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A Guide to Basic Estate Planning

Estate Planning Guide

Estate planning can be compared to the creation of a personal legal “suitcase” in which all types of property ownership can be placed including personal belongings, assets, business holdings, financial resources and real estate. The person creating the “suitcase” or Trust is referred to as the Grantor or Settlor and initial Trustee. During the Grantor’s lifetime, the Grantor is in control over all of the assets placed into the Trust or “suitcase” and can take assets out and change the features of the Trust however they want. Because the Grantor has total control over the Trust, the Trust is referred to as Revocable or is frequently named a Revocable Living Trust “RLT”. There are no separate tax returns filed by the Trust and no separate identification numbers required as the RLT is considered the same as the Grantor.

The big advantage of the RLT is that the Grantor has already named the person (or persons) who will be able to control the assets in the RLT after the death or incapacity of the Grantor. This change of control happens automatically without having to file a petition in a Probate Court. Once the new person, the “Successor Trustee” takes over the RLT, the terms of the Trust become final and cannot be changed, “irrevocable” so the new Trustee must follow the provisions in the RLT that the original Grantor created. This feature is another big advantage of
a RLT as the Grantor can describe who shall receive the assets, when and under what circumstances, these recipients are referred to as “Beneficiaries”. The flexibility of a RLT and the fact that it remains private and automatically vests the Successor Trustee with the ability to manage the Trust assets are excellent advantages over the alternatives. The alternatives are either (1) no estate plan at all or (2) a Last Will.

If a person has no estate plan at the time of death, they are referred to as “intestate” and the State of Hawaii law will apply to determine who will receive legal title and distribution of the assets. This may not always be what the person would have wanted but because they had no estate plan, the State of Hawaii will provide one for them.

The other alternative, a Last Will, is better than no estate plan but has several big disadvantages to a RLT; namely that in order to put it into effect, a petition must be filed with the Probate Court to have the person named to take care of things, the Personal Representative, appointed to office by the Probate Court Judge. When the Personal Representative wants to sell real estate or settle a claim or do other things, the Personal Representative may have to file for a Court Order for authority; and that process always takes time and money to accomplish.

Another advantage of estate planning is to minimize the impact of federal and Hawaii Estate Tax. Estate taxes may apply when the total assets of the Grantor add up to more than $5.43 million. If the Grantor is married, the federal estate tax exemption is doubled for the husband and wife to use together so a family can transfer the maximum amount of assets to the Beneficiaries without federal or Hawaii Estate Tax imposed. The federal Estate Tax typically has been around 45% on non exempt assets. The current federal Estate Tax exemption is $5.43 million per person. Hawaii now also has an estate tax on estates over $5.43 million and requires an estate tax return to be filed within nine months from the date of death of the taxpayer.

Grantors can also effectively use charitable giving or gifts to family members in the estate plan to minimize federal Estate Tax.

Anyone who owns real estate or a business should seriously consider creating a RLT. A Last Will is also useful as a “pour over” to catch any property not already included in the RLT and pass it over to the RLT after death of the Grantor. The Last Will can also name potential guardians of minor children. Another useful estate planning document is a Power of Attorney to name a person that can sign documents for the Grantor while living but perhaps incapacitated or unavailable. In Hawaii many persons have created Advanced Health Care Directive (“AHCD”) to name a person to make significant health care decisions if they are unable to do so as part of the estate planning process.

The big advantage of the RLT is that the Grantor has already named the person (or persons) who will be able to control the assets in the RLT after the death or incapacity of the Grantor.

There are many advantages of estate planning; not only avoiding confusion, delay and waste but also providing for an orderly and private, efficient transfer of assets, business, real estate etc. to beneficiaries in a manner that minimizes estate taxes. Estate planning is a sensible and vital part of any financial plan and can save families from expenses associated with probate court and family divisions and/or tension that may arise after the death of the Grantor.

We look forward to working with you to assist you in creating and packing your own “suitcase” RLT and other estate plan components. Please feel free to contact us to discuss any particular questions or concerns you may have concerning your own Estate Plan.

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