Estate Planning

Estate planning n Goals and objectives n Reviewing current plan n Passing property at death n Probate n Estate taxes (federal, state) n Unification of estate and gift taxes n Other transfer issues n Life planning

What are some common estate planning goals?

Is your current plan effective? n Asset inventory  Comprehensive/up to date  Accurate on ownership and title n Reasons for review  Change in financial position/goals  Deaths of beneficiaries, executors, guardians  Relocation  Additions to family  Changes in the law  Need to ensure tax-effective transfers  Need for estate liquidity

Passing property at death By will By contract or trust By operation of law By will By contract or trust By operation of law

Passing property at death By will n Attorney assistance n Witnesses n Safeguarding n Changing n Letter of instructions

Passing property at death Advantages of a will (vs. dying without one) n Assets are distributed as desired n Personal representative can be named (executor/executrix/co-executors) n Potential guardians for children can be named n Cost and time of probate can be minimized n Trust can be established to protect and manage assets (testamentary trust)

Passing property at death Disadvantages of a will (vs. other property transfer methods) n Wills do not provide for lifetime planning for:  Disability  Your own guardianship  Management of your assets while alive n Assets are subject to probate n Wills become public documents at death n Review is needed if you move to another state or laws change

Passing property at death By will By contract or trust By operation of law By will By contract or trust By operation of law

Passing property at death By contract n Life insurance policies n Annuities n Individual retirement accounts (IRAs) n Employee benefit plans

Passing property at death By trust n A legal device to transfer assets or property to a trustee to manage for beneficiaries of the trust n Involves:  Grantor  Trustee  Beneficiary  Trust agreement (contract)  Corpus (trust property)

Passing property at death By trust n A trust can:  Provide for professional management  Make distributions to beneficiaries during the lifetime of the grantor or at death n A trust can be:  Testamentary (bypass, QTIP)  Living (revocable, irrevocable)

Passing property at death By will By contract or trust By operation of law By will By contract or trust By operation of law

Passing property at death By operation of law n Passing property by title: “The built-in estate plan” n Joint tenancy with right of survivorship n Community property n Intestate death n Dower/curtesy provisions

Passing property at death Joint tenancy with right of survivorship n Property is owned equally with others n You can:  Give your interest in the property  Sell your interest n You cannot:  Pass your interest at death to others  surviving co-owners acquire your entire interest

Passing property at death Community property n Applies only in certain states and only to married persons n Assets acquired during marriage are considered equally owned (50%/50%) n Assets acquired prior to marriage or by gift/inheritance during marriage remain separate property n You can:  Give your interest in the property  Sell your interest  Pass your interest at death

Passing property at death Intestate death (death without a will) n Assets that would have passed under your will pass by state law instead Dower/curtesy provisions n Surviving spouse may be entitled to a certain percentage of the deceased spouse’s estate n To protect a spouse from being disinherited by the other spouse

Passing property at death By will By contract or trust By operation of law By will By contract or trust By operation of law

Probate Functions of the probate process n Appoint an administrator if no will n Interpret the will n Inventory and assess value of all property n Locate and identify heirs n Identify and settle outstanding loans and liabilities n Complete and file tax returns n Distribute all property

Probate Disadvantages of probate n Probate proceedings are public n Probate can be costly n Probate can prolong the settlement of an estate n Heirs may be prevented from receiving their inheritance in a timely fashion

Federal estate tax Adjustments to gross estate n Debts n Probate/administrative expenses n Funeral expenses Deductions from gross estate n Unlimited marital deduction n Unlimited charitable deduction

Federal estate tax Life insurance and certain trusts n Life insurance proceeds are included in your taxable estate, but:  Are excluded if you do not have an ownership interest within three years before death  Are deducted if spouse is beneficiary (under the unlimited marital deduction) n Assets must be transferred to an irrevocable living trust at least three years before death

Unification of estate and gift taxes The unified transfer credit n First $2,000,000 (2006) is exempt from estate tax n Future years: YearExemption 2007 and 2008$2,000, $3,500, No limit 2011$1,000,000

State taxes at death The state gets its share n Your state of residence, or “domicile,” determines which state will tax n Three state approaches:  Gap-tax or state death tax credit  Direct estate tax  Inheritance tax

Unification of estate and gift taxes Annual gift tax exclusion n $12,000 (indexed) per year to as many individuals as you wish n Gifts can be split: both spouses’ exclusions are used for a gift of property belonging to one of them n Any gift tax is liability of donor n Lifetime taxable gifts are added to estate at death (unless you elect to pay it at time of gift)

Other transfer issues Rules of cost basis  death n Property basis is “stepped up” to fair market value on the date of death n At later sale, capital gain is measured from this stepped-up basis Rules of cost basis  gifts n Property basis for donee is basis held by donor (assuming appreciated property) n At later sale, capital gain is measured from this basis

Life planning n Powers of attorney  General  Specific  Durable  Springing n Health care proxy n Living will

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