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What Is Estate Planning?

Last Updated:  April 5, 2017

As a continuation of the Fee-Only Financial Advisor blog sharing group, this month’s post comes to us from Dave Fernandez, a Financial Advisor in Scottsdale, Arizona. He shares his thoughts on estate planning, and the documents you should consider having an attorney draft for you to complete your estate plan.


What is Estate Planning?


Estate Planning takes time and consideration. Make sure your plan is set up properly from the start.
What is Estate Planning? it’s the process of putting your financial affairs in order for your heirs.

Most people aren’t too eager to tackle estate planning. Unfortunately, it is an issue all of us are forced to deal with at some point in our lives. It’s important to do the right thing for your spouse, significant other, children and loved ones.

Many people hold off on dealing with this issue for a variety of reasons: procrastination, “I am healthy, this will not happen to me anytime soon”, costs, time involved, not wanting to face this issue, not knowing where to start, etc. I am going to provide you with a big picture overview of “estate planning.”

Estate planning is a subject with a lot of breadth and depth. Every person has a completely different personal financial situation which may necessitate additional planning, tools and techniques which are beyond the scope of this article.

As you read this, keep in mind that what I have attempted to discuss are the core concepts which everyone’s estate plan should be designed around regardless of your total net worth. You will want to work with an estate planning attorney licensed in your state of residence to create or amend any estate planning documents such as your will, trust, powers of attorney, living will, etc. Your estate planning attorney will be familiar with any particular estate laws that pertain to your state of residence, as they can vary from state to state.

Most people have three main goals when establishing or amending their estate plan:

  1. Making sure their assets go to those they want to receive them
  2. Avoiding estate taxes
  3. Avoiding probate

With a little planning, all three of these goals are easily achieved. Here is an overview of terminology and tools that are utilized in estate planning, and how they can help you and your significant others.



Probate is a court proceeding. Final debts are settled, and legal title to property is formally passed from the decedent (you upon your death) to your heirs.

Probate is a public (court) process governed by state law and varies along with costs from state to state. Some people choose to avoid probate due to privacy wishes, costs, and the time it takes to probate an estate.

Typical costs for probate are 2% to 6% of the total estate, and it usually takes six to nine months to complete the probate process.

Avoiding probate can typically be accomplished through the coordination of two options:

  1. Use of a revocable living trust
  2. Using beneficiary designations for specific accounts such as IRAs, retirement plans, life insurance, variable annuities, payable on death (bank) accounts, etc.

Beneficiary designations pass by operation of law, and stand on their own without need for direction from a will or trust. If privacy, efficiency, and cost savings are a big concern of yours, then you may want to consider a revocable living trust. At your death, anything titled in the name of your revocable living trust will avoid the public probate process.



A will is reviewed during the probate process and distributes all remaining property not named in your trust or beneficiary designations. If you die without a will (intestate), the state of your legal residence will decide who should receive all of your property that has not been directed by beneficiary designations.

Make sure your will correctly expresses your current wishes.

For example, your home, personal property, cars and non-retirement investment accounts. One of the most important reasons to have a will is to name guardians for minor children. If you do not have a will, state court could dictate who will become guardians of your children.



An executor, also called a personal representative, is the individual named in a will charged with “executing,” or carrying out the will’s instructions. Many name their spouse, adult child or other close family member as executor.

The will also may name an institution, such as a bank, trust company or an attorney, as executor or co-executor. Generally, an individual executor can settle a simple estate with minimal legal advice; the larger or more complicated the estate, the more likely the executor will need professional advice from an attorney, certified public accountant and other professional advisers.

Typical responsibilities of an executor will usually include accumulating the assets of the estate, paying any debts or obligations owed by the decedent, distributing the remaining assets to heirs and completing necessary tax returns. Note that being an executor is a huge responsibility and it will take up a lot of time, as it usually takes 6 to 12 months to settle an estate depending on the size and complexity of the estate.



Think of a trust as an empty box that you pour your assets into. The way to do that is to retitle the name of your assets into the name of your trust.

Some typical assets that people fund into their trust are their homes, taxable brokerage/investment accounts and land. Typically personal property is not held within a trust.

Retirement accounts do not need to be held in a trust since they have beneficiary designations which will allow you to direct who should receive your property.

The major benefit of a trust is that you do not have to probate a trust through a public court process. A trust, like a will, provides directions as to whom you would like to receive the assets in your estate.

There are three main types of trusts – revocable living trusts, testamentary trusts and irrevocable trusts. Revocable living trusts are created during your (grantor) lifetime and can be revoked, collapsed or amended at any time (just like a will).

Testamentary trusts are created at your death from instructions provided in your will.

Irrevocable trusts can be created during your lifetime or at your death from your will, but they are very difficult to amend once established.

It is important to coordinate the instructions and language between your will, trusts and beneficiary designations. Beneficiary designations from IRAs and insurance supersede all language within trusts and wills. Trust directions supersede all language within a will. Thus, if your will says that your IRAs should be left to your children, but your IRA beneficiary is named as Aunt Mildred, then Aunt Mildred will receive the IRA.


Portability and Estate Taxes


Current estate tax law allows you to shelter up to $5.49 million dollars per person from estate taxes. If you are married, you can elect what is called the portability option.

Any unused portion of the estate tax exemption is “portable” and can be transferred to your surviving spouse. You make this “portability” election when filing form 706 (estate tax return).

Any assets in your estate above the $5.49 million dollar exemption will be taxed at a 40% estate tax rate.


A and B Trusts


A benefit of estate planning for married couples is that there is an unlimited marital deduction against estate taxes if assets are left to a surviving spouse. However, when the surviving spouse dies, you can only shelter up to $5.49 million for the surviving spouse, or possibly up to $10.98 million if portability was elected when the first spouse died.

Under the current estate tax law, the simplicity of leaving everything to a surviving spouse may work well for many people as most will not end up having a taxable estate when the second spouse dies.

However, there are a few situations to consider another estate planning option:

  • What if Congress changes its mind and lowers the estate exemption back toward $1 million instead of the current $5.49 million?
  • What if you have kids from a previous marriage and you want to ensure they receive an inheritance in the event your spouse remarries?
  • What if you have assets accumulated beyond your financial needs and you want to maximize the growth and ability to transfer those assets estate tax-free to your heirs?

A common estate planning technique that an attorney may recommend that could help protect your assets in all of the above situations would be the use of an A and B trust arrangement.

A typical revocable living trust for married couples has provisions for A and B trusts to be established upon the death of the first spouse. Upon the death of the first spouse, all sole and separate property + up to one-half of the community property is commonly funded into the B trust (also known as a bypass trust or credit shelter trust).

The remaining balance of the couple’s estate is funded into the A trust or survivor’s trust. The surviving spouse has 100% access to the principal and income of the assets in the A Trust. The surviving spouse usually has access to all income generated in the B Trust.

In addition, the surviving spouse has the right to make annual withdrawals of the greater of $5,000 or 5% of the principal in the B Trust based on an ascertainable standard – to meet their Health, Education, Maintenance and Support needs (HEMS power).

The benefit of using this A and B trust strategy, is that all of the assets in the B trust (plus all future appreciation) avoid any type of estate tax upon the second spouse’s death. This could be a protection in the event Congress lowered the estate exemption from $5.49 million to say $1 million, or if you suspect you will not need the additional assets and they can be invested aggressively and may accumulate above the $5.49 million estate exemption.

Any assets that are in a B trust are ultimately left to surviving heirs (usually children) upon the surviving spouse’s death. Since the income rights to the B Trust are somewhat restricted and the B trust is irrevocable, it increases the probability that the assets in a B Trust will be left to your children at the death of your surviving spouse. This provides an inheritance protection for your children if they are from a previous marriage.

Note that single and non-married persons are not eligible for this type of strategy and may have additional exposure to estate taxes.



Trustee definition – An individual or agent (such as an attorney or bank trust department) to whom property is entrusted to manage and promises to wisely administer it for the use and benefit of the beneficiary or beneficiaries of the trust.

There are two main responsibilities for a trustee:

  1. Managing the assets prudently from an investment point of view, and
  2. Administering the funds as called for by the trust.

When your trust is initially established it will require a trustee – someone to manage the trust. If you are still alive, then typically you and/or a spouse will serve as trustee(s).

When the first spouse passes away the surviving spouse will usually become sole trustee. At the second spouses death you will have language in your trust that names a new trustee or trustees to manage the trust for your beneficiaries (typically children).

It is very important that you name at least a primary and a secondary trustee. Think about who in your circle of family or friends is capable, competent and willing to manage such a task.

Many people do not put enough thought into this issue. Mismanagement by a trustee could occur due to being overburdened and lacking the follow through to manage this task.

Another option is to name an institution as trustee. However, the fees can be quite large depending on the services you require such as investment management, disbursement of funds to minor children and beneficiaries and overall day to day administration of the trust.

Another option is to name your investment advisor to serve specifically to manage the investments of your trust (not serve as trustee!) and appoint a 3rd party trust company to serve as the administrator and trustee of the trust. The benefit of this arrangement is you have two professionals watching over your trust, and you are also able to continue a seamless long-term relationship with your investment advisor.


Community Property vs. Common Law Property


The term “community property” often comes up in discussions about estate planning (and divorce). It is a form of property ownership solely between husband and wife and recognized only in the following states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. (All other states are “common law” states, regarding their marital property ownership system.)

Specifics in law differ in significant details from state to state. The defining feature of community property is irrespective of the name(s) on title documents, ownership of (almost) all property (including income from wages and self-employment acquired during marriage by either spouse) is automatically split.

Each spouse owns a separate, undivided one-half interest. An “undivided” interest is one in which each spouse has half ownership of the whole “pie,” rather than full ownership of only the “left half” or the “right half.”

In community property states, property acquired by a spouse with sole and separate assets and brought into the marriage remains separate. In these states, too, property acquired by gift or inheritance also remains separate. Planning tip – estate planning attorneys would commonly advise that all inheritances remain in separate name versus commingling assets into a joint account or joint trust with your spouse or significant other. In the event of divorce, you risk losing a portion of your inheritance if it has been commingled with the joint assets of your spouse/significant other.

One huge benefit of having assets titled and considered as community property is that at the death of the first spouse, 100% of the property has a step-up in cost basis. In contrast, if titled as Joint With Rights of Survivorship (WROS), only half of the assets will receive a step up in cost basis.

For example, you may have a taxable investment portfolio that has appreciated over several years. Let’s assume you paid $200,000 for this investment portfolio and it is now worth $600,000. If you die and it is titled as Joint (WROS), then half of the assets receive a step up in cost basis to current day values. So your portfolio cost basis is now $400,000.

Your heirs will have to pay capital gain taxes on any amount above $400,000 as they liquidate the portfolio. However, if the account was titled as Community Property (WROS), the whole account is brought up to current day values, the cost basis is now $600,000, and you heirs will only pay taxes on any future appreciation above $600,000.

Personal Inventory = Net Worth Statement + Insurance


A net worth statement of all assets and liabilities provides an excellent starting point to assess your estate. Your fee-only financial planner is a great resource to initiate an estate planning conversation and he/she can also provide you with an up-to-date net worth statement.

Gifting and Gift Tax


For those of you with large estates, charitable intent, or a wish to see your heirs benefit from your assets during your lifetime, you can make annual gifts up of to $14,000 per year per person, and $28,000 per person per year if you are married. In addition to the annual gift tax exemption of $14,000, you have a lifetime gift exclusion of up to $5,490,000.

Any gifts above $14,000 per year would be shielded by the $5,490,000 unified gift/estate exclusion. After your $5,490,000 exclusion is used up, any gifts above this are taxed at a gift tax rate of up to 40%.

Yes, Uncle Sam will also tax you for being too generous to family and friends! Many people will fund annual gifts to their grandchildren’s 529 College Savings Plan as a way to reduce their estate during their lifetime. You can also make an outright gift of cash or assets to anyone. Stock with a very low cost basis makes an excellent gift too.

There is no maximum for gifts that are made to qualified charities, or payments made directly to a medical institution or educational institution.

Advanced Directive for Health Care or Living Will


Provides written instructions to physicians regarding the types of life sustaining treatment you do or do not want if you are unable to communicate those decisions yourself.

Health Care Power of Attorney


Enables a trusted relative or friend to make decisions about your medical care if you are unable to do so.

Durable Power of Attorney – Financial Power of Attorney


Arranges for the handling of your financial affairs and management of your assets if you are unwilling or unable to do so.

Letter of Direction


To tell your family of your wishes regarding such matters as funeral plans and obituary information that is not covered by other documents.

List of Emergency Information


To help your family locate your assets, accounts, life insurance policies, etc, and to provide the names and phone numbers of key contacts such as lawyer, accountant, investment advisor, and others who may be needed.



Hopefully I have provided you with a starting point of information to begin initiating an estate plan or to begin revising any current estate planning documents you may have. If you already have an estate plan, but have not had it reviewed in a while, now would be a good time to review it and make sure it still reflects your intended wishes. I would encourage you to discuss any estate planning thoughts with your financial advisor and he/she can provide you with a referral to an estate planning attorney.

Below is a grid recapping all of the recommended estate planning documents you should consider, regardless of total assets or net worth:






Revocable Living Trust


Health Care Power of Attorney


Financial Power of Attorney


Advanced Directive for Health Care or Living Will


Letter of Direction


List of Emergency Information



About The Author


Dave Fernandez, CFP® is a native of Arizona and has over 20 years of experience in the financial services industry. He started his financial services career in 1995. As a NAPFA Registered Financial Advisor, Dave owns a fee only financial planning and wealth management firm, in Scottsdale, Arizona called “Wealth Engineering.”

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