ESTATE PLANNING - AN OVERVIEW

1. The basics of estate planning generally include the following documents:
• Will or Trust
• General Durable Power of Attorney
• Advanced Health Care Directive
2. Probate and Asset Ownership.

There are many ways to own, or title, property, including a Trust. Under Minnesota Law, ownership of assets determines whether or not your family will need to probate your estate.

So what is probate, anyway? If you own assets in your name alone of more than $20,000 or own real estate of any value, your personal representative (administrator or executor) will need to probate the estate, unless you have taken steps to avoid probate. If you own property in other states, multiple probate proceedings could result unless you have taken steps to avoid the probate. A Will takes you directly into probate. The Will designates whom will inherit your property. If you have no will and have not made other arrangements, your property will still have to be probated to insure proper transfer to your heirs. This is called Intestacy. The Intestacy Laws of Minnesota control who gets your property.

Each family’s situation is different. Avoiding probate may or may not be important for your family. If you desire to avoid probate, there are many methods to do so, including a Trust.

Non-probate and probate Assets. Non-probate assets are not controlled by your will. Such assets simply pass to the designated family members or beneficiaries upon death and do not require court proceedings. Probate assets are those controlled by your will, or if you do not have a will or trust, by the law of Minnesota. In order to pass title to probate assets to those named in your will, a probate proceeding would be required.

Non-Probate Assets	vs.	Probate Assets
1. Joint Tenancy Accounts		1. Assets titled in your name alone
2. Life Insurance		2. Tenancy in Common
3. Payable on Death accounts		3. Insurance or Retirement funds naming your estate as beneficiary.
4. Transfer on Death accounts		4. Remainder Interests
5. Trusts
6. Annuities and Retirement funds naming beneficiaries
7. Life Estates

3. What Are Trusts in General?

Trusts are quite often utilized as an estate planning tool. Contrary to common belief, you do not need to be very wealthy to benefit from a trusts.

The Bowl of Fruit Analogy:
Trusts are like a bowl of fruit. The Trust Agreement is the bowl which holds the assets. In order to properly use a trust, the assets must be in the bowl. Consequently, when a trust is set up, all assets must be reviewed and assets would be then registered to the name of the trust.

The Trust is a separate entity, which you may compare to a corporation, partnership, or other entity. There are many types of trusts, and many uses of a trust from very simple, to very complicated.

4. Types of Trusts.

• Basic Revocable Living Trusts are used to avoid an estate administration proceeding. In this situation, the Trust really takes the place of a Will, so rather than stating who gets your property in a Will, you would make this gifts and distributions in a Trust. Upon your death, the family avoids a probate proceeding (estate administration) in district court.
• Testamentary Trusts are established under a Will. Examples here would be a trust for minor children, trust for a disabled family member, or trust for a surviving spouse. A probate proceeding is needed to establish the trust, by court order.
• Credit Shelter Trusts/A-B Trusts are used when a family is estate tax sensitive. The goal here is to maximize the federal and state estate tax exclusion amounts. You will owe federal estate taxes if, on your death, you own $1,000,000 or more of assets. Currently, you will owe state death taxes if, on your death, you own $700,000 or more of assets. Included in this calculation are life insurance proceeds. This amount, called the Applicable Exclusion Amount, will be periodically increasing, until it reaches $3,500,000 in the year 2009. It is repealed for one year, in 2010, after which the estate tax returns at 1,000,000. For Estate Tax purposes, assets that are not traditionally considered available assets are included, such as life insurance death benefits. You may be Estate Tax Sensitive and not even realize it.

Federal Estate Tax Exemption Amounts: 2001 $675,000 2002 $1,000,000 2003 $1,000,000 2004 $1,500,000 2005 $1,500,000 2006 $2,000,000 2007 $2,000,000 2008 $2,000,000 2009 $3,500,000 2010 Estate Tax Repealed     Note: Gift tax exemption amount is fixed at $1,000,000--it does not go up

Minnesota Estate Tax Exemption Amounts: 2002 $700,000 2003 $700,000 2004 $850,000 2005 $950,000 2006 $1,000,000

Irrevocable Life Insurance Trusts. Life Insurance Trusts are a valuable tool to provide for family members and for dealing with estate taxes. Life Insurance held in a properly drafted trust will NOT be included in your gross estate for estate tax purposes, so the proceeds really are “tax free.” Life insurance can be used generally to make distributions of assets equal to family members (i.e. one child gets real estate, the other gets cash), provide for grandchildren and great grandchildren (Dynasty or Generation Skipping Trusts), providing “wealth replacement” to family members for charitable distributions, deal with second marriages/blended family issues, and etc.

Charitable Trusts. There are many types of charitable trusts, just as there are life insurance trusts. Commonly, you will hear of the Charitable Remainder Annuity Trust or Charitable Remainder Unitrust. If you have charitable intentions, these trusts can be designed to provide funds for a charity, but provide an income stream to you and/or your family for life, or a set number of years. The benefit is generally a significant charitable income tax or estate tax deduction. These types of trusts are commonly used for highly appreciated property such as highly appreciated stock or local real estate. Coupled with appropriate estate tax planning, the estate tax can be completely zeroed out.

For More Information Contact:
Lisa Bowen, Attorney
Thornton, Reif, Dolan, Bowen & Klecker, P.A.
1017 Broadway, P.O. Box 819
Alexandria, MN 56308-0819
320-762-2361

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