This month’s column is written by another member of my firm, Tamorah Christine Butts, J.D.* Mrs. Butts focuses her practice on estate and business planning matters. Many of lose money every quarter or every year because we didn’t want to spend the money to have adequate estate and/or business plans prepared for us. Some readers may be in that position so this column gives them some things to think about.

In my work administering estates of lost loved ones and drafting documents to support estate plans, I recognize that, in addition to preparing documents to support the plan, I must investigate the types of assets that make up the taxable estate, review relevant documents governing those assets, coordinate beneficiary designations, and sometimes recommend changes in the style of ownership on assets. Challenging issues are often presented when I am meeting with moderately wealthy clients whose retirement plans represent the bulk of their estate. The questions that follow are some I see often in my practice.

Q: I am an employee with a large oil company in Houston and I am married. The total value of my taxable estate is about $2 million. Do I have a taxable estate even though my wife and I each may utilize the $1 million estate tax exemption equivalent?

A: The surviving spouse will likely have a taxable estate. If you both of you were to pass away this year with “I Love You” wills, leaving everything to each other outright, the surviving spouse’s estate would be liable for approximately $435,000 in death and estate taxes. However, if one of you were to survive until 2004, but then die in 2004 or 2005, then the surviving spouse’s estate would be liable for approximately $225,000 in death and estate taxes.

Q: How can I make sure that the exemption equivalent of $1 million available to my estate is fully utilized and that my wife receives the full benefit of the assets in my estate?

A: Tax planning through a will or revocable trust could eliminate estate taxes from being due in your situation. Tax planning involves placing the assets being administered after the first spouse’s death into a bypass or credit shelter trust. This trust usually benefits the surviving spouse for her lifetime. After the surviving spouse’s death, the assets in the bypass or credit shelter trust pass to the beneficiaries (often the children of the couple) without being subject to estate or death tax.

Q: If most of my taxable estate is comprised of qualified plans like 401(k) plans and IRAs, how can I use such retirement assets to fund a bypass or credit shelter trust without causing a lump sum distribution to the bypass or credit shelter trust when I die?

A: In the not too distant past, retirement plans, like 401(k) and IRA plans, could not be placed into a trust without causing a lump sum distribution of the plan proceeds, thereby resulting in the acceleration of income tax. Consequently, many executives with taxable estates could not take complete advantage of estate tax planning using bypass or credit shelter trusts because most of their taxable estate was comprised of qualified plans. Now, the IRS allows qualified plans like 401(k) and IRA plans to be distributed to qualified trusts without causing a lump sum distribution. When such plans pass to qualified trusts, the minimum required distributions from the plan are calculated over the life expectancy of the eldest beneficiary of such qualified trust.

Q: If I plan to use retirement assets to fund a bypass or credit shelter trust, what steps should I take now?

A: Your retirement plan may be used to fund a bypass or credit shelter trust upon your death but it is important that the language of such bypass or credit shelter trust allow it to be recognized by the IRS as a qualified trust. It is also important that the beneficiary designation of such plan dovetail with your estate plan by naming such bypass trust or credit shelter trust as the primary or alternate beneficiary of the retirement plan. Finally, in the case of 401(k) plans, it is necessary to ask an attorney to review the terms of such plan to insure that distributing the plan to a qualified trust will not result in a lump sum distribution, as each 401(k) plan is unique.

Q: All of this sounds complicated. Is this something I can do myself?

A: Usually not. There are some form books and software out there you can purchase but you may do harm to your estate than good. The best option for you is to hire a lawyer. After all, if you have an estate large enough to protect, it is worth a few dollars to keep it.

Q: How much would an attorney cost me for these types of services?

A: It is difficult to say because it depends on the nature of the assets and the difficulty of the plan your lawyer chooses for you. On the other hand, most lawyers will meet with you for nothing and explain your options. Oftentimes, legal services are like anything else. You can pay for only what you absolutely need and save some of the extra services until you can better afford them.

Q: How do I find an estate or business planning attorney?

A: Contact me or Mr. Dunn at the information below. We can attempt to help you with your problem and/or we will give you some names of attorneys who work in that field. Also, there are multiple referral services you can call. One is operated by the State Bar of Texas and they can be contacted through the web.