Estate Planning: Law Studies You Need To Know

Estate planning attorneys help clients prepare for the disposal of their estate, establish a will, trust, and power of attorney, and determine the distribution of their assets upon their death or incapacitation. To become an estate planning attorney, one must complete an undergraduate degree, gain relevant work experience, pass the Law School Admissions Test (LSAT), attend law school, and pass the bar exam. Estate law classes cover various topics, including asset management, estate planning, family law, taxation, real estate law, and trusts.

Wills and trusts

A will is a simple legal document that outlines your wishes for the distribution of your property and assets after your death. You can make your will as detailed or as generalised as you like, and you can also include instructions for the care of any dependents or pets.

Creating a will is an important step in estate planning as it ensures your assets are distributed according to your wishes and can help prevent disputes among family members or other beneficiaries. After creating your will, you can modify it using an amendment or write a new one to replace it. Your will becomes a matter of public record after your death, and it will go through probate court, which is a sometimes-lengthy process where your will is recorded with the state.

A trust, on the other hand, is a complex legal contract or arrangement that allows you to transfer your property to an account managed by a third party, to be distributed to beneficiaries at any time. Trusts are typically used for complex estates with multiple properties, investment accounts, and/or sizable assets. Trusts can be revocable or irrevocable. Revocable trusts allow you to maintain control over the trust and make changes during your lifetime, whereas irrevocable trusts cannot be changed or revoked once created.

You can have both a will and a trust as part of your estate plan. While a will becomes effective after your death, a trust goes into effect immediately after it is signed. A will typically goes into probate after you die, while a trust does not, allowing beneficiaries to access assets more quickly.

section 754 and other special basis elections

Estate planning attorneys help clients establish and determine the distribution of their estates, which include the client's net worth, personal assets, interests, legal rights and property. This area of law is similar to family law and often involves preparing and reviewing legal documents, as well as negotiating terms and conditions.

Section 754 of the Internal Revenue Code allows certain new partners in a partnership to take additional depreciation or amortization for increases in asset values over a partnership's adjusted cost basis. A partnership can elect to increase or step up the basis of its assets, equating a partner's basis in their interest in the partnership (outside basis) to the partnership's basis in its assets (inside basis). This election is available in the distribution of partnership property or the transfer of an interest by a partner (sale/exchange or death).

The election is made by the partnership by attaching a written statement, which includes calculations of the step-up, to a timely filed tax return. The election is generally irrevocable and is in effect for the year filed and any subsequent years.

The step-up is allocable to all partners when a partnership purchases an interest from a partner, distributing cash and/or property in redemption of the partner's interest. This is known as a Section 734(b) basis adjustment.

When there is a taxable sale/exchange of a partnership's interest or transfer to a decedent's estate due to a partner's death, the step-up is only allocable to the new partner. This is a Section 743(b) basis adjustment.

The benefits of a Section 754 election include the ability for the partner to take incremental depreciation and amortization deductions, instead of reducing gain when the partnership interest is sold or the partnership is liquidated.

However, there are several considerations when making a Section 754 election in the context of private equity/funds:

• The election is generally irrevocable, meaning the fund must make basis adjustments for all future transfers of partner interests and distributions of partnership property.
• The election must be made by lower-tier partnerships (LTPs) for depreciation and amortization deductions for assets owned by LTPs.
• Timing of the fund lifecycle and increased compliance costs may make the election impractical.

Key Takeaways

While a Section 754 election can be beneficial, it should be made only in limited circumstances and tax advisors should be consulted. Fund managers should also consider including language in fund organizational documents that addresses the Section 754 election.

Additionally, it is important to note that there are automatic and discretionary relief options available if a taxpayer fails to timely file a valid Section 754 election.

Federal Wealth Transfer Tax

Estate planning attorneys need to have an in-depth understanding of federal and state tax laws, and it is their responsibility to keep up to date with the latest changes in tax legislation. Federal Wealth Transfer Tax is a key component of estate planning.

The gift tax, on the other hand, applies to transfers made while a person is still alive. The gift tax exemption for 2023 is $12.92 million per donor, and any gifts above this amount are taxed at the estate tax rate of 40%. Additionally, an annual exclusion of $15,000 per recipient is allowed, and gifts below this amount are not counted towards the exemption.

The generation-skipping transfer tax (GSTT) was enacted by Congress in 1976 to prevent families from avoiding estate taxes by making direct gifts or bequests to grandchildren or great-grandchildren. The GSTT imposes an additional layer of tax on wealth transfers to recipients who are two or more generations younger than the donor, using the same exemption and tax rate as the estate tax.

There are various strategies that individuals can employ to minimise the impact of Federal Wealth Transfer Tax. These include making generation-skipping gifts, establishing Grantor Retained Annuity Trusts (GRATs), and transferring appreciating assets before they appreciate in value.

Fiduciary duties

Estate planning attorneys help individuals plan for the disposal of their estate and establish a will, trust, and power of attorney. They also help clients determine the specific distribution of their estate and counsel those seeking to establish a trust where assets are set aside for a future beneficiary.

Fiduciary duty is a crucial concept in estate planning. It describes the responsibilities assigned to an individual or entity, with the expectation that they will always act in the best interest of someone else. This involves acting with the highest level of integrity and avoiding any conflicts of interest.

• Definition and Role: Fiduciary duty refers to the legal and ethical obligation of a fiduciary, who is typically a professional such as an attorney, trustee, or financial advisor. They are expected to act in the best interests of their client or beneficiary, putting their client's interests ahead of their own.
• Types of Fiduciary Duties: There are two main types of fiduciary duties: the duty of loyalty and the duty of care. The duty of loyalty requires fiduciaries to act in the best interests of their clients, even if it conflicts with their personal interests or beliefs. The duty of care mandates that fiduciaries carry out their duties to the fullest extent, without cutting corners.
• Examples in Estate Planning: In the context of estate planning, fiduciaries can include executors, trustees, guardians, and conservators. For instance, an executor is entrusted to distribute the assets of a deceased person's estate according to their will. Trustees manage assets within a trust and distribute them to beneficiaries per the conditions set by the trustor. Guardians are appointed to care for dependent children, while conservators are assigned to manage the affairs of adults unable to do so due to mental illness or disability.
• Importance: Fiduciary duty is important because it provides assurance that a trusted individual will act in good faith and in the best interests of their clients or beneficiaries. It also allows for the identification of legal obligations and consequences for failing to fulfil fiduciary responsibilities.
• Challenges and Risks: Assuming a fiduciary duty is a significant responsibility that carries ethical weight. It can be challenging when an individual's personal interests conflict with their duty to act in the best interests of another. Fiduciary risk refers to the possibility of a fiduciary not optimally performing in the beneficiary's best interests, which may include making excessive trades or incurring unnecessary costs. Fiduciary abuse or fraud occurs when a fiduciary uses their power to benefit financially or serve their self-interest.

Probate

The person responsible for initiating probate is called the executor, who is usually a family member specified in the will. The executor must file the will with the probate court within a specific timeframe, which varies by state. The probate court then supervises the process of authenticating the will and appointing the executor, who gains legal power to act on behalf of the deceased.

The executor works with the court to locate and determine the value of the decedent's assets, which can include real estate, vehicles, capital, and other personal possessions. They must also resolve any outstanding debts or taxes, which can include filing the final personal income tax returns on behalf of the deceased. If there are more debts than assets, the executor may choose not to initiate probate, and any remaining assets will go to the state to cover these debts.

To avoid the potentially high costs and complexities of probate, individuals can have an easily authenticated will or use investment vehicles that do not require probate, such as trust funds or designated beneficiary accounts. Each state has its own laws and requirements for probate, including thresholds for when probate is necessary based on the size of the estate. For example, in Texas, probate is not required if the value of the estate is less than $75,000.

Frequently asked questions