Why Create an Estate Plan?

  • You’ve worked hard to build your wealth.
  • Now that you’ve achieved many of your financial goals, you want to be sure that your assets can be transferred to your loved ones.
  • The estate tax and probate expenses can cost your survivors a significant portion of their inheritance at the time of your death.
  • While taxes may be inevitable you have options to preserve your legacy.

Did you know…?

The on December 17th, 2010 President Obama singed the "Tax Relief Act" into law. The Tax Relief Act reinstates the estate tax for 2011 and 2012.  The new exclusion amount is $5 million for 2011 and is adjusted for inflation in 2012.  The top estate and gift tax rate is 35 percent for 2011 and 2012.

Did you know…?

Absent further legislation, the exclusion will revert to $1 million and the top estate and gift tax rate will revert to 55% in 2013.

Do you also know how the 2011 Tax Act may affect you and your estate planning strategy today?

What is an Estate Plan

An effective estate plan can help you preserve as much of your wealth as possible for your beneficiaries. There are many tools available to help you minimize transfer costs and help ensure that payment of costs is taken care of at the time of death. The information below is intended to provide you with an overview of some estate planning terms and techniques. It is important to review your situation with your financial advisor and especially with your legal counsel to determine the best course of action for you and your family. We would welcome an opportunity to meet with you to review your current estate plan and work with your attorney to find the best course of action to meet your estate planning goals. Please feel free to contact us for by email or calling us at 858-658-0600.


  • Asset values are preserved
  • Transfer taxes and expenses are minimized
  • Lifetime gifts are leveraged and maximum tax exemptions are utilized
  • Assets will be distributed as you desire to your beneficiaries in an efficient and economical way
  • Assets will be competently managed should you become disabled

What is included for estate tax purposes?

Every asset you own at the time of your death constitutes your gross estate. These assets are taxed at their fair market value on the date of death (or alternative valuation date). Assets that are included in your gross estate are:

  • Cash, bank accounts and CD’s
  • Assets in your living (revocable) trusts
  • Stocks, bonds and mutual funds
  • Life insurance
  • Notes receivable
  • Real Estate
  • Business interests
  • Retirement plan assets and IRAs
  • Automobiles, jewelry and other property
  • Assets you have retrained certain rights or interests

Estate Planning Basics

Federal Estate Taxes: While the Tax Relief Act of 2010 reduced the top rate to 35% in 2011 and 2012, absent further legislation, the top estate and gift tax rate will revert to 55% in 2013.

Estate and GST Tax Exemption Amount: The exemption amount is the amount of assets per decedent that may be transferred to your beneficiaries without estate or gift taxes. In 2011 the estate tax exclusion amount is $5 millioin per decedent and will be adjusted for inflation in 2012. Absent further legislation, the exclusion will revert to $1 million in 2013.

Reunification of Estate, Gift and GST: The Tax Relief Act reunifies the exemption amounts allowed for estate, gift, and generation skipping transfer taxes at $5 million.  This is in contrast to the disparity that existed in 2009 of a $3.5 million estate tax exemption and a $1 million gift tax exemption.  Unlike many provisions, the reunification is effective in 2011 and does not sunset.

Utilization of Exemptions Between Spouses: Historically, every decendent had his or her own exemption amount.  If proper planning was not done and the first-to-die spouse did not use his or her full exemption, then the remaining portion was lost.  The Tax Relief Act allows the estate of the second-to-die spouse to use any unused portion of his or her spouse’s exemption.  The unused portion must be determined on the first to die spouse’s estate tax return.  This election is available as of 2011.

Probate: Probate is a court supervised process used to make an orderly distribution and transfer of property from a decedent to their beneficiaries. Probate not only includes the distribution of assets and property but the filing of claims against the estate by creditors, publication of a last will and testament. Its disadvantages include:

  • It is public process as the will and all documents filed with the court become public records
  • The probate process can cause a delay in the transferring of property. It is not unusual for the delay to be several months to over several years.
  • Additional costs in the case that probate is required due to administrative and attorney fees. Typically these fees are based on a percentage of the value of the probate estate. In California the statutory fee schedule is 4% of the first $100,000, 3% of the next $100,000, 2% of the next $800,000, and 1% of the next $15 million.

Unlimited Marital Deduction: You may transfer an unlimited amount of assets to your spouse without any federal estate tax or gift tax being imposed. The marital deduction can be take advantage of by making an outright gift or bequest to your spouse, or by using a marital trust. While transfer an entire estate to a spouse can avoid estate taxes at the first death it is often a tax trap for the surviving spouse.

Annual Gifts: Currently individuals can give up to $13,000 in cash or assets each year. This amount is indexed for inflation and may be given to as many individuals as you wish without federal gift tax. If you are married you can combine your annual exclusion so that you can transfer up to $26,000 per year per receipient.

Will: A will is one of the most fundamental documents in establishing an estate plan. A validly executed will is important because it give instructions on who will receive assets that you own individually, who the executors of your estate will be and who will act as guardians of your minor children. Assets passing under a will need to be transferred through the probate process.

Living Will/Health Care Proxy: A living will goes into effect only when you are not able to make your own medical decisions or cannot express your wishes yourself. It lets your family and doctors know the type of care you want, or do not want, if you become terminally ill or permanently unconscious. In many states you can create a health care proxy or power of attorney for health care to appoint another individual on your behalf and your expressed wishes.

Durable Power of Attorney: In the event that you become absent or incompetent this document enables another person to manage your affairs if you are not able to act on financial, legal and administrative matters. It bypasses probate court and does not require the appointment of a guardian or conservator.

Basic Trusts

Credit shelter trust (CST): A credit-shelter trust (also called a bypass, A/B trust or family trust), allows you to take full advantage of the applicable exclusion amount and also provide for your surviving spouse and children. By using a will you bequeath an amount to the trust up to but not exceeding the estate-tax exemption. The remaining assets can be passed to your spouse tax-free. You can also specify how you want the trust to be used - for example, you may stipulate that income from the trust after you die goes to your spouse and that when he or she dies, the principal will be distributed tax-free among your children. The Tas Relief Act does allow for the utilization of the exemptions between spouses; so at this time the CST is not necessary to utilize the estate tax exemption amount, but may still have beneftis based on restrictions and provisions in the trust.

While you can pass an amount equal to the estate-tax exemption directly to your kids when you die; the reason for a bypass trust is to protect your spouse financially in the event he or she has need for income from the trust or in the event you think your children will squander their inheritance before the surviving parent dies.

Generation-skipping trust: A generation-skipping trust (also called a dynasty trust) allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior - typically your grandchildren.

The generation-skipping exemption has been increasing gradually and is $5.0 million in 2011. You may specify that your children may receive income from the trust and even use its principal for almost anything that would benefit your grand kids, including health care, housing or tuition bills.  For transfers made after 2010, the GST tax rate would be equal to the highest estate and gift tax rate in effect for the year (35 percent for 2011 and 2012).  The 2010 Tax Relief Act also extends certain techincal provisions under EGTRRA affecting the GST tax.

Beware, however. If you leave more than the exemption amount, the bequest will be subject to a generation-skipping transfer tax. This tax is separate from estate taxes, and is designed to stop wealthy seniors from funneling all their money to their grandchildren.

Qualified personal residence trust: A qualified personal residence trust (QPRT) can remove the value of your home or vacation home from your estate. A QPRT lets you give your real estate as a gift - most commonly to your children - while you keep control of it for a period that you stipulate, say 10 years. You may continue to live in the home or real estate and maintain full control of it during that time.

In valuing the gift, the IRS assumes your home is worth less than its present-day value since your kids won’t take possession of it for several years. (The longer the term of the trust, the less the value of the gift.)

However there is a catch: If you don’t outlive the trust, the full market value of your house at the time of your death will be counted in your estate. In order for the trust to be valid, you must outlive it, and then either move out of your home or pay your children fair market rent to continue using or living in the property. While that may not seem ideal, the upside is that the rent you pay will reduce your estate further.

Irrevocable Trusts & Irrevocable Life Insurance Trust: An irrevocable trust has as its primary feature the ability to transfer assets irrevocably into a trust and thus directly reduce the grantors gross estate and possible estate tax. An irrevocable life insurance trust (ILIT) can remove your life insurance from your taxable estate, help pay estate costs, and provide your heirs with cash for a variety of purposes. In either case a grantor established an irrevocable trust and transfers either assets, life insurance or both into the trust. As long as the grantor retains no incidents of ownership over the property and retains no powers over the corpus of the trust that could be construed as ownership, then the assets in the trust will not be includable in the gross estate of the grantor. There are exceptions to this rule such as transferring an existing life insurance policy. In this case the proceeds of the policy may be brought back into your estate if you do not survive for at least three years after the transfer.

To remove a life insurance policy from your estate, you surrender ownership rights, which means you may no longer borrow against it or change beneficiaries. In return, the proceeds from the policy may be used to pay any estate costs after you die and provide your beneficiaries with tax-free income.

That can be useful in cases where you leave heirs an illiquid asset such as a business. The business might take a while to sell, and in the meantime your heirs will have to pay operating expenses. If they don’t have cash on hand, they might have to have a fire sale just to meet the bills. But life insurance proceeds can help tide them over.

Qualified terminable interest property trust: If you’re part of a family where there have been divorces, remarriages and stepchildren, you may want to direct your assets to particular relatives through a qualified terminable interest property (QTIP) trust. A QTIP trust can be appropriate when the grantor wishes to provide a stream of income to a spouse for the life of the spouse, but wishes to pass the assets to someone other than the surviving spouse, typically the children from a previous marriage.

QTIP trusts are typically used to ensure that a fair portion of their wealth ultimately passes to their own children and not someone else’s. Money in a QTIP trust, unlike that in a bypass trust, is treated as part of the surviving spouse’s estate and may be subject to estate tax. However the grantor may want to consider a disclaimer trust when the surviving spouse wishes to have the decedent’s estate take full advantage of the unified credit.

Advanced Planning Options

There are many other advanced planning options, techniques and tools that can be used to reduce estate taxes, maintain control of assets and help accomplish your estate planning goals. The following are a few of those techniques:

  • Grantor Retained Annuity Trust (GRAT)
  • Wealth Replacement Trust
  • Charitable Lead Trust (CLT)
  • Private Foundations
  • Family Limited Partnerships (FLP) – Business Strategy
  • Charitable Trusts (CRAT/CRUT) – Charitable Retained Annuity Trust/Charitable Retained Uni-Trust
  • Spousal Lifetime Access Trust (SLAT)

Don’t go it alone

Working together we can make sure that your estate plan is effective and efficient in meeting your needs. Please feel free to contact us for by email or calling us at 858-658-0600.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

Securities and Advisory services offered through LPL Financial. A registered investment advisor. Member FINRA & SIPC.

Registered for Securities in the following states: AZ, CA, CO, FL, LA, MA, NH, NJ, NY, OH, OK, PA, TX, UT, VA, WI, CA, LA

Registrations Held: 07, 24, 63, 65

Insurance License in the following states: CA, FL, OH