THE MONTANA STATUTORY ESTATE PLAN

Decisions regarding handling every issue that comes up in the process of estate planning will be made as the result of death of every individual. The only real difference is who will make those decisions. Decisions consciously made by the decedent tend to be a lot better since they are tailored to that decedent's unique family and financial circumstances. To the extent a decedent neglects to make those decisions, then that decedent's "plan" will be the haphazard result of the ways that property was owned and the statutory plan set in place by the State of Montana under its intestate succession provisions. This rarely is the best plan. Consider, for example, the following "Will", the provisions of which are representative of the Montana statutory plan.

SAMPLE WILL

ESTATE PLANNING TOOLS

Those individuals who chose to create their own estate plans, rather than rely on the State of Montana to do it for them, have a surprising number of techniques available to them, including Wills, Trusts, Powers of Attorney, beneficiary designations on insurance contracts or retirement plans, joint tenancies, pay on death accounts and many more. No one of these techniques is intrinsically better than any of the other techniques. They are all simply tools, and proper estate planning is fundamentally nothing more than selecting the right tool or tools to do the job. Selection of the proper tools, though, requires an understanding of them and how they work. Set forth below is a description of some of the basic estate planning tools available and how they work.

WILLS

A Will is a written document that describes how you wish for your property to be distributed following your death. A Will has no effect during your lifetime. It can be amended or revoked at any time prior to death assuming you are legally competent. To make a Will in Montana, you must be at least 18 years of age and of sound mind.

TRUSTS

Trusts are commonly used in estate planning and can serve a number of useful functions. To create a trust, property is conveyed to a Trustee (which can also be the transferor in some circumstances) to be held and managed by the Trustee for the benefit of the trust beneficiaries according to the terms of the Trust Agreement. Trusts can be inter vivos (during life) or testamentary (under Will to be effective at death). Inter vivos trusts can be revocable (meaning the creator of the trust can amend or revoke the trust at any time prior to incompetency or death) or irrevocable (meaning the trust cannot be amended or revoked once it is created).

One of the most common types of trusts used for estate planning is a Revocable Living Trust. A revocable living trust is a trust created during a person's lifetime to hold all of his or her property. The creator of the trust (who is called the trustor) transfers his or her property to the trustee of the trust. The trustor generally names himself or herself as trustee of the trust and names an alternate to serve as trustee if the trustor is unable to serve. The trustee then uses the trust property for whatever purposes are specified in the trust document. Most likely the trustee will pay to the trustor all of the income of the trust each year. The trustee may also use any or all of the trust property for the trustor's benefit. The trustee may deal with the property as an individual deals with his or her own property (i.e. sell, transfer, etc.). The trustee is under a duty, however, to manage the property for the benefit of the trustor. Upon the trustor's death, the trust property will be distributed to the beneficiaries named in the trust agreement. In this manner, a revocable living trust essentially serves as a Will substitute.

Revocable living trusts have several advantages:

• One of the advertised benefits of a revocable living trust is that it avoids probate of the trustor's estate upon his or her death. Because the trust property is disposed of by contract (the Trust Agreement) upon the trustor's death, the trust property will not be disposed of according to a Will or by intestate succession. By avoiding probate, it may be possible to distribute assets to the heirs more quickly, attorney fees may be lower, and it is not necessary to file an inventory of the decedent's property with the court, where it becomes a matter of public record. However, as discussed below, probate in Montana is not overly burdensome as it is in some states like California. Therefore, while this is often a big selling point of revocable living trusts, it is not a particularly significant factor in Montana.

• Revocable living trusts offer security in that if the trustor becomes incapacitated, the successor trustee will step into the shoes and manage the assets for the incapacitated trustor. However, this same benefit may be achieved by having a durable power of attorney in place.

• The trust instrument can contain provisions for tax planning. However, this same planning can be done in a Will also.

Revocable living trusts also have several disadvantages:

• Probably the single biggest drawback of a revocable living trust is that all assets of the trustor must be placed in the trust for it to work. This means that all real property, bank and investment accounts and personal property of the trustor must be transferred into the trust. It has been our experience that very few clients successfully transfer all of their assets to their revocable living trust, so there generally ends up being a probate anyway.

• Many people have a difficult time dealing with property in their capacity as trustee of their revocable living trust. For example, it is hard to get used to writing checks in your capacity as trustee of your trust rather than in your own name, and titling assets you purchase in the name of the trust rather than your own name. Many clients make the mistake of acquiring assets in their own names instead of in the trust's name, and by doing so, they have defeated the purpose of avoiding probate.

• There are also larger "start up" fees associated with a revocable living trust. A revocable living trust is generally a more complicated document than a Will because the trust document must cover management and disposition of the trust assets during the trustor's lifetime as well as following the trustor's death. On the other hand, a Will only governs the disposition of property following death. Furthermore, in order for a revocable living trust to be effective, all the trustor's assets must be legally transferred into the trust at the time the trust is created, which involves additional time and expense.

• By having your assets in a revocable living trust, you do not avoid all expenses upon your death. It is still necessary to prepare estate, inheritance, and income tax returns and prepare deeds and other instruments of conveyance to transfer the property to your heirs.

Revocable living trusts work well for some people and not so well for others. Church, Harris, Johnson & Williams, P.C. has extensive experience in estate planning and drafting Wills and trusts and can help you decide whether a Will or a revocable living trust is best for your individual estate planning situation.

FORMS OF PROPERTY OWNERSHIP

Individuals may own property in a number of different ways. The form of property ownership is important in planning an estate because it can determine how that property is transferred upon the death of the owner. The following is a discussion of various types of property ownership and their characteristics as it relates to estate planning.

SOLE OWNERSHIP

Property owned in sole ownership is owned outright by one individual alone. If the owner has a Will, property owned in sole ownership will be distributed according to the Will upon the owner's death. If the owner does not have a Will, property owned in sole ownership will be distributed according to state laws which govern the disposition of property for those who die without a Will.

CO-OWNERSHIP

Property owned in co-ownership is owned by two (or more) persons. In Montana, there are two basic types of co-ownership: tenancy in common and joint tenancy with right of survivorship.

• Tenancy in common: When property is owned as tenancy in common, each co-owner (tenant) owns a percentage interest in the whole property. The ownership interests do not need to be equal among the owners. All owners have the right to occupy or possess the property. Each owner can dispose of his or her ownership interest by gift, sale, Will or otherwise without the consent of any of the other owners. Tenancy in common does not have the characteristic of a right of survivorship in the other owners. In other words, when one owner dies, the remaining owners do not automatically inherit the property.

• Joint tenancy with right of survivorship: Joint tenancy with right of survivorship is similar to tenancy in common in that each co-owner (tenant) owns a percentage interest in the whole property, the ownership interests do not need to be equal among the owners, and all owners have the right to occupy or possess the property. However, what distinguishes joint tenancy with right of survivorship from tenancy in common is the "right of survivorship," which means that when one joint tenant dies, all ownership interest in the property by the deceased joint tenant is lost. The surviving joint tenant becomes the sole owner of the property--regardless of what the deceased joint tenant's Will may have said.

BENEFICIARY DESIGNATIONS

Certain types of property may contain a beneficiary designation that specifies how the property is to be distributed upon the owner's death. Beneficiary designations are most commonly found on bank and brokerage accounts, life insurance policies, annuities, and retirement plans.

• Bank and brokerage accounts may contain a "pay on death" (POD) beneficiary designation and brokerage accounts may contain a "transfer on death" (TOD) beneficiary designation. The account owner controls the account while alive, and can change the beneficiaries at any time. Beneficiaries (and their creditors) have no rights to the account during the owner's life. Upon the account owner's death, the account proceeds are payable directly to the beneficiaries designated by the deceased owner and are not controlled by the deceased owner's Will.

• With life insurance policies, the persons named as beneficiaries in the policy will receive the proceeds of the policy upon the insured's death. The proceeds are not (generally) controlled by the insured's Will unless the estate or personal representative is named as the beneficiary of the policy. Annuities are similar to life insurance policies in that a beneficiary will generally be named in the annuity contract to receive any remaining annuity proceeds which are payable following the owner's death.

• Retirement plans such as a 401(k) plan, profit-sharing plan, or Individual Retirement Accounts (IRA) typically require the plan owner or participant to designate the beneficiaries who will receive any remaining benefits payable under the plan following the death of the owner or participant. The benefits are not (generally) controlled by the plan owner or participant's Will unless the estate or personal representative is named as the beneficiary of the retirement plan.

Property that is controlled by a Will is referred to as probate property. As indicated above, probate property generally includes property owned in sole ownership and property owned in tenancy in common. Property which is not controlled by the owner's Will is referred to as non-probate property, and generally includes property owned as joint tenants with right of survivorship and property which contains a beneficiary designation, such as POD and TOD accounts, life insurance policies, annuities, and retirement plans.

TRANSFER TAXES (ESTATE, GIFT, AND INHERITANCE TAXES)

As discussed above, one of the fundamental goals of estate planning is to reduce unnecessary losses in the amount of property going to one's family or other beneficiaries. It is critical to evaluate the potential impact of taxes on the transfer of a person's property to his or her beneficiaries as part of the estate planning process. If proper tax planning is not done, the government may end up being one of the largest beneficiaries of a deceased person's estate. Following is a brief discussion of the various transfer taxes.

FEDERAL GIFT AND ESTATE TAXES

The federal gift tax applies to gratuitous transfers (i.e., transfers for which the transferor does not receive full and adequate consideration in money or money's worth from the person receiving the property from the transferor) made by a person during his or her lifetime. The gift tax is imposed on the person making the gift, not the person receiving the gift. The federal estate tax applies to gratuitous transfers made by a person at death, regardless of whether such transfer occurs by Will, revocable living trust, intestate succession, non-probate transfer, or otherwise. In this respect, it is very important to understand that just because an estate avoids probate does not necessarily mean that estate taxes will be avoided.

The federal gift and estate taxes are "unified" in that they apply to the cumulative amount of gratuitous transfers (i.e., transfers for which the transferor does not receive full and adequate consideration in money or money's worth from the person receiving the property from the transferor) made by a person both during his lifetime and at death. There are, however, some substantial gift and estate tax exclusions which permit a variety of planning opportunities:

• Perhaps the most important exclusion for gift and estate tax purposes is the unlimited marital deduction, which means that, as a general rule, a person can make gratuitous transfers of an unlimited amount of property to his or her spouse (as long as the spouse is a United States citizen) both during lifetime and at death without incurring any federal gift or estate tax consequences.

• Another important gift and estate tax exclusion is the applicable exclusion amount, which enables a person to make gratuitous transfers (both during life and at death) of up to $1,000,000 in aggregate value to persons other than a spouse free of federal gift or estate tax. Under the tax bill which was signed by President Bush in June 2001, the federal estate tax is repealed in 2010 and the applicable exclusion amount will increase to $1,500,000 in 2004 and then gradually increase to $3,500,000 by the year 2009. However, due to a quirk in the new tax bill which was designed to comply with budgetary limitations, the bill contains a "sunset" provision whereby the tax laws prior to the enactment of the bill are scheduled to return after 2010 unless Congress provides otherwise at some future time. This means that, absent further action by Congress, the federal estate tax is repealed only for those persons who die in 2010.

• A third exclusion which applies only to the gift tax is known as the gift tax annual exclusion, which allows a person to give any number of donees up to $11,000 each per year without incurring any gift tax consequences. Gifts in excess of the $11,000 annual exclusion are considered taxable gifts. Taxable gifts are first applied to reduce the $1,000,000 "applicable exclusion amount," so no gift tax is imposed until the total of all taxable gifts exceeds the applicable exclusion amount (which is currently $1,000,000).

As a general rule, only those persons whose estates exceed $1,000,000 in value face a potential estate tax problem. Estates less than $1,000,000 will be subject to the federal estate tax only if the deceased person makes taxable gifts during his or her lifetime which reduced his or her applicable exclusion amount to an amount less than the date of death value of his or her estate. Statistics show that only about 3% of estates are large enough to be subject to the federal estate tax. For those few estates, proper estate planning is critical in order to avoid paying unnecessary taxes. If proper planning is done, a husband and wife dying in 2002 can pass up to $2,000,000 (and even more under certain circumstances) to their children free of federal estate or gift taxes. If proper planning is not done, the amount passing tax-free to the children may be considerably less.

MONTANA STATE INHERITANCE TAX

For many years, Montana imposed an inheritance tax on the transfer of property at death to persons other than a spouse, lineal descendant (i.e., child or grandchild), or a stepchild. However, the Montana state inheritance tax has been repealed effective January 1, 2001; therefore, the inheritance tax does not apply to persons who die after December 31, 2000.