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Flowcharts: Graphic Illustrations of Estate Planning Options

Sometimes pictures are worth 1,000 words, or more. And, of course, some people learn better visually than verbally. So we developed a number of flowcharts to describe the principal estate plans many people choose. Here are the first few.

Basic Estate Planning

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Under this plan all the decedent’s assets flow through probate to be distributed under the terms of their will. Typically the will distinguishes between tangible personal property — things you can touch such as furniture, clothing, silverware, artwork and dishes — and everything else — often called the “residuary.” The individual may leave specific items of tangible personal property to particular beneficiaries and divide everything else equally among the named heirs. The will also appoints a personal representative (or “executor” or “executrix”) to carry out the instructions in the will.

Basic Estate Planning for Married Couple

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The typical estate plan for a married couple includes “reciprocal” wills in which they each give their entire estate to the other and then the survivor passes it on to their children (if they have children, or other heirs if they don’t). If the children are minors the will provides that anything they may inherit will be held in trust for their benefit until they reach a specified age, often 25. While under the terms of the wills, the estates of both spouses would have to be probated upon their deaths, if the spouses own all their property and accounts in joint names and have named one another as beneficiaries of their retirement accounts and life insurance policies, no probate is necessary upon the death of the first spouse to pass away.

Married Couple with Joint Revocable Trust

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While a married couple having reciprocal wills as described above probably only means needing to probate the estate of the second spouse to pass away, even that can be avoided by the couple executing a joint revocable trust. This has further advantages. The trust can continue for the benefit of children without involving the probate court as is required with a trust under a will. Further, the trust provides for asset management in the event either or both spouses become incapacitated.

Married Couple with Estate Tax Planning (QTIP Trusts)

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At $1 million, Massachusetts has the lowest estate tax threshold in the United States (tied with Oregon). With house values so high in Massachusetts, many middle-income Massachusetts residents face this tax (or their heirs do). Couples can protect $2 million from estate taxation by sheltering $1 million in the estate of the first spouse to pass away so that it is not taxed upon the death of the second spouse. These trusts are sometimes referred to as “credit shelter” trusts because the shelter the “credit” of the deceased spouse.

While there are a number of ways to draft these trusts, our preferred method is to use “QTIP” trusts because they permit the surviving spouse to choose how much of the deceased spouse’s estate to shelter or not to shelter, allowing for maximum flexibility. To qualify, the trusts must provide that the surviving spouse receive all the income earned by the deceased spouse’s trust. Principal distributions may be discretionary to the trustee. The surviving spouse can serve as trustee with some minor restrictions on principal distributions.

These are a few of the basic estate plan structures. Future articles will discuss variations used in specific circumstances.

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