via a will.
• A will only goes into effect upon your death. If you were to become incapacitated, the court would take control of your assets and determine how your assets should be used to care for you. They may also appoint a conservator to manage your estate and the conservator may not be a person you would have necessarily chosen.
• At your death, a will becomes a public document. This may lead to a will contest by disgruntled family members.

Trusts
A Trust is a legal document that holds title to your real property or assets. When you create a Trust, your transfer your real property and assets into the name of your Trust that you control.

Pros

• A trust allows you to avoid probate since the estate is now owned by the Trust and controlled by the Trustee of the Trust. It also prevents the courts from taking control of your assets.
• A properly drafted trust will allow a married couple to maximize their estate tax exemptions (this will be described in more detail below). Lack of proper estate planning may significantly increase the estate taxes you have to pay.
• A trust often allows assets to be distributed in a matter of weeks as opposed to months or years with a will.
• If you become incapacitated, your successor trustee can manage your property without court intervention.
• A trust can remain in existence after your death allowing you to hold property in trust to be managed by your Trustee for the benefit of your minor children. A trust allows you to sprinkle your property to your children in various stages. Ex. 25% at age 18, 40% at age 25, and 35% at age 30. It also allows you at add provisions such as not letting the children inherit property unless they graduate from a four year college or not letting them inherit if they have drug or alcohol problems.
• Your living trust is a private document.
• If you own property in several states, it prevents multiple probate proceedings.

What is a living will or healthcare directive?
A living will or healthcare directive allows you to choose the person to make health care decisions for you, including those involving life support, should you become incapacitated. A living will or healthcare directive should be part of any comprehensive estate plan.

What is probate?
The purpose of probate is to transfer title to all of your assets into the name of your heirs and make sure all other legal claims against your estate are considered and paid. Probate is the legal process whereby the court takes control of your property upon your death, pays your debts and distributes your property according to your will. If you do not have a will, the court will distribute your property according to state intestate laws, which are state statutes that designate who will receive your property upon your death. The probate process can take 9 months to two years and can incur fees of between 3%-10% of your gross estate. Probate fees are assessed on your gross estate! This means that probate does not take debt into consideration when it calculates fees. If your estate consists of a home worth $500,000, with a mortgage of $100,000, the fees will be calculated on $500,000, even though you only owe $100,000 on the home. Probate can be timely and costly and can delay the distribution of your property to your loved ones. Proper estate planning can allow you to avoid probate and allow your property to be distributed without court intervention in a timely manner upon your death.

Does Joint Tenancy avoid probate?
Joint tenancy does not avoid probate, it only prolongs it. If Sonny and Cher own their home in joint tenancy, and Sonny passes away, the home is now transferred to Cher as sole owner. When Cher passes away, the home will now have to be probated if she remained the sole owner on the property.


Joint Tenancy with your children or others can have consequences.
Often parents will place their home in joint tenancy with their children or others as a means of passing on the home without a will or a trust. This may have unintended consequences.

1. The children’s share of the property now becomes subject to the children’s creditors, including people who win lawsuits against them.
2. The children have an equal right to the property. That means that they can and have the right to occupy the property and the other joint tenants have no say in the matter.
3. The parents’ relationship with the child may change over the years. If the relationship should become strained, the child cannot be removed as joint tenant without their permission. Furthermore, if the parent(s) want to sell the home in order to pay for unforeseen expenses or simply just to move, they cannot sell the home without permission from the child.
4. Adding a child as joint tenant can trigger a gift tax.
5. Adding a child may also have adverse tax consequences.

• Ex) If the parents purchased a home in 1980 for $100,000, their basis is $100,000. In 2000, the child is added as joint tenant on the home. The child now inherits the parents $100,000 basis. Let’s say both parents die in 2000 when the house is now worth $500,000. If the child sells the home in 2000, they will be subject to $400,000 (after applicable tax exclusion for the sale of a home) in capital gains taxes! If the parents had only put the house in trust for the child, and the child received the home upon the death of both parents, the child’s basis would have been $500,000. Now, if the child sells the home in the same year at the same price, his capital gains will be zero.

What amount will I be taxed on upon my death?
A Federal estate tax will be imposed on your net estate. Your net estate is defined as all of the assets you own minus your debts. Assets include real property, personal property, cash, qualified plans, and life insurance death benefit proceeds. However, the current estate tax exemption is 1.5 million per U.S. citizen and the exemption amount will increase again in 2006. Ex. Using the chart below, if you die in 2004 and your net estate is valued at 2 million, estate taxes will be assessed at 47% on $500,000 of your estate!

How can proper estate planning maximize tax exemptions?
Sonny and Cher own all of their property in joint tenancy. At the death of Sonny, the estate is valued at 2 million and the estate passes to Cher tax-free through the unlimited marital deduction. However, Sonny has just forfeited his 1.5 million dollar exemption. If at the time of Cher's death, the net estate is valued at 3 million, her estate will have to pay estate taxes on 1.5 million dollars! That's a $720,000 tax bill at a 48% tax rate. (In 2004, the estate tax starts at 45% and goes up to 48%, depending on your tax rate). Through proper estate planning and the use of a by-pass trust, Sonny and Cher would have been able to utilize both exemptions (3 million), thus avoiding federal estate taxes.

How can proper estate planning minimize my taxes?
Gifting away of your assets is another effective way to minimize estate taxes. Each year you can gift away $11,000 to as many recipients as you wish ($22,000 per recipient if you include your wife) and you will not have to pay a gift tax and your estate tax exemptions remain in place. If you have three kids and you can gift away $66,000 a year over 10 years, you have now reduced your estate by $660,000 and still have your exemptions to utilize. Currently, the most an individual can gift away is $1,000,000 in a lifetime.