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ROBERT E. MCKENZIE, ESQ.

ARNSTEIN & LEHR LLP


120 SOUTH RIVERSIDE PLAZA, SUITE 1200
CHICAGO, IL 60606
312-876-6927
312-876-7318 fax
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"PLANNING FOR THE FUTURE - ESTATE AND TAX PLANNING"


By: Robert E. McKenzie

INTRODUCTION

1.05 Estate planning for many people connotes the way assets will be disposed of upon death. However, a
large part of estate planning consists of the disposition of assets during one's lifetime. There are numerous
benefits to making lifetime transfers rather than holding onto assets and transferring them upon death.
Furthermore, there are several different methods and vehicles that may be used for making lifetime transfers
depending on the desired result. Some of these methods and vehicles include outright gifts of property,
transfers of property into trusts, and transfers of property to and interests in family limited partnerships.

WHY YOU NEED A WILL OR LIVING TRUST


1.10 A will or living trust is the foundation of any good estate plan. As a legal document, a will or living
trust is the primary way to ensure that the property in your estate will be distributed according to your wishes
after your death. In addition, a will or living trust can help you accomplish the following:

provide financial security for your loved ones, allow for the special health or educational needs of a family
member, or make allowances for the varying income needs of your heirs;

appoint a guardian for children under age 18;

determine who will be in charge of carrying out your wishes by naming an executor or successor trustee;

minimize taxes and administrative costs; and


support worthy charitable organizations.

What is Probate and How It May Be Avoided


1.20 Probate is the process by which a person's estate is administered. The first step is for the court to
determine that the decedent's will is valid. This is often called "admitting the will to probate." Next, the court
appoints a personal representative to administer the estate. This is typically the person named as executor in
the will. Next, the court authorizes the personal representative to administer the estate. Estate administration
involves gathering the decedent's assets, discharging the debts and liabilities, and distributing the remaining
assets according to the will or intestacy statutes. The court supervises the estate administration process and
discharges the personal representative from his or her responsibilities when the process is complete.

Living Trust Option


1.30 For those who wish to avoid the time, expense, and public nature of probate, the living trust is often a
good supplement to a will. The living trust is a three-part document that handles the financial aspects of death
and possible incapacity without taking these matters through court. The first part of the living trust typically
addresses the distribution of your assets while you are of sound mind and body. Usually this involves naming
yourself as trustee and granting yourself the right to distribute your assets as you see fit. The second part of
the document often names a successor trustee to handle your financial affairs after your death, or if you
become incapable of handling them yourself during your lifetime. The final part provides for the distribution
of your assets. Like a will, the living trust is revocable, which means you can change it while you are living
and competent. To be effective, the trust must own all of your assets. Since some people don't remember to
transfer all of their assets to the trust, it is advisable to also have a "pour-over" will, which transfers any
forgotten assets into the trust at your death.

If You Don't Have a Will or Living Trust


1.40 If you die intestate (with no legal estate plan) your property will be distributed according to state law,
without regard to your personal wishes or the specific needs of your family members. Although intestacy laws
vary from state to state, they frequently provide that your spouse and children receive equal amounts of your
estate. Without a will or living trust, these distributions will be made regardless of age, health, or financial
need and, of course, there can be no bequests to friends, more distant relatives, or charitable organizations.

Tax Planning Through Your Will or Living trust


1.50 A carefully planned will or living trust can help you avoid or reduce taxes so that you can leave as
much as possible to your heirs and/or charitable organizations. Should you want to take advantage of tax
planning opportunities, such as establishing a charitable remainder trust, you should consult your attorney or
financial advisor to achieve the best results for yourself and your heirs.

OVERVIEW
1.60 Why is estate planning necessary generally?

a. Unless you decide to whom you would like your assets to pass at your death, the State will make the
decision for you

i. State Probate Acts set forth a priority of distribution for individuals who die "intestate" (without a will or
trust);

ii. The statutory scheme may not be what you intend, or even what you would expect;

iii. It is not true, however, that if you die without a will your property automatically will pass to the State
(unless you have absolutely no relatives living).

b. Unless you die with a will or trust in existence, the State will also decide who has the right to administer
your estate

i. The statute generally gives priority to relatives in the order of closeness (i.e., first your spouse, then your
children, etc.) -- The individual having priority, however, may not be the best person for the job (i.e., your
spouse or children might have absolutely no investment experience or may be "spendthrifts" who are unable
to manage their own funds);

ii. If you establish a will or trust, you decide who should manage your estate -- you may decide to use an
unrelated individual (such as your accountant or investment counselor) or even a bank, having more
experience in these matters.

c. As a general rule, the costs associated with administering an intestate estate are greater than if you die
with a will or trust

i. The administrator of an intestate estate is required by law to post a bond with corporate surety in an
amount equal to 1-1/2 times the value of your estate:
(a) The surety bond premium charged is generally 1 to 2 percent of the amount of the bond (i.e., for a
$500,000 estate, the required bond would be $750,000 (1-1/2 times), so the premium could be in excess of
$10,000 annually);

(b) With a will or trust on the other hand, surety on the bond can be waived, thus decreasing the cost.

ii. Where a large number of statutory "heirs" are involved, the general administration of the estate and the
time expended by the estate's attorney tend to be greater, thus increasing cost.

d. Without a will or trust, there is absolutely no opportunity for planning for the minimization of Federal and
state estate tax (discussed below).

e. Moreover, in an intestate situation, there is no opportunity for planning for special circumstances, such as
a minor or disabled child, or a "spendthrift" child who cannot properly manage funds.

i. With a will or trust, you can provide that a beneficiary's share is to be held in trust, with a trustee making
decisions as to the beneficiary's need, and/or you can provide for the beneficiary's inheritance to be held in
trust until a more mature age;

ii. In an intestate estate, all property would simply be distributed outright to your heirs, except in the case of
a minor, in which case a guardianship estate might need to be opened for the minor, or the minor's share might
need to be held in a special bank account subject to further order of Court until the child reaches legal age.

f. Without a will, the Court will decide upon the appropriate guardian for any minor children.

1.65 ESTATE, GIFT AND GENERATION-SKIPPING TRANSFER TAX CHANGES

Phase-out and Repeal of Estate and Generation-Skipping Transfer Taxes; and Increase in Unified Credit
Effective Exemption
a. Beginning in 2002, the top marginal estate, gift and generation-skipping tax rate is reduced from 55% to
50%. In addition, as of 2002, the unified credit effective exemption amount (for both estate and gift tax
purposes) is increased to $1,000,000. The "unified credit effective exemption amount" is the amount which
an individual may shelter from estate tax at his or her death (or from gift tax on lifetime gifts in excess of such
individual's annual $10,000 gift tax exclusions). Presently, this exemption amount is $675,000. Beginning in
2002, the 5% surtax (which phases out the benefit of both the graduated rates and the unified credit for
estates in excess of $10,000,000) is repealed.

1. In 2003, the estate and gift tax marginal rates in excess of 49% are repealed. In 2004, the estate and gift
tax rates in excess of 48% are repealed, and the unified credit effective exemption amount for estate tax and
generation-skipping tax purposes increases to $1,500,000. The unified credit effective exemption amount for
gift tax purposes remains at $1,000,000, as increased in 2002. In addition, in 2004 the family-owned business
deduction under Section 2057 of the Code is repealed.

2. In 2005, the estate and gift tax marginal rates in excess of 47% are repealed. In 2006, the estate and gift
tax marginal rates in excess of 46% are repealed, and the unified credit effective exemption amount for both
estate tax and generation-skipping tax purposes is increased to $2,000,000.
3. In 2007, the estate and gift tax rates in excess of 45% are repealed. In 2009, the unified credit effective
exemption amount for estate and generation-skipping tax purposes is increased to $3,500,000. In 2010, the
estate and generation-skipping transfer taxes are repealed in their entirety.

4. It should be noted, however, that under the "sunset" provisions of the Act, unless further action is taken to
extend the tax relief provided prior to 2011, the provisions of the Act will become ineffective as of December
31, 2010, reverting to a $1,000,000 exemption and a 55% top marginal estate tax rate for 2011.

b. Thus, from 2002 through 2010, the estate GST and gift tax rates and unified credit effective exemption
amount for estate tax and generation-skipping tax purposes are as shown below:

Calendar Estate and GST Highest estate, GST and


Year transfer exemption gift tax rates

2002 $1 million 50%


2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 N/A (taxes repealed) top individual rate
applies for gift tax only

c. Beginning in 2010, the top gift tax rate will be the top individual income tax rate, and, except as provided
in Regulations, a transfer to a trust will be treated as a taxable gift, unless the trust is treated as wholly owned
by the donor or the donor's spouse under the grantor trust income tax rules. The gift tax exemption remains at
$1,000,000, subject to adjustments for inflation.

d. Under the Act, from 2002 through 2004, the State death tax credit allowable under present law against the
Federal estate tax is reduced as follows: in 2002, the State death tax credit is reduced by 25% (from present
law amounts); in 2003, the State death tax credit is reduced by 50% (from present law amounts); and in 2004,
the State death tax credit is reduced by 75% (from present law amounts). In 2005, the State death tax credit is
repealed, after which there will be a deduction in arriving at the Federal taxable estate for death taxes (e.g.,
any estate, inheritance, legacy or succession taxes) actually paid to any State or the District of Columbia, in
respect of property included in the gross estate of the decedent.

Basis of Property Acquired from a Decedent

e. After repeal of the estate and generation-skipping transfer taxes, the present-law rules providing for a fair
market value (i.e., stepped-up) basis for property acquired from a decedent are repealed. After 2009, a
modified carryover basis regime generally takes effect, which provides that recipients of property transferred
at a decedent's death will receive a basis equal to the lesser of the decedent's adjusted basis or the fair market
value of the property on the date of the decedent's death.

f. Several exceptions apply to the new carryover basis rules. First, a surviving spouse will be allowed a
stepped-up basis in up to $3,000,000 in assets received by the spouse. An additional $1,300,000 of
stepped-up basis will be allowed to other heirs (whether or not a surviving spouse) on assets passing to those
individuals. The basis of an asset cannot be adjusted above its fair market value. However, not all property
will be eligible for an increase in basis. Property acquired by a decedent by gift from a non-spouse within
three years of his or her death will be excluded (in order to prevent "gifts" of low basis assets in anticipation
of stepped-up bequests). Property which constitutes "income in respect of a decedent" is excluded, as is stock
in foreign investment companies and personal holding companies. Similarly, property subject to a power of
appointment is excluded.
1. Surviving spouses and other heirs receiving stepped-up basis assets will be required to comply with fairly
complex identification and reporting procedures to keep track of the stepped-up assets. Substantial penalties
will be imposed for noncompliance.

2. The Act also extends the income tax exclusion for $250,000 of gain on the sale of a principal residence to a
decedent's estate, revocable trust and heirs. If the decedent's estate, revocable trust or an heir sells the
decedent's principal residence, $250,000 of capital gain can be excluded on the sale of the residence;
provided the decedent used the property as a principal residence for two or more years during the five-year
period prior to sale. In addition, if an heir occupies the property as a principal residence, the decedent's period
of ownership and occupancy of the property as a principal residence can be added to the heir's subsequent
ownership and occupancy in determining whether the property was owned and occupied for two years as a
principal residence.

Modified Generation-Skipping Transfer Tax Rules

g. The Act increases the generation-skipping tax ("GST") exemption to parallel the estate tax exemption
increases, and ultimately repeals the GST beginning in 2010. In addition to these changes, the Act makes the
following modifications to the GST provisions:

(1) Provides for a deemed allocation of the GST exemption to lifetime transfers to certain "generation-
skipping transfer trusts" that are not direct skips;

(2) Allows for retroactive allocation of the GST exemption when there is an unnatural order of deaths;

(3) Authorizes a "qualified severance" at any time of trusts holding property having an inclusion ratio of
greater than zero. In order to be qualified, the severance must be on a fractional basis and the new trusts must
provide, in the aggregate, for the same succession of interests as are provided for in the original trust;

(4) Modifies certain valuation rules pertaining to timely and automatic allocations of GST exemption;

(5) Authorizes the Treasury to grant relief from certain late elections and allocations of GST exemption; and

(6) Allows for substantial compliance to satisfy GST allocation rules for any particular transfer.

The changes to the foregoing GST provisions (other than the phase out of the GST itself) are generally
effective this year.
1.70 "Living trust" vs. will -- Which is right for you?

a. What is a "living trust"?

i. You establish a trust agreement currently, naming yourself (usually) or a third party as trustee;

ii. After establishing the trust, title to your various assets is re-registered in the name of the trustee (this is
known as the process of trust "funding");

iii. During your lifetime and so long as you are competent, you retain full control over all trust assets, and
retain the right to amend or revoke the trust at any time;

iv. If you should become incompetent during your lifetime, the trustee (or the successor trustee designated
in the trust if you were acting as your own trustee) would manage the assets and make distributions for your
benefit;

v. Upon your death, the trustee or successor trustee, as the case may be, pays all debts, taxes, and expenses,
and then administers and distributes all remaining property as provided in the trust -- thus, the trust in effect
substitutes for a traditional will.

Phase-out and Repeal of Estate and Generation-Skipping Transfer Taxes; and Increase in Unified Credit
Effective Exemption
1.80 Beginning in 2002, the top marginal estate, gift and generation-skipping tax rate is reduced from 55%
to 50%. In addition, as of 2002, the unified credit effective exemption amount (for both estate and gift tax
purposes) is increased to $1,000,000. The "unified credit effective exemption amount" is the amount which
an individual may shelter from estate tax at his or her death (or from gift tax on lifetime gifts in excess of such
individual's annual $11,000 gift tax exclusions).

1.90 In 2003, the estate and gift tax marginal rates in excess of 49% are repealed. In 2004, the estate and
gift tax rates in excess of 48% are repealed, and the unified credit effective exemption amount for estate tax
and generation-skipping tax purposes increases to $1,500,000. The unified credit effective exemption amount
for gift tax purposes remains at $1,000,000, as increased in 2002. In addition, in 2004 the family-owned
business deduction under Section 2057 of the Code is repealed.
1.100 In 2005, the estate and gift tax marginal rates in excess of 47% are repealed. In 2006, the estate and
gift tax marginal rates in excess of 46% are repealed, and the unified credit effective exemption amount for
both estate tax and generation-skipping tax purposes is increased to $2,000,000.
1.110 In 2007, the estate and gift tax rates in excess of 45% are repealed. In 2009, the unified credit
effective exemption amount for estate and generation-skipping tax purposes is increased to $3,500,000. In
2010, the estate and generation-skipping transfer taxes are repealed in their entirety.

1.120 It should be noted, however, that under the "sunset" provisions of the Act, unless further action is
taken to extend the tax relief provided prior to 2011, the provisions of the Act will become ineffective as of
December 31, 2010, reverting to a $1,000,000 exemption and a 55% top marginal estate tax rate for 2011.

1.130 Thus, from 2002 through 2010, the estate GST and gift tax rates and unified credit effective
exemption amount for estate tax and generation-skipping tax purposes are as shown below:

Calendar Estate and GST Highest estate, GST and


Year transfer exemption gift tax rates

2002 $1 million 50%


2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 N/A (taxes repealed) top individual rate
applies for gift tax only

1.140 Beginning in 2010, the top gift tax rate will be the top individual income tax rate, and, except as
provided in Regulations, a transfer to a trust will be treated as a taxable gift, unless the trust is treated as
wholly owned by the donor or the donor's spouse under the grantor trust income tax rules. The gift tax
exemption remains at $1,000,000, subject to adjustments for inflation.

1.150 Under the Act, from 2002 through 2004, the State death tax credit allowable under present law
against the Federal estate tax is reduced as follows: in 2002, the State death tax credit is reduced by 25%
(from present law amounts); in 2003, the State death tax credit is reduced by 50% (from present law
amounts); and in 2004, the State death tax credit is reduced by 75% (from present law amounts). In 2005, the
State death tax credit is repealed, after which there will be a deduction in arriving at the Federal taxable
estate for death taxes (e.g., any estate, inheritance, legacy or succession taxes) actually paid to any State or
the District of Columbia, in respect of property included in the gross estate of the decedent.

Basis of Property Acquired from a Decedent


1.160 After repeal of the estate and generation-skipping transfer taxes, the present-law rules providing for a
fair market value (i.e., stepped-up) basis for property acquired from a decedent are repealed. After 2009, a
modified carryover basis regime generally takes effect, which provides that recipients of property transferred
at a decedent's death will receive a basis equal to the lesser of the decedent's adjusted basis or the fair market
value of the property on the date of the decedent's death.

1.170 Several exceptions apply to the new carryover basis rules. First, a surviving spouse will be allowed a
stepped-up basis in up to $3,000,000 in assets received by the spouse. An additional $1,300,000 of
stepped-up basis will be allowed to other heirs (whether or not a surviving spouse) on assets passing to those
individuals. The basis of an asset cannot be adjusted above its fair market value. However, not all property
will be eligible for an increase in basis. Property acquired by a decedent by gift from a non-spouse within
three years of his or her death will be excluded (in order to prevent "gifts" of low basis assets in anticipation
of stepped-up bequests). Property which constitutes "income in respect of a decedent" is excluded, as is stock
in foreign investment companies and personal holding companies. Similarly, property subject to a power of
appointment is excluded.

1.180 Surviving spouses and other heirs receiving stepped-up basis assets will be required to comply with
fairly complex identification and reporting procedures to keep track of the stepped-up assets. Substantial
penalties will be imposed for noncompliance.
1.190 The Act also extends the income tax exclusion for $250,000 of gain on the sale of a principal
residence to a decedent's estate, revocable trust and heirs. If the decedent's estate, revocable trust or an heir
sells the decedent's principal residence, $250,000 of capital gain can be excluded on the sale of the residence;
provided the decedent used the property as a principal residence for two or more years during the five-year
period prior to sale. In addition, if an heir occupies the property as a principal residence, the decedent's period
of ownership and occupancy of the property as a principal residence can be added to the heir's subsequent
ownership and occupancy in determining whether the property was owned and occupied for two years as a
principal residence.

Modified Generation-Skipping Transfer Tax Rules


1.200 The Act increases the generation-skipping tax ("GST") exemption to parallel the estate tax exemption
increases, and ultimately repeals the GST beginning in 2010. In addition to these changes, the Act makes the
following modifications to the GST provisions:

(1) Provides for a deemed allocation of the GST exemption to lifetime transfers to certain "generation-
skipping transfer trusts" that are not direct skips;

(2) Allows for retroactive allocation of the GST exemption when there is an unnatural order of deaths;

(3) Authorizes a "qualified severance" at any time of trusts holding property having an inclusion ratio of
greater than zero. In order to be qualified, the severance must be on a fractional basis and the new trusts must
provide, in the aggregate, for the same succession of interests as are provided for in the original trust;

(4) Modifies certain valuation rules pertaining to timely and automatic allocations of GST exemption;

(5) Authorizes the Treasury to grant relief from certain late elections and allocations of GST exemption; and

(6) Allows for substantial compliance to satisfy GST allocation rules for any particular transfer.

The changes to the foregoing GST provisions (other than the phase out of the GST itself) are generally
effective this year.
Federal Estate and Gift Tax - The Mechanics
1.210 Estate - The total property owned by an individual prior to the distribution of that property under the
terms of a will, trust or inheritance laws. An individual's estate includes all assets and liabilities.
1.220 Property - Property is described as either real or personal. Real property is real estate, and personal
property is everything else. Personal property includes physical assets such as automobiles, equipment,
household items, etc. Personal property also includes financial property, such as securities, notes or loans
receivable, bank accounts, cash and insurance policies.

BASIC ESTATE TAX PLANNING

1.230 For those individuals who expect to have assets at death valued at $1,000,000 or more (or who are
anywhere close to the $1,000,000 threshold amount), planning steps should be taken to avoid or minimize the
Federal and State estate tax

a. In this regard, the proceeds of any life insurance policies and employee benefits should be considered, as
well as the value of any real estate, stocks, bonds, bank accounts or other assets;

b. Without proper planning, estate tax may unnecessarily be paid, thus reducing the amount passing to your
heirs;

c. The current estate tax brackets effectively start at 37 percent and may be as high as 50 percent for estates
over $3,000,000 -- consequently, the tax exposure may be substantial.

1.240 In planning for estate tax minimization, two concepts are key -- the $1,000,000 exemption and the
unlimited marital deduction

a. Under current law, each individual may have up to $1,000,000 at his or her death without paying any
estate tax. This exemption will increase in stages through the year 2010, at which time the estate tax will be
eliminated for one year;

b. In addition, for married individuals, an unlimited marital deduction is allowed at the first death for any
property which passes to the survivor, regardless of amount;
i. Example: Husband owns $1,000,000 worth of assets, all held in joint tenancy with Wife. Upon Husband's
death, all property passes to Wife. No tax is payable as a result of Husband's death due to the unlimited
marital deduction (BUT WHAT HAPPENS ON WIFE'S DEATH?. . . SEE BELOW);

ii. The unlimited marital deduction is not available, however, if the surviving spouse is not a United States
citizen (even though a resident alien), unless a special type of trust, known as a QDOT, is established;

iii. Any existing wills or trusts executed before 1982 should be reviewed, as substantial changes in the estate
tax law have occurred, and the unlimited marital deduction may not be available for those documents, unless
revised.

1.250 Combining the $1,000,000 exemption and the unlimited marital deduction to minimize estate tax for
married couples

a. In most marital situations, there is a tendency to leave all property outright to the surviving spouse, or to
hold title to all assets jointly;

i. From a tax planning standpoint, this is not recommended, as it generally will not result in estate tax
minimization (assuming combined assets of over $1,000,000);

(a) Although there will be no tax at the first death due to the unlimited marital deduction, the $1,000,000
exemption of the first spouse will be wasted -- thus, at the second death, only $1,000,000 will be sheltered
from tax (assuming the 2001 exemption level);

(b) In the above Example, although no tax is payable upon Husband's death, at Wife's death she will have a
taxable estate of $1,000,000, and will only have $1,000,000 of exemption available to shelter her estate from
tax.
b. The tax preferred approach would be the use of a Marital Trust/Family Trust arrangement -- Here's how
it works:

i. The estate plan of each spouse provides that upon the first spouse's death, the first $1,000,000 of assets of
the deceased spouse are to be allocated to a separate trust known as the "Family Trust" -- This trust is
designed to use the deceased spouse's $1,000,000 exemption
(a) The surviving spouse may receive benefits from this trust including any one or more of the following:

(1) The right to receive all income;

(2) The right to receive principal from the trust for the survivor's health, support and maintenance;

(3) A "power of appointment," allowing the survivor to rearrange the ultimate distribution of the trust in
favor of anyone other than the spouse, the spouse's estate, the spouse's creditors, or the creditors of the
spouse's estate; and

(4) The unlimited right to withdraw the larger of $5,000 or 5 percent of the value of the trust each year, for
any reason.

(b) The survivor may also act as his or her own trustee, and consequently could make decisions on his or
her own behalf;

(c) The tax advantage of this arrangement is that upon the survivor's death, no portion of the Family Trust
will be included in his or her tax base, and consequently the property of this trust will pass tax-free to the
children or other beneficiaries.

ii. To the extent that the assets of the deceased spouse exceed $1,000,000, any excess assets would be
allocated to the Marital Trust

(a) The trust is designed to qualify for the unlimited marital deduction, to ensure that no tax will be payable
at the first spouse's death;

(b) This trust will be taxable in the survivor's estate at his or her death, but he or she may apply his or her
own $1,000,000 exemption against this trust, as well as the survivor's own assets;

(c) Since the Marital Trust will be taxable in the survivor's estate, the survivor can be given an unlimited
right of withdrawal or general power of appointment over this trust, or this portion can be distributed outright
to the survivor.

iii. The net result of the Marital Trust/Family Trust arrangement is that a total of $2,000,000 can effectively
be sheltered from estate tax after both spouses' deaths, with minimal restrictions having been placed on the
survivor's access to funds during his or her lifetime.

iv. Example: In the previous Example, if Husband had a $1,325,000 estate and had a will or trust which
provided for the foregoing arrangement, the result would be as follows: Upon Husband's death, the first
$1,000,000 is allocated to the Family Trust, and is sheltered from tax by Husband's exemption. The remaining
$325,000 is allocated to the Marital Trust, and qualifies for the unlimited marital deduction. Thus, no tax is
payable at Husband's death. Wife receives benefits from both the Marital Trust and the Family Trust during
her lifetime, but upon her death only the Marital Trust is taxable in her estate. Assuming no other assets,
Wife's taxable estate is $325,000, but she applies her own $1,000,000 exemption against this amount,
resulting in no tax being payable at her death. Thus, the entire $1,000,000 passes to the children tax-free,
saving taxes which would have been payable if all property had been owned jointly or had passed directly to
Wife at Husband's death.

v. Note: The Marital Trust is also sometimes referred to in literature as "Trust A" or the "Spouse's Trust",
and the Family Trust is sometimes known as "Trust B" or the "Exemption Trust" or the "Shelter Trust" --
whatever the terminology used, the net result is the same.

Planned Giving
1.255 A person may make gifts of up to $11,000 per year to an individual without incurring
a gift tax. Therefore a husband and wife with three children could each make gifts to their children each of
their children for a total of $66,000 without incurring a gift tax. The gifts may made to an individual or a trust
for her benefit. For clients of advanced age planned gifting can be used to substantially diminish the taxable
estate. The gifting provisions can be combined with advanced trust family limited partnership concepts to
leverage the $11,000 gifts to the maximum.

1.260 ADVANCED ESTATE PLANNING TECHNIQUES

1. Irrevocable Life Insurance Trusts

a. For individuals having substantial amounts of life insurance, this device may effectively remove the
proceeds of life insurance from the estate tax base altogether;
b. Irrevocable nature of the document requires careful thought as to provisions contained therein;

c. For existing insurance policies, effectiveness of tax avoidance depends upon whether owner of policies
survives for three years after policies are transferred to the trust.

2. Generation-Skipping Transfer Tax Planning

a. For individuals having estates valued at more than $1,000,000, a generation-skipping trust can effectively
reduce estate tax at the level of the next generation (i.e., at your child's death);

b. Basically, trust is designed to continue through life of first generation (i.e., child), with benefits being
available to that beneficiary, if needed, but not vesting in the beneficiary and upon the beneficiary's death
distributing to the next generation (i.e., grandchildren);

c. Since trust never vests in first generation, the trust is not includable in the estate of the first generation
beneficiary at death, but instead passes tax-free to the next generation;

d. Usefulness of this device depends upon size of your estate and likelihood that your children or other first
generation beneficiaries will have their own estate tax exposure (i.e., that their estates at their deaths will be
larger than $1,000,000).

3. Family Limited Partnerships

a. A limited partnership organized pursuant to a written agreement following state law, with the partners
consisting of members of the family or perhaps corporations or trusts controlled by family members;

b. Vehicle to make gifts to younger family members, particularly of business and real estate interests, that
are neither convenient assets to value nor divide for gift or estate tax purposes, while retaining control over
the management of partnership assets;
c. The primary advantage of the partnership arrangement from an estate tax point of view is that when the
grantor passes away, interests in the partnership could give rise to valuation discounts from the underlying net
asset values of the partnership itself;

d. Family limited partnerships offer certain non-tax advantages in the nature of creditor protection and
protection from spousal claims in a divorce proceeding;

e. Unlike irrevocable trusts which cannot be amended or revoked, family limited partnership agreements
offer more flexability.

4. Qualified Personal Residence Trusts

a. Creation of a Qualified Personal Residence Trust may result in the realization of substantial transfer tax
savings;

b. Transfer title to personal residence to an irrevocable trust. The trust would last for a term of years,with
the grantor retaining the right to use and occupy the personal residence through the term of the trust. Upon
termination of the trust, the residence could pass on to a continuing trust for the benefit of children;

c. The benefit to of establishing a qualified personal residence trust is that a completed gift of the residence
to the trust would be made, but at a substantially reduced gift tax value.

1.270 PROPERTY POWERS OF ATTORNEY

1. A property power of attorney allows you to appoint an agent for purposes of managing any property
which may be outside of your trust if you should become disabled.

a. The trust itself would govern as to any property titled in the name of the trust, but the property power of
attorney offers further protection if for some reason you should become disabled and some assets remain
outside of the trust.
1.280 LIVING WILLS AND HEALTH CARE POWERS OF ATTORNEY

1. A "living will" or declaration is a document whereby you indicate your desire not to be maintained on life
support procedures if you are suffering from an incurable and terminal condition, and would not be able to
survive but for such procedures

a. The decision to "pull the plug" is ultimately left to the physician;

b. The statute does not require any doctor or hospital to withhold or withdraw such procedures, but if he or
she refuses to do so, the statute requires that the patient be transferred to another physician who will honor
the directive.

2. A health care power of attorney is a relatively new device in States and allows you to appoint an agent to
make medical and health care decisions if you are otherwise unable to do so

a. The statutory form also covers the life support situation, and authorizes the agent to decide whether to
withhold or withdraw such procedures in accordance with your wishes as expressed in the health care power
of attorney;

b. On the one hand, the health care power of attorney is more "personal" than the living will, since the
designated agent, rather than the doctor, ultimately makes the decision -- On the other hand, the health care
power of attorney forces your agent to make a very difficult and emotional decision;

c. The health care power is broader than the living will, since it authorizes all types of medical decisions to
be made by the agent if you are unable to do so (for example, if you are unconscious, but not otherwise
terminal, your agent could consent to recommended surgery).

d. The health care power and living will are not mutually exclusive (you can have both at the same time).
However, if a conflict arises between the two documents, the health care power of attorney will be
controlling.
3. The "food and water" issue -- The Nancy Cruzan Case

a. As a result of a series of Supreme Court decisions, nutrition and hydration (food and water) may now be
withheld or withdrawn as "life support procedures" if there is evidence that you would have desired such;

b. In view of the cases, it is best if you specifically indicate in your living will or health care power of
attorney whether or not you intend for food and water to be considered to be "life support" procedures which
may be withheld or withdrawn under appropriate circumstances.

1.290 STEPS AND TIMETABLE FOR ESTATE AND


TRUST ADMINISTRATION

1. Initial Steps

Obtain certified copies of death certificate from local city authority.

Take possession of real and personal property. Move promptly to safeguard assets which may require
protection from theft (e.g. cash and jewelry), immediate collection, management (e.g. margin brokerage
accounts), or immediate effects to sell (e.g. sole proprietorship or professional practice). Inspect real estate
and examine insurance coverage. Protect representative by adequate liability and casualty insurance.
Make sure surviving spouse or other dependent has adequate cash to meet immediate needs. Quick sources
include joint bank accounts, life insurance proceeds, and short term bank loans.

If estate is to be opened, apply for Employer Identification Number by calling the Internal Revenue Service at
1-816-926-5999, and then either fax or mail IRS Form SS-4 to the Internal Revenue Service Center, Kansas
City, Missouri. Fax number is 1-816-926-7988. In other areas use appropriate #. File notice of fiduciary
relationship (IRS Form 56) with Internal Revenue Service.

Determine whether ancillary(another state) administration is necessary.

2. Testate Estate
Petition for probate of will and for letters testamentary or for letters of administration with will annexed.
Indicate names and addresses of all heirs and legatees. If administration with will annexed is requested,
indicate names and addresses of all persons having an equal or prior right to that of petitioner, to administer or
to nominate an administrator. Independent administration will be granted unless supervised administration is
requested.

Affidavit of Heirship, if this method of proof is to be used.

Order declaring heirship.

Affidavit as to copy of will with a facsimile which accurately and permanently reproduces the will attached.

Oath and bond of individual executor.

Order admitting will to probate and appointing independent representative.

Notices to heirs and legatees.

Designation of newspaper for publication of claims and for notice of proof of will, where required, and
independent administration, where applicable.

3. Control and Management of Assets

Discover, collect and obtain information relative to all assets of decedent. Consider whether jointly held
assets belong to survivor or estate and if to estate, file appropriate citation proceedings.

Arrange to have proper books of account maintained by the representative with income and principal
identified. Expenditures should be evidenced by receipts or canceled checks.
Notify transfer agents of all securities held in name of decedent or jointly with another, supply them with
certified copies of letters, death certificates, affidavits of domicile, IRS Form W-9 and advise where dividends
and correspondence should be sent. Consider transfer of registered securities into name of representative or
into the name of a nominee.

Open bank account for representative and transfer bank accounts of decedent to the new account.

Collect title papers pertaining to decedent's real estate and ascertain status of title.

Prepare claims for life insurance and obtain Treasury Department Form 712 for each policy. Consider making
copies of policies for estate tax examination, especially if decedent was not the owner of the policies.

Ascertain status as a participant or beneficiary under IRA, Keogh or other employee benefit and welfare
plans and prepare claims, if applicable. Consider income and estate tax impact.

Obtain appraisals of real estate, business interests and tangible personal property.

Obtain date of death value for securities and other assets.

Determine cash requirements of estate and necessity of sale of estate assets.

4. Inventory and Appraisal

Independent administration: Copy of inventory must be mailed or delivered to each interested person but
need not be filed with clerk of court.

5. Sales of Personal Property


Securities: Consider transferring securities into name of representative or into "street name" before ordering
broker to sell. Delivery of securities with legal documents does not comply with clearing house settlement
rules, so as to permit immediate sale or transfer. Submit to transfer agent certificate or bond, assignment by
representative, with signature guaranteed by a bank or stockbroker, certified copies of letters issued within 60
days of sale, IRS Form W-9, death certificate and affidavit of domicile.

Goods and Chattels: Motor vehicle - submit to Secretary of State certificate of title assigned by
representative, certified copy of letters issued within 60 days of sale, and application for new certificate of
title. Transfer may be expedited if application processed through a currency exchange.

6. Claims Against Estate

Claim may be filed with representative or the court or both. When filed with representative, representative
may, but is not required to, file with the court.

Duty of representative to publish notice once each week for 3 successive weeks and to mail or deliver to each
creditor of decedent, whose claim has not been allowed or disallowed, a notice stating the death of the
decedent; the name and address of the representative and his attorney of record; that claims may be filed on
or before the date stated in the notice, which date shall be not less than 6 months from the date of the first
publication or 3 months from the date of mailing or delivery, whichever is later; and that any claim not filed
on or before that date is barred. The published notice must be published in a newspaper in the county where
the estate is being administered. Representative must file proof of publication with the clerk of the court. For
known creditors, actual notice must be given.

Except with respect to a claimant whose claim is known to the representative and is not paid or otherwise
barred, a representative who acts in good faith to determine and give notice to creditors is not personally
liable to a creditor of a decedent, but any claim barred may be asserted against (1) the estate, to the extent
that assets have not been distributed and (2) a distributee of the estate, other than a creditor, but only to the
extent that the distributee's share of the estate will not be diminished below what distributee would have
received had the claim been paid by the representative.

Check monthly claim docket (for Cook County probates) on 4th Monday of each month.

7. Disclaimer
Advise heirs, legatees, persons succeeding to a disclaimed interest and persons taking pursuant to a power of
appointment exercised under will, of their right to disclaim within 9 months after death of decedent or of
donee of the power, or if a future interest, 9 months after the event as a result of which the taker has become
finally ascertained and his interest has become indefeasibly fixed, both in quality and quantity. A disclaimer
must be made no later than 9 months after the later of the day on which the transfer creating the interest in
such person is made or the day on which such person attains age 21. Disclaimer will be barred if the
disclaimant accepts any benefits from the property to be disclaimed prior to the disclaimer.

8. Federal Estate Tax and Generation Skipping Transfer Tax

Secure information and documentation on (1) inter vivos trust agreements executed by decedent; (2) pension,
profit-sharing, IRA and Keogh plans; (3) gifts and transfers made by decedent; and (4) contributions to
acquisition of property jointly held with persons other than spouses. In determining federal estate tax credits
(property previously taxed and gift tax credit), secure information on all assets inherited by decedent during
the 10 years prior to his death and on all gifts made by decedent and his spouse during his lifetime, together
with copies of pertinent federal estate and gift tax returns.

Prepare and file federal estate tax return (Form 706) if gross estate exceeds $1,000,000. The tax return is filed
and tax must be paid within 9 months after death, unless an extension is obtained under the Internal Revenue
Code provisions.

Consider whether to take expenses of administration as a deduction on the federal estate tax return or on the
federal estate income tax return or partially on each.

Consider whether to elect to have any part or all of a trust for the surviving spouse treated as qualified
terminable interest property (QTIP) to obtain marital deduction for federal estate tax purposes.

Consider making a request to the Area Director for a prompt examination and audit of the return and
discharge of the representative from personal liability.

9. State Estate Tax

If a federal estate tax is due, prepare and file in duplicate an State estate tax return with the State proper
office and deposit any tax due. The return and tax deposit are due within 9 months after death.
Obtain Certificate of Discharge and Determination of Tax proper state office.

Determine if any inheritance tax is due or if return must be filed in any other jurisdiction.

10. Federal and State Income Tax

File notice of fiduciary relationship with IRS.

Obtain copies of decedent's income tax returns for past five years.

File tax returns for decedent for taxable year in which death occurred (IRS Form 1040, Form IL-1040).
Consider joint returns with surviving spouse. Surviving spouse who qualifies as a "head of household", may
file return on joint basis for 2 additional years.

Consider filing request for prompt audit and assessment of all open years of decedent's federal income tax
return.

Consider electing to report accrued interest on U.S. Series E or EE bonds on final return of decedent or return
of the estate.

Unpaid medical expenses of decedent may be deducted on decedent's final income tax return or on estate tax
return, but not on both.

File annual tax returns for estate during period of administration.

If necessary, file state income tax returns for income derived from property located out of state.
Advise beneficiaries of items to be reflected in their individual tax returns with respect to distributions from
the estate.

File final federal and State fiduciary income tax returns for estate. Send copies to distributees.

11. Current Accounts and Distributions

All estates: Consider desirability of partial distribution. Court order may be required in supervised
administration. If distribution is made within 6 months after issuance of letters, refunding bond is required in
supervised or independent administration.

12. Closing Estate

Representative must account to all interested persons for administration and distribution of estate and file a
receipt and approval of the residuary legatees but need not present an accounting to the court unless an
interested person requests it. Representative must file report with court, have estate closed and representative
discharged.

13. Trusts

Apply for trust tax identification number by calling the Internal Revenue Service at 1-816-926-5999 or
appropriate # for your area.

Prepare Acceptance of Successor Trusteeship document.

Re-register any trust assets in the name of the successor trustee(s) using new tax identification number.

Allocate and distribute assets to respective trusts. If an estate tax filing is required, final allocation should not
be made until estate tax return has been filed, and preferably after receipt of estate tax closing letter. Interim
partial funding or distribution may be made prior to receipt of estate tax closing letters, provided that an
adequate audit reserve is maintained.

Review S Corporation status of stocks in trust. Determine whether trust qualifies as QSST or electing small
business trust. Make appropriate S Corporation elections to maintain S Corporation status.

14. Partnerships

Review all partnership agreements relating to partnerships in which the decedent was either a general or
limited partner, and specifically review buy-sell provisions which became applicable upon the decedent's
death.

Arrange for the preparation of partnership income tax returns in any partnership where the decedent had an
obligtion to prepare such returns in his role as general partner, tax partner, or otherwise.

If any partnership in which the decedent was a partner is currently undergoing an IRS audit, the
representative should provide needed information and take whatever other steps are necessary in order to
bring the audit to a successful conclusion.
The partnership should consider the practicality of making an election under Section 754 of the Internal
Revenue Code in order to obtain a stepped-up basis in a share of the partnership assets equal to the
decedent's ownership share in the partnership, to the value of those assets as of the decedent's date of death.
The election must be made in writing and must be submitted with the partnership's income tax return for the
year in which the decedent died.

Consideration should be given to the transfer of partnership interests into the name of the representative.

A VOCABULARY OF ESTATE PLANNING

BASIS OF PROPERTY - The value used to determine gain or loss for income tax purposes. The basis may be
original cost or some different amount, depending on the law affecting the transaction.
BENEFICIARY - The person (individual or corporation) receiving the benefit of a transaction. (E.g.,
beneficiary of a life insurance policy, beneficiary of a trust, beneficiary under a will).
CODICIL - An addition to a will. A codicil may modify, add to, subtract from, qualify, alter, or revoke
provisions in the will instrument. A codicil is a separate document. It must be signed with the same formalities
as the will. A testator can change, revoke, cancel or destroy a codicil at any time.

COMMUNITY PROPERTY - Property, whether real property or personal property, owned in common by
husband and wife as a kind of marital partnership. Husband and wife have management and control, but
neither can dispose of ownership without the other's consent. Community property includes all property
acquired during the marriage from earnings; earnings are also community property. (This is an
oversimplification of the law.)

ERTA - ECONOMIC RECOVERY TAX ACT OF 1981 - A comprehensive revision of the estate, gift and
other tax laws which made broad sweeping changes, including the "Unlimited Marital Deduction" and
increased "Unified Tax Credits."
ESTATE - The total property owned by an individual prior to the distribution of that property under the terms
of a will, trust or inheritance laws. An individual's estate includes all assets and liabilities.
ESTATE TAXES-FEDERAL - The taxes imposed by the U.S. Government on the transfer of assets upon
death.

EXECUTOR - The person (an individual or a corporation) nominated in a Will by the Testator to take care,
during probate, of the Testator's property. Also called "personal representative," the Executor is appointed by
the Probate Court, has legal and business responsibilities, and functions under the jurisdiction of the Probate
Court. The executor selects the attorney who performs the legal work for the estate.

EXEMPTION EQUIVALENT - The dollar amount of a decedent's estate that can be left by will or operation
of law to anyone, free of Federal estate taxes. The current exemption equivalent equals $1,000,000, which
corresponds to a "Unified Tax Credit" of $345,800
(See Unified Tax Credit). The exemption equivalent amount is scheduled to be increased as follows:

FIDUCIARY - A person charged with a duty of trust on behalf of a beneficiary. Executors and Trustees are
fiduciaries.

GIFT TAX ANNUAL EXCLUSION - The Federal government allows a donor to exclude up to 11,000 per
year of gifts that create a present interest gift in a specific individual donee. A present interest gift is one in
which the donee has an immediate unrestricted right of use, benefit and enjoyment. For example, if father
gives son $5.00 and son can use it now, then father has made a present interest gift. The State of California
has a similar rule. The Taxpayers Relief Act of 1997 indexes this for inflation but rounds to the nearest
$1,000.00.

GRANTOR - The person (individual or corporation) who makes a grant of property to another person (e.g.,
grantor of a trust; grantor of a deed of property).

GUARDIAN - The entity (individual or corporation) legally charged with responsibility for the care and
management of the person and/or property of (1) a child during minority, which ends at age 18 in California;
or (2) an incompetent individual.

HEIR - A person who inherits property.

INHERITANCE TAXES - The taxes imposed by the State of California according to the relationship of the
person who receives property upon the death of a person. These taxes have been repealed by referendum.
Many states still have such taxes on individuals or property subject to their jurisdiction.

INTER-VIVOS TRUST - A trust created "between the living," also known as a "living trust." The grantor
(settlor, trustor) is a living person. Compare this to a testamentary trust. It can be either revocable or
irrevocable.

IRREVOCABLE TRUST - A trust whose terms and provisions cannot be changed, modified, altered,
amended, or revoked. Under certain limited circumstances, a court may make limited changes.

JOINT TENANCY - A form of ownership of property by two or more persons, expressed as "joint tenants
with right of survivorship." When a joint tenant dies, his or her interest in the property automatically passes to
the surviving joint tenant outside of and beyond the power of the will of the deceased joint tenant; the
property passes outside probate. However, joint tenancy has dangers. Consult your attorney before taking title
to property in joint tenancy.

MINOR - A person who is under the age of legal competence. In California that age is 18.

POUR-OVER WILL - A will that provides for transfer, during or at the conclusion of probate court
proceedings, of the net assets of the deceased person from the control of the executor to a trust that was in
existence immediately before the testator's death. The executor "pours over" the assets into the open vessel of
the existing trust.

PROBATE - Court proceedings in which the probate court has jurisdiction over (a) the executor, and (b) the
assets of the deceased person. The purposes of probate are:
(1) to protect the heirs from fraud and embezzlement
(2) to protect the federal, state, and local government interests in taxes that are to be paid by the estate; and
(3) to protect the creditors of the deceased person.

Probate begins with (a) the will being admitted to probate and (b) the executor being granted "letters
testamentary." Probate concludes when all assets have been accounted for, taxes and creditors paid and any
residue distributed as provided in the will.
PROPERTY - Property is described as either real or personal. Real property is real estate, and personal
property is everything else. Personal property includes physical assets such as automobiles, equipment,
household items, etc. Personal property also includes financial property, such as securities, notes or loans
receivable, bank accounts, cash and insurance policies.

Q-TIP TRUST - (Qualified Terminable Interest Property Trust) A special type of living trust that permits use
of the "unlimited marital deduction." The beneficiary spouse is entitled to all of the income from the trust
property for life, but no person has the power to appoint any part of the property to any person other than the
surviving beneficiary spouse during that spouse's lifetime. This has the effect of protecting the ultimate
beneficiaries of the trust from having the trust property given away to or taken by another person.

The most widely used exception to the terminable interest rule is the IRC 2056(b)(7) exception for "qualified
terminable interest property." Qualified terminable interest property ("QTIP") is property which passes from
the decedent, in which the surviving spouse has a "qualifying income interest" for life and to which an
election under IRC 2056(b)(7) applies.

The surviving spouse has a "qualifying income interest" for life if the surviving spouse is entitled to all of the
income from the property, payable annually or at more frequent intervals, and no person has a power to
appoint any part of the property to any person other than the surviving spouse (except for a power
exercisable only at or after the death of the surviving spouse).

Until recently, the executor of the decedent's estate had to make an affirmative election on the Federal Estate
Tax Return (Form 706) in order to obtain an estate tax deduction for

QTIP-ed property. Unintended omissions by executors who neglected to make the election on the decedent's
estate tax return gave rise to countless private ruling requests. Finally, in 1996, the I.R.S. adopted the rule in
its revised Form 706 that the executor is presumed to have made the election unless he elects otherwise. An
election, once made, is irrevocable.

Property for which a QTIP election is made need not be in trust. A legal life estate in real or personal property
may be QTIP-ed so long as the relevant safeguards vis a vis income are present. In addition, the surviving
spouse must have a power to sell the residence. Reg. 20.2056(b)(7)(h), Example 1.

The appeal of the QTIP trust over the old-style power of appointment trust sanctioned by IRC 2056(b)(5) is
illustrated by the following example. Suppose a re-married decedent with children from a prior marriage
wants to provide for his surviving spouse with a life estate, but wants to ensure his children get a remainder
interest. Suppose further that the children and the second wife are not on the best of terms. Prior to the
introduction of QTIP property, the decedent's choices were limited. He could provide an old-style IRC
2056(b)(5) trust and risk that his spouse exercise the power of appointment in favor of someone other than his
children, or he could draft the trust he really wanted (which, prior to the QTIP rules, was a non-deductible
terminable interest) and pay estate tax. Under the QTIP rules, he can provide his surviving spouse with an
income interest for life with a limited invasionary provision for principal, and, at the spouse's death, the
remainder will pass to his then living children. If the QTIP election is made (or not unmade, as it were), a
marital deduction will be allowed.

QTIP trusts receive their anointing of the marital deduction because their purpose is only to defer estate tax.
IRC 2044 directs that upon the death of the surviving spouse, all previously QTIP-ed property must be
includible in her or his gross estate. This ensures that the property is taxed at least once at the generational
level of the decedent and his or her spouse.

Although beyond the scope of these materials, the eventual taxing of a QTIP trust in the survivor's estate
pursuant to IRC 2044 can have unintended consequences for those residual beneficiaries of the estate of the
surviving spouse. Care must be exercised to be sure that the estate tax is fairly apportioned, particularly if the
remaindermen of the QTIP trust and the residual beneficiaries of the survivor's estate are different.

REVOCABLE TRUST - A trust whose terms and provisions can be changed, modified, altered, amended, or
revoked. Such power is usually reserved by the person who created the trust (the "trustor"), but it can also be
assigned by the trustor to a second person. The revocable trust is a popular means of avoiding probate, but a
will should be used with it. The revocable trust can be used by aged people to protect themselves and their
assets from the expense and delay of conservatorship. Before using a revocable trust, a person should consult
an attorney who is experienced with revocable trusts.

SETTLOR - Another word for "grantor" or "trustor" of a trust. The person who "settles" the assets into the
trust.
SPENDTHRIFT TRUST - A trust that provides a fund for the maintenance of a beneficiary, while, by its
terms, insulating the beneficiary's interest from any improvidence or incapacity of the beneficiary, as well as
from claims of the beneficiary's creditors.
TENANCY IN COMMON - A form of title to real or personal property held by two or more persons. The
legal relationships and results are very different from those of joint tenancy. The best form of property title
should be decided only after consulting with an attorney because the effects on income tax, estate, tax, death
rights, etc. vary greatly.

TESTAMENTARY TRUST - A trust hat comes into being only as a result of the death of the person whose
will provides for its creation; hence, the term "testamentary."

TESTATOR - The person who signs a will, and in it, disposes of property.
TRUST - A legal entity established either (1) by a trust agreement signed by a living person (inter-vivos trust
or living trust) or (2) arising after death from a will (testamentary trust). The trust is governed by the terms in
the document. Trusts can last as long as 50 years or more. Thus, they must be written with great care.
TRUSTEE - A person (individual or corporation) who, in a given trust, has bare legal title to the assets and
has the power given in the trust to carry out the wishes of the trustor. The trustee has a fiduciary obligation to
the beneficiaries of the trust and is subject to strict legal regulation. Although the trustee has legal title for
convenience, the beneficiary owns the beneficial or equitable title.
TRUSTOR - A person who establishes a trust. There can be more than one trustor.
UNIFIED ESTATE AND GIFT TAX RATES - Effective January 1, 1977, the separate estate and gift tax
schedules were combined into a single new tax schedule. Now the cumulative value of taxable gifts made
during life is added to the value of the decedent's estate when determining the applicable estate tax rates. The
same tax rates apply to both lifetime gifts and to the estate left at death.
UNIFIED TAX CREDIT/APPLICABLE CREDIT AMOUNT/APPLICABLE EXCLUSION AMOUNT - A
specific dollar amount that can be deducted from the Federal estate taxes a decedent's estate would have to
pay in a given year, but for the existence of the credit. For 2002, the Unified Tax Credit is equal to the
amount of $345,800, which corresponds to an "Exemption Equivalent" of $1,000,000. IRC § 2001 & 2010.
UNLIMITED MARITAL DEDUCTION - A special provision of the estate tax laws that permits a surviving
spouse to receive all or any portion of the property of a deceased spouse's estate without any Federal estate
tax liability.
WILL - A signed document that provides for the orderly disposition of assets after death in accord with the
person's wishes. Wills are important tools to provide for family security and protection and to minimize death
taxes.

PLANNING FOR THE FUTURE - ESTATE AND TAX PLANNING

TABLE OF CONTENTS
INTRODUCTION

1.05 Introduction Page 1


1.10 Why You Need a Will or Living Trust Page 1
1.20 What is Probate and How It May Be Avoided Page 1
1.30 Living Trust Option Page 2
1.40 If You Don't Have a Will or Living Trust Page 2
1.50 Tax Planning Through Your Will or Living Trust Page 2

OVERVIEW

1.60 Why is Estate Planning Necessary Generally Page 2


1.65 Estate, Gift and Generation-Skipping Transfer Tax Changes Page 4
Phase-Out and Repeal Page 4
Basis of Property Acquired from a Decedent Page 5
Modified Generation-Skipping Transfer Tax Rules Page 6
1.70 Living Trust v. Will - Which is Right For You Page 7

Phase-Out and Repeal of Estate and Generation-Skipping Transfer Taxes; and Increase in Unified Dredit
Effective Exemption
1.80 Top Marginal Estate, Gift and Generation-Skipping Tax Rate Page 8
1.90 Estate and Gift Tax Marginal Rates in Excess of 49% Page 8
1.100 Estate and Gift Tax Marginal Rates in Excess of 47% Page 8
1.110 Estate and Gift Tax Rates in Excess of 45% Page 8
1.120 "Sunset" Provisions Page 8
1.130 Estate GST and Gift Tax Rates Page 9
1.140 Top Gift Tax Rate Page 9
1.150 State Death Tax Credit Page 9
1.160 Basis of Property Acquired from a Decedent Page 9
1.170 Exceptions - Carryover Basis Rules Page 10
1.180 Surviving Spouses and Other Heirs - Basis Assets Page 10
1.190 Extension - Income Tax Exclusion for $250,000 Page 10
1.200 Modified Generation-Skipping Transfer Tax Rules Page 10

Federal Estate and Gift Tax - The Mechanics


1.210 Estate Page 11
1.220 Property Page 11

BASIC ESTATE TAX PLANNING


1.230 $1,000,000 Threshold Page 11
1.240 Estate Tax Minimization Page 12
1.250 $1,000,000 Exemption/Unlimited Marital Deduction Page 12
1.255 Planned Giving Page 14
1.260 Advanced Estate Planning Techniques Page 15
Irrevocable Life Insurance Trusts Page 15
Generation-Skipping Transfer Tax Planning Page 15
Family Limited Partnerships Page 16
Qualified Personal Residence Trusts Page 16
1.270 Property Powers of Attorney Page 16
1.280 Living Wills and Health Care Powers of Attorney Page 17
A Living Will Page 17
Health Care Power of Attorney Page 17
The "Food and Water" Issue - The Nancy Cruzan Case Page 17
1.290 Steps and Timetable for Estate and Trust Administration Page 18
Initial Steps Page 18
Testate Estate Page 18
Control and Management of Assets Page 19
Inventory and Appraisal Page 20
Sales of Personal Property Page 20
Claims Against Estate Page 20
Disclaimer Page 21
Federal Estate Tax and Generation-Skipping Transfer Tax Page 21
State Estate Tax Page 22
Federal and State Income Tax Page 22
Current Accounts and Distributions Page 23
Closing Estate Page 23
Trusts Page 23
Partnerships Page 24

A Vocabulary of Estate Planing Page 25-30

ILLUSTRATIONS Page 31-45


PLANNING FOR THE FUTURE - ESTATE AND TAX PLANNING

by

ROBERT E. McKENZIE, EA, ATTORNEY

ARNSTEIN & LEHR


SUITE 1200
120 SOUTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
(312) 876-7100

REMCKENZIE@ARNSTEIN.COM
http://www.mckenzielaw.com

PORTIONS REPRINTED WITH PERMISSION OF


WEST GROUP, INC.®
FROM
REPRESENTATION BEFORE THE COLLECTION DIVISION OF THE IRS

BY
ROBERT E. McKENZIE
ARNSTEIN & LEHR
120 SOUTH RIVERSIDE PLAZA, SUITE 1200
CHICAGO, ILLINOIS 60656
(312) 876-7100

REMCKENZIE@ARNSTEIN.COM
http://www.mckenzielaw.com

©2003