South Carolina Trust
and Estate Law Blog

One night while out on the town with some friends, a friend of a friend asked me what estate planning was. I thought about the question for a moment, quickly raced through what my answer should be, and realized that there are many different ways to answer that question. Since the goals to be accomplished by estate planning can be varied, how you might define estate planning can differ.

My answer was three fold. First, estate planning arranges for the orderly transfer of assets to your heirs after your lifetime. Second, estate planning allows you to protect your heirs from the potentially detrimental effects that an inheritance can have. Third, estate planning can be utilized to protect assets from creditors and illness.

The estate planning task can also vary based on the stage of life you find yourself at. If you are at a younger stage of your life, estate planning can address issues such as guardianship for your young children, and management of your children’s finances if something were to happen to the natural parents. If you are at a later stage of life, estate planning can address transmission of retirement assets and protection of assets from medical expenses and, if the estate is large enough, from estate taxes. While we also might focus on the transmission of assets to the next generation, we also have to be concerned with the management of assets in the current generation in the case of disability or mental incapacity.

The typical estate plan is made up of several basic documents. They are the Last Will and Testament, the Durable Power of Attorney for Property, the Durable Power of Attorney for Health Care, a Living Will, and possibly a testamentary or inter vivos trust. We also must not forget that beneficiary designation forms play a large role in the estate plan, and oftentimes these important documents receive scant attention. The documents to be used in a particular estate plan depends on the individual situation.

I am often asked how much estate planning costs. My standard reply is that is a lot like walking into a car repair shop and asking how much to fix a car. The answer is it depends on what you need. You can expect a truly bare bones simple estate plan to run several hundred dollars, whereas an estate plan using one or more trusts can be several thousand dollars. Bottom line is it depends. It can seem like a significant investment, but some attorneys will give you a free consultation to discuss your situation.

Okay, so here comes the lawyer stuff, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs does not make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

Next up in South Carolina Estate Lawyer A to Z, is the marital estate tax deduction. This is a deduction against the estate tax, and it results in significant tax savings when utilized correctly.

The marital deduction was first introduced in 1948 with the passage of a fifty percent marital deduction applicable to non-community property. In 1977, the marital deduction was changed to be the greater of $250,000.00 or fifty percent of the decedent’s estate, still applicable only to non-community property. In the Economic Recovery Tax Act (there seems to be a lot of these Recovery Acts doesn’t there?) of 1981, the marital deduction became unlimited and it was applied equally to separate and community property. This is where we stand at present with the marital deduction.

There are seven major requirements in order for a transfer to a spouse to qualify for the marital deduction. They are set forth in IRC Section 2056 and are:

• 1. The decedent must have been legally married at the time of death.
• 2. The person to whom the decedent was legal married must survive the decedent.
• 3. The surviving spouse must be a US citizen (or the property is held in a QDOT trust).
• 4. The interest passing to the surviving spouse is includible in the decedent’s gross estate
• 5. The interest must pass to the surviving spouse.
• 6. The interest received by the surviving spouse must be a deductible interest.
• 7. The value of the interest passing to the surviving spouse must be at its net value.

The fifth requirement is one of the more interesting, as it leads to the question of what qualifies as an interest that passes to the surviving spouse. Certainly, property acquired by will, intestacy, elective share, power of appointment, or beneficiary designation qualifies as passing to the surviving spouse. But what about transfers in trust where the surviving spouse only has an interest for life? Do these qualify for the marital deduction as property passing to a surviving spouse?

The rule has existed that terminable interests in property do not qualify for the marital deduction. The reasoning behind this is that while the government is willing to defer the estate taxes owed when the first spouse passes away, the government wants some assurance that it will eventually be paid when the surviving spouse passes away (the marital deduction can be seen more as a delay in the payment of estate taxes rather than a full avoidance of the tax). Property given to the spouse that is a terminable interest would circumvent this principle. Some examples of terminable interests are run-of-the-mill life estates and interests in trusts that fail to meet certain requirements.

What are the certain requirements that could result in a marital deduction being available for a terminable trust interest? Well that would be the QTIP trust (Qualified Terminable Interest Trust), and I will talk about that some more when I get to the letter Q.

Installment G of A to Z is Gift Tax Exemption and Exclusion. The federal government imposes a gift tax on gifts. (Most states, including South Carolina, do not impose a gift tax.) The maker of the gift is generally liable for the tax on the gift. However, all of us are permitted to make a certain amount of gifts without incurring any tax.

The gift tax exemption is the amount of gifts that people can make during their lifetime without having to pay gift tax upon their deaths. This is the lifetime gift tax exemption amount and it currently stands at five million dollars. (The gift tax exemption is unified with the estate tax exemption, so any amount of gifts that reduces your gift tax exemption reduces your estate tax exemption dollar for dollar.)

For example, if you were to make taxable gifts totalling four million dollars during your lifetime, and upon your death you leave a taxable estate worth three million dollars, the four million dollars in gifts will reduce your five million dollar gift tax/estate tax exemption to one million dollars. The one million dollars left of the gift tax/estate tax exemption will reduce the taxable estate by one million dollars, leaving a taxable estate of two million dollars. This is what is meant by the unified gift tax/estate tax: Taxable gifts made during your lifetime can decrease the amount of estate tax exemption available to your estate after your death.

The other gift tax concept is the gift tax annual exclusion. The gift tax annual exclusion amount currently stands at $13,000.00 per year per person receiving a gift. This means that you may gift up to $13,000.00 per person per year without reducing your gift tax lifetime exemption amount. Spouses have the option to elect to double the amount of gift they can make to any one person during the year without reducing their lifetime exemption amount, this is called “gift splitting.” Spouses can do this even if the source of the gifts is with one spouse only. This election is made on the gift tax return.

Speaking of gift tax returns, when is one required to be filed? A gift tax return must be filed with the IRS when any person makes a gift to any other one person in a given year in an amount greater than $13,000.00 (or $26,000.00 if spouses elect gift splitting.) Also, a gift tax return must be filed whenever spouses elect gift splitting for a gift made. The gift tax return is generally due by April 15 of the year following the year of the gift. If the gift maker has died before the return is filed, his or her Personal Representative must file the return, and a Personal Representative is permitted to elect gift splitting for gifts made prior to the gift maker’s death.

Unless you give away an amount greater than your gift tax lifetime exemption amount, no gift tax must be paid when the gift tax return is filed. The tax is instead determined after death through the concept of the unified gift tax/estate tax exemption, as described above, ie, the gift made during lifetime reduces the gift tax/estate tax exemption after death.

So there you have a brief primer on the gift tax exclusion and exemption amounts and their interplay with the estate tax regime.

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

Oh, and the IRS would like me to let you know that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.