PART 5: LIFE CYCLE ISSUES Chapter 17 Estate Planning: Saving Your Heirs Money and Headaches

17-2 The Estate Planning Process Step 1: Determine the Value of Your Estate Determine the value of your assets. Determine the value of your assets. Use the life insurance proceeds amount (the death benefit) to determine value of life insurance. Use the life insurance proceeds amount (the death benefit) to determine value of life insurance. Include employer-sponsored death benefits. Include employer-sponsored death benefits. In 2006, the first $2 million of an estate can be passed tax-free. In 2006, the first $2 million of an estate can be passed tax-free.

17-3 The Estate Planning Process Step 2: Choose Your Heirs and Decide What They Receive Once you know what you have, you can decide who’s going to get it. Once you know what you have, you can decide who’s going to get it. In addition to a spouse, consider the special needs of your dependents. In addition to a spouse, consider the special needs of your dependents.

17-4 The Estate Planning Process Step 3: Determine the Cash Needs of the Estate Before distributing property to heirs, must pay medical costs, funeral expenses, legal fees, outstanding debt, and taxes. Before distributing property to heirs, must pay medical costs, funeral expenses, legal fees, outstanding debt, and taxes. Use liquid funds to cover tax needs. Use liquid funds to cover tax needs.

17-5 The Estate Planning Process Step 4: Select and Implement Your Estate Planning Techniques Decide which estate planning tools are most appropriate to achieve your goals. Decide which estate planning tools are most appropriate to achieve your goals.

17-6 Estate Planning Tools Will. Will. Trust. Trust. General durable power of attorney. General durable power of attorney. Durable power of attorney for health care. Durable power of attorney for health care. Living will. Living will. Disposition of last remains. Disposition of last remains.

17-7 More Estate Planning Tools Lifetime gifts. Lifetime gifts. Life insurance. Life insurance. Joint ownership. Joint ownership. Family ownership. Family ownership. Family limited partnership. Family limited partnership. Family LLC. Family LLC.

17-8 Taxes Income tax. Income tax. Form Form Estate tax. Estate tax. Gift tax. Gift tax. Generation-skipping tax. Generation-skipping tax.

17-9 Understanding and Avoiding Estate Taxes The estate tax exemption (unified tax credit) is $2 million for years 2006 – 2008 (46% tax rate for 2006 and 45% tax rate for ). The estate tax exemption (unified tax credit) is $2 million for years 2006 – 2008 (46% tax rate for 2006 and 45% tax rate for ). For 2009, the exemption is $3.5 million. For 2009, the exemption is $3.5 million. Year 2010 – no estate tax. Year 2010 – no estate tax. Year 2011 – exemption is $1 million and tax rate is 55% Year 2011 – exemption is $1 million and tax rate is 55%

17-10 Understanding and Avoiding Estate Taxes Move towards estate tax planning as net worth climbs above the tax-free transfer threshold. Move towards estate tax planning as net worth climbs above the tax-free transfer threshold. The uncertainty of the estate tax rate and the exemption amount make estate planning more difficult. The uncertainty of the estate tax rate and the exemption amount make estate planning more difficult. As the exemption amount increases, the demand for complex estate plans decreases. As the exemption amount increases, the demand for complex estate plans decreases.

17-11 Gift Taxes Gifts are an excellent way of transferring wealth before you die. Gifts are an excellent way of transferring wealth before you die. The recipient is not taxed. The recipient is not taxed. Gift tax exclusion is $12,000 annually per recipient. Gift tax exclusion is $12,000 annually per recipient. The gift tax and the estate tax work together with a total lifetime exemption from tax of $2 million (currently). The gift tax and the estate tax work together with a total lifetime exemption from tax of $2 million (currently). There is a $1 million lifetime tax-free gift limit. There is a $1 million lifetime tax-free gift limit. This does not include tax-free gifts made using the annual gift tax exclusion (currently $12,000). This does not include tax-free gifts made using the annual gift tax exclusion (currently $12,000).

17-12 Unlimited Marital Deduction There is no limit to the size of estate transfers between spouses on a tax-free basis. There is no limit to the size of estate transfers between spouses on a tax-free basis. Spouse must be U.S. citizen. Spouse must be U.S. citizen. Estates up to $2 million can be transferred tax- free to any other beneficiary. Estates up to $2 million can be transferred tax- free to any other beneficiary. Use special estate planning techniques available to spouses to reduce estate taxes. Use special estate planning techniques available to spouses to reduce estate taxes.

17-13 The Generation-Skipping Transfer Tax An additional tax is imposed on gifts that skip a generation. An additional tax is imposed on gifts that skip a generation. From grandparent to grandchild. From grandparent to grandchild.

17-14 Wills A legal document that describes how to transfer your property to others. A legal document that describes how to transfer your property to others. Designate: Designate: Beneficiaries – those who are willed property. Beneficiaries – those who are willed property. A personal representative (executor) who will carry out the will’s provisions. A personal representative (executor) who will carry out the will’s provisions. A trustee if the will creates a trust at death. A trustee if the will creates a trust at death. A guardian – who will care for children under the age of 18. A guardian – who will care for children under the age of 18.

17-15 Intestate The decedent did not leave a will, or the will is invalid. The decedent did not leave a will, or the will is invalid. The court appoints the personal representative (executor). The court appoints the personal representative (executor). After expenses and taxes are paid, assets are distributed in accordance with state law. After expenses and taxes are paid, assets are distributed in accordance with state law.

17-16 Colorado Intestacy Laws If a person leaves no valid will: If a person leaves no valid will: Surviving spouse receives the estate. Surviving spouse receives the estate. If no surviving spouse, then children share equally. If no surviving spouse, then children share equally. If no spouse or children, then parents share equally. If no spouse or children, then parents share equally. If no surviving parents, then siblings or their children share equally. If no surviving parents, then siblings or their children share equally.

17-17 Wills and Probate Probate is the legal process of distributing an estate’s assets. Probate is the legal process of distributing an estate’s assets. Probate validates the will. Probate validates the will. Probate court appoints a personal representative (executor), generally the one designated in the will. Probate court appoints a personal representative (executor), generally the one designated in the will. Letters Testamentary. Letters Testamentary. Once the expenses and taxes have been paid, the assets are distributed and the estate is closed. Once the expenses and taxes have been paid, the assets are distributed and the estate is closed.

17-18 Probate Advantages Validates the will. Validates the will. Resolves disputes concerning the will. Resolves disputes concerning the will. In terrorem clause. In terrorem clause. Allows for an orderly distribution of assets if intestate. Allows for an orderly distribution of assets if intestate. Disadvantages Costs (legal fees, PR fees, court filing fees). Slow, time consuming process, especially if there are challenges or tax problems. Probate codes are a state law concept; some states have more onerous probate codes than others.

17-19 Wills and Estate Planning Why do you need a will? A Will Can Assure that a child with special needs is taken care of. Assure that a child with special needs is taken care of. Make sure assets are transferred according to your wishes. Make sure assets are transferred according to your wishes. Make special gifts or bequeaths. Make special gifts or bequeaths. Select PR, trustee, guardians, and conservators. Select PR, trustee, guardians, and conservators. Create testamentary trusts. Create testamentary trusts. Without a Will The court will appoint a guardian for any children. The court appoints the personal representative. State law controls who will receive your assets.

17-20 Wills in Colorado You must be at least 18 years and of sound mind. You must be at least 18 years and of sound mind. You must have testamentary capacity. You must have testamentary capacity. You must make the will under your own free will. You must make the will under your own free will. A will can be typed or handwritten (holographic will). A will can be typed or handwritten (holographic will). A will must be dated and signed by the testator. A will must be dated and signed by the testator. Two disinterested persons must sign the will in your presence as witnesses. Two disinterested persons must sign the will in your presence as witnesses. All signatures should be notarized. All signatures should be notarized.

17-21 Writing Your Own Will Do not write your own will. Do not write your own will. Drafting a will requires special skill; have an attorney draft your will. Drafting a will requires special skill; have an attorney draft your will. Holographic wills are often found to be ambiguous or defective, which causes delay, expense, and litigation. Holographic wills are often found to be ambiguous or defective, which causes delay, expense, and litigation.

17-22 Writing a Will A will should contain: A will should contain: Introductory statement. Introductory statement. Payment of expenses and taxes clause. Payment of expenses and taxes clause. Disposition of property clause. Disposition of property clause. Personal property. Personal property. Residual estate. Residual estate. Appointment clause. Appointment clause. Common disaster clause. Common disaster clause. Attestation and witness clause. Attestation and witness clause.

17-23 Updating or Changing a Will – The Codicil A codicil is an attachment to a will that alters or amends a portion of the will. A codicil is an attachment to a will that alters or amends a portion of the will. Make sure your will conforms to your present situation. Make sure your will conforms to your present situation. Substantial changes warrant a new will. Substantial changes warrant a new will. A codicil should be drawn up by a lawyer, witnessed, and attached to the will. A codicil should be drawn up by a lawyer, witnessed, and attached to the will. Codicil vs. amending and restating the will. Codicil vs. amending and restating the will.

17-24 Letter of Last Instructions A letter of last instructions is generally written to the surviving spouse. A letter of last instructions is generally written to the surviving spouse. It is not a legally binding document. It is not a legally binding document. It provides information and directions with respect to the execution of the will. It provides information and directions with respect to the execution of the will.

17-25 Letter of Last Instructions The letter of last instructions may contain: The letter of last instructions may contain: Location of the will, legal documents Location of the will, legal documents Location of financial assets Location of financial assets Names of those to notify of the death Names of those to notify of the death Listing of personal property Listing of personal property Funeral and burial instructions Funeral and burial instructions Organ donations Organ donations

17-26 Selecting an Executor An executor has a dual role: An executor has a dual role: Making sure your wishes are carried out. Making sure your wishes are carried out. Managing your property until the estate is passed on to your heirs. Managing your property until the estate is passed on to your heirs.

17-27 Selecting an Executor The executor will: The executor will: Deal with personal matters Deal with personal matters Pay taxes Pay taxes Manage the financial matters of the estate Manage the financial matters of the estate Distribute assets Distribute assets Make a final accounting to the courts Make a final accounting to the courts

17-28 Other Estate Planning Documents A general durable power of attorney provides for someone to manage your financial affairs should you become incapacitated. A general durable power of attorney provides for someone to manage your financial affairs should you become incapacitated. A durable power of attorney for health care provides for someone to make health care decisions for you should you become incapacitated. A durable power of attorney for health care provides for someone to make health care decisions for you should you become incapacitated. A living will allows you to state your wishes regarding medical treatment in the event of terminal illness or injury. A living will allows you to state your wishes regarding medical treatment in the event of terminal illness or injury.

17-29 Avoiding Probate Probate is essential to validate your will and ensure your provisions are carried out. It can also be time consuming and expensive. Probate is essential to validate your will and ensure your provisions are carried out. It can also be time consuming and expensive. Depending on state law, it might be a good idea to avoid probate. Depending on state law, it might be a good idea to avoid probate.

17-30 Avoiding Probate Life insurance. Life insurance. Retirement plans. Retirement plans. Joint ownership. Joint ownership. Trusts. Trusts.

17-31 Designating Beneficiaries Life insurance. Life insurance. Retirement plans. Retirement plans. Name primary and contingent beneficiaries. Name primary and contingent beneficiaries. Review these designations from time to time. Review these designations from time to time.

17-32 Joint Ownership Jointly-owned assets transfer to the surviving owner without probate. Jointly-owned assets transfer to the surviving owner without probate. 3 forms of joint ownership: 3 forms of joint ownership: Joint tenancy with right of survivorship – ownership passes to survivor, bypasses the will. Joint tenancy with right of survivorship – ownership passes to survivor, bypasses the will. Tenancy in common – decedent’s interest passes under the will. Tenancy in common – decedent’s interest passes under the will. Community property – surviving spouse receives ½ of all property acquired during the marriage. Community property – surviving spouse receives ½ of all property acquired during the marriage.

17-33 Trusts A legal entity that holds and manages an asset for another person. A legal entity that holds and manages an asset for another person. Is created when an individual, a grantor, transfers property to a trustee for the benefit of one or more beneficiaries. Is created when an individual, a grantor, transfers property to a trustee for the benefit of one or more beneficiaries. The trustee can be an individual, an investment firm, or a bank. The trustee can be an individual, an investment firm, or a bank. Any asset can be placed in a trust. Any asset can be placed in a trust.

17-34 Trusts Why use a trust? Why use a trust? Trusts avoid probate. Trusts avoid probate. Trusts are more difficult to challenge in court. Trusts are more difficult to challenge in court. Trusts can reduce estate taxes, but so can wills. Trusts can reduce estate taxes, but so can wills. Trusts allow for professional management. Trusts allow for professional management. Trusts can hold money for a child with special needs or until a child reaches maturity. Trusts can hold money for a child with special needs or until a child reaches maturity. Trusts can ensure that children from a previous marriage will receive an inheritance. Trusts can ensure that children from a previous marriage will receive an inheritance.

17-35 Living Trusts Revocable Living Trusts Place assets in trust while alive, withdraw them later if you wish. Place assets in trust while alive, withdraw them later if you wish. You retain title and have control over assets. You retain title and have control over assets. No tax advantages. No tax advantages. Irrevocable Living Trusts Trust is permanent. It becomes a legal entity, paying taxes on gains produced. Not part of estate, bypasses probate, no estate taxes but possibly gift taxes.

17-36 Testamentary Trusts A testamentary trust is created by a will. A testamentary trust is created by a will. It exists once probate has been completed. It exists once probate has been completed. Common types: Common types: Marital Trusts and Family Trusts – used to reduce estate taxes. Marital Trusts and Family Trusts – used to reduce estate taxes. Qualified Terminable Interest Property Trust (QTIP) – often used in second marriages. Qualified Terminable Interest Property Trust (QTIP) – often used in second marriages. a n n u a l i n c o m e o v e r $ 1 0 0, % c o m p l e t e d c o l l e g e 4 t i m e s m o r e l i k e l y t o h o l d p o s t g r a d u a t e d e g r e e s m a r r i e d c o u p l e s h e a d 8 5 % o f w e a l t h y h o u s e h o l d s

17-37 Estate Planning Checklist 17.1 Do you and your family know… Do you and your family know… Location of your will, power of attorney, and living will? Location of your will, power of attorney, and living will? The name of your attorney and accountant? The name of your attorney and accountant? Where to find your letter of last instructions? Where to find your letter of last instructions? Location of safety deposit box? Location of safety deposit box? Whereabouts of deeds and titles to property? Whereabouts of deeds and titles to property? Site of your investments? Site of your investments? All account numbers? All account numbers? Last year’s income tax return? Last year’s income tax return? Pension and retirement benefits? Pension and retirement benefits?

17-38 A Last Word on Estate Planning Many put off estate planning because it is complex and deals with death. Many put off estate planning because it is complex and deals with death. Go to a professional – don’t do your own estate planning. Go to a professional – don’t do your own estate planning. Make sure your family knows where your estate planning documents are. Make sure your family knows where your estate planning documents are.