July 29, 2013
Authored by: Stephanie Moll and Kim Civins
On July 22, 2013, the question everyone wanted answered, boy or girl, was answered when Catherine, Duchess of Cambridge, gave birth to the royal baby, a baby boy, who is now third in line to the throne, after his grandfather, Prince Charles, and his father, Prince William.
On July 24, the next question everyone wanted answered, what’s his name, was answered with the announcement that the baby prince’s name is George Alexander Louis, and that he will be known as Prince George of Cambridge.
Now, the question that we’re sure is burning in everyone’s mind is, are Will’s and Kate’s estate planning documents up-to-date so that Prince George will be properly taken care of in the event something happens to his parents?
As we’ve previously discussed in our 2011 post, “Why Do I Need a Will?”, in the United States, primary reasons for having estate planning documents for a couple are naming a guardian for their child, preserving the use of the decedent’s estate tax exemption, and establishing a trust for minors to avoid a conservatorship.
As discussed in that post by Kim, naming a guardian for minor children in most states is merely a nomination, and a judge would decide who will raise minor children if they lose both their parents. This is usually determined with a “best interests of the child” approach. However, in many states there is a presumption that the individual(s) named in a person’s Will will be named unless someone establishes good cause why they should not be named. Most parents would want a say in who would raise their children. Therefore, having a Will to formally set forth your preference is important.
Kim also explained that, for wealthy clients, there is a pretty simple estate planning technique that can save their children a ton of money. To explain, let us explain a few tax rules. First, in 2013, generally the first $5.25 million in an estate can be transferred to beneficiaries free of estate tax, but federal estate tax kicks in after that point at a 40% rate. Second, you can leave as much as you want to your spouse with zero tax. Many couples merely want to leave all their assets to their surviving spouse, and this can be done without estate tax. However, when the second spouse dies, only the $5.25 million exemption is available to that spouse. In essence, we’ve wasted the first spouse’s $5.25 million exemption. Therefore, we could have shielded $10.5 million from estate tax rather than just $5.25 million if we had instead created a trust with the exemption amount on the first death. The surviving spouse can be primary beneficiary of this trust and even the trustee. So, if the estate planning documents are tweaked slightly to provide a trust, many tax dollars can be saved. Using very raw numbers here and 2012 exemptions and rates, $2,100,000 would be the tax savings. The implementation of portability, discussed in one of our very first blog posts in 2011, “Portability, the Good, the Bad, and the Ugly” gets rid of this problem with the estate tax exemption, as the surviving spouse can now elect to use the deceased spouse’s unused estate tax exemption, but no similar portability election is available with respect to the generation-skipping transfer tax exemption, so this would still be good planning for couples wanting to pass their wealth down the generations, to grandchildren and beyond. Dependent on the situation, portability can provide some relief in estate tax planning, but for many families, it shouldn’t be depended upon exclusively (but that’s a topic for another blog post on another day).
Also discussed in Kim’s prior post, in most states, if a minor receives assets greater than a certain amount ($15,000 in Georgia, where Kim practices), state law requires that a court-appointed conservator (called guardian or guardian of the property in other states) manage the property. State law may require that a conservator be bonded and file an initial inventory and regular reports to the court. The ability to manage the assets and use them is under strict court supervision. Even something as simple as selling real estate can require court supervision. Therefore, we try to avoid this outcome for our clients and create trusts in the estate planning documents so that a conservatorship can be avoided, and instead a trust is used with more flexible administrative provisions and distribution standards, giving most of the discretion to the trustee who is named in the document by the Will maker.
In addition, we have also previously discussed why a Will may not be enough for clients such as Will and Kate. As we discussed in Alan Singer’s post, “Why Do I Need a Trust?”, a revocable trust avoids probate, preserves privacy, and like a Will, controls the disposition of your assets at death, but, in addition, also controls disposition of the assets during your lifetime and in the event of your incapacity.
For celebrities such as Will and Kate, the privacy issue may be a very strong factor in deciding to use a revocable trust in conjunction with a pourover Will, as opposed to merely using a Will. We’ve seen how the lack of privacy is demonstrated in the case of celebrities in examples such as Whitney Houston, which we discussed in 2012 in our post, “A Will is Not Enough: An Estate Planning Lesson From Whitney Houston’s Passing” and, more recently, James Gandolfini, in our post, “James Gandofini’s Death Will Bring in Money to IRS and NYS”