Estate Planning Simplified Law Office of R ICHARD M. B ASKETT Attorney - CPA Suite North Higgins Avenue Missoula, Montana (406)

Some Estate Planning Tools Pre-Death Living (Revocable) Trust Irrevocable Trust Gifts Durable General Power of Attorney Durable Health Care Power of Attorney Living Will Guardianship Conservatorship At & After Death Probate – Will Non-Probate – Living (Revocable) Trust – Joint Property – Beneficiary Designations Life Insurance Retirement Plan TOD Account (Stocks) POD Account (Bank Accts) Beneficiary Deed 2

Common Terms Will Trust – Inter Vivos Trusts Living (Revocable) Trust Irrevocable Trust – Life Insurance Trust – Testamentary Trusts 3

How They Compare Will Not effective until death Governs Probate assets Personal Representative controls the estate Living Trust Can be used while alive and to control disposition of assets after death Governs assets held in the trust Trustee controls the trust 4

Elements of a Trust Trustor / Settlor / Grantor – The person who creates a trust Trustee – Owns legal title to assets in trust – Administers trust in accordance with trust instrument for benefit of the beneficiaries Beneficiary – Receives the benefit of the trust Trustee Trustor Beneficiary 5

Different Uses for Different Trusts Living Trust – Will substitute – Same person is usually Trustor, Trustee & Beneficiary – Avoids probate as to those assets in the trust – May or may not have tax planning use – May or may not continue after death Irrevocable Trust – Usually, tax planning use, such as lifetime gifts to minors or to hold life insurance policy – Very restrictive as to any benefit that can be provided for person setting it up (Trustor) Testamentary Trust – Created under Will, so does not avoid probate – Not in effect while Testator is alive – Used for tax planning (e.g., bypass trust) or for asset management (e.g., minor children) 6

Common Terms (Cont’d) Power of Attorney – Principal – Agent Living Will – Comfort One – Advance Directive Testate – Die with a valid Will Testator / Testatrix Intestate – Die without a valid Will 7

Common Terms (Cont’d) Personal Representative (Executor) Trustor / Settlor / Grantor – Used interchangeably Trustee Beneficiary Principal Agent 8

Common Terms (Cont’d) Gift – Lifetime Devise – Formerly: Real Estate – Now: Everything Bequest – Cash or other personal property Estate Tax Inheritance Tax Gift Tax 9

Common Terms (Cont’d) Probate – Court-controlled process of distributing an estate Probate Assets – Pass through the hands of the Personal Representative Non-Probate Assets – Pass directly to the beneficiary Estate – Taxable Estate – Probate Estate 10

The “Estate” Probate Estate Assets that pass through the hands of the Personal Representative and are subject to control by the probate court Does not include non- probate assets Taxable Estate Probate Assets + Nonprobate Assets – Liabilities If less than $3.5 Million, no estate tax 11

Probate Submit Will, if any, to Court Appoint Personal Representative (Letters) Collect assets Publish notice to creditors and pay debts File decedent’s final income tax return File any necessary estate/inheritance tax returns Account for administration of estate Distribute to Devisees 12

What the Will Controls Assets that do not pass by non-probate means The Will does not override non-probate transfers Will is effective upon your death – Can be amended, revoked or replaced any time prior to your death as long as you have testamentary capacity 13

What the Will can do Pass probate assets Create testamentary trusts – Often, for tax planning purposes – Also to provide for asset management Name Personal Representative Name Trustee of Testamentary Trusts Name Guardian 14

Elective Share A surviving spouse has a right to elect against a Will and receive the value of the elective- share percentage of the “augmented estate,” determined by the length of time the spouse and the decedent were married to each other – The elective-share percentage ranges from 3% after 1 year of marriage to 50% after 15 years 15

Testamentary Trusts Created under the terms of a Will – So, not created until your death Tax Planning Uses – Trust can be created to hold assets for surviving spouse, but which will not count as part of surviving spouse’s estate for tax purposes Asset Management Uses – Beneficiary may not be capable of managing assets (e.g., minor children) 16

Dying Without a Will (Intestacy) The state provides a “Will” for you Probate assets pass in manner prescribed by intestacy statute – In general, to surviving spouse, and then to children – Beware: Convoluted rules when decedent has children other than with spouse Still, only probate assets are governed by intestacy statute; non-probate assets are not 17

Intestacy Examples (Montana) Example 1: Husband and Wife have had three children during their marriage. Upon Husband’s death, Wife and all (or any) of the children are still living. His entire estate will pass to Wife. Example 2: Same facts as Example 1, and now Wife dies. Her intestate estate passes in equal shares to the three children. 18

Intestacy Examples (Montana) Example 3: Husband and Wife have no children. Husband’s mother is still alive when Husband dies. – Wife takes the first $200,000 plus ¾ of the balance of Husband’s intestate estate. – Husband’s mother takes ¼ of Husband’s intestate estate in excess of $200,000. – However, had any descendant of Husband survived him, Husband’s mother would not have taken any share. 19

Intestacy Examples (Montana) Example 4: Wife had a child born of her first marriage. She married a second time, during which marriage she died, survived by her second husband and her child. – The second husband takes the first $100,000 plus one-half of the balance of Wife’s intestate estate. – The child takes the other ½ of the intestate estate in excess of $100,

Intestacy Examples (Montana) Example 5: Wife had a child with Husband during their marriage and Husband has a child from a prior marriage. Wife is survived by Husband, her child and her step-child. – Husband takes the first $150,000 plus ½ of the balance of Wife’s intestate estate. – Wife’s child takes the other ½ of the intestate estate in excess of $150,000. – The step-child takes nothing. 21

Non-Probate Tools: Living (Revocable) Trusts Management of assets owned by the trust – While you are alive (distinguish Wills) – After you are dead (similar to Wills) Tax planning (same as Wills) Avoid probate – Assets in the trust – Especially useful when assets in multiple states 22

Non-Probate Tools: Life Insurance Beneficiary Designation Insurance company pays directly to the beneficiary, not the Personal Representative (unless the Estate is the beneficiary) 23

Non-Probate Tools: Retirement Plans Beneficiary Designation Again, paid directly to named beneficiary, so non-probate 24

Non-Probate Tools: Joint Tenancy Passes automatically on death to surviving joint tenant “A & B as joint tenants” or “A & B as joint tenants (and not as tenants in common)” Different tax treatment if joint tenants are married than if not Contrast Tenancy in Common 25

Joint Tenancy vs. Tenancy in Common Joint Tenancy Each co-tenant has undivided interest in the entire property Deceased co-tenant’s interest passes automatically at death to surviving co-tenant(s) Tenancy in Common Each co-tenant has undivided interest in the entire property Deceased co-tenant’s interest passes through probate estate in manner directed by Will (or intestacy statute) 26

Joint Tenancy Pros & Cons Advantages Simple Avoids probate Especially useful for husband and wife Disadvantages May frustrate tax planning (in Will or Living Trust) May lose stepped up basis May pass to unintended beneficiary Potential claims of creditors of other joint tenant May have right to draw out account May require consent of other joint tenant to transfer or encumber 27

Non-Probate Tools: POD Accounts Similar to joint tenancy in that asset passes to named beneficiary at your death without probate (need beneficiary designation) But, beneficiary has no ownership interest in account prior to your death Change beneficiary at any time “POD” means payable on death Bank accounts only 28

Non-Probate Tools: TOD Accounts Same as POD Accounts, but applies to security accounts held at stock brokers “TOD” means transfer on death Need to fill out a beneficiary designation 29

Non-Probate Tools: Beneficiary Deeds New: Available in Montana as of 10/1/2007 Operate similarly to POD and TOD Accounts: – Designate a beneficiary – Beneficiary has no ownership interest in property until your death – Upon your death, your interest transfers automatically to beneficiary without probate Subject to Joint Tenancy 30

Drawbacks to Beneficiary Designations Each institution has its own form – Life insurance company – Bank (POD Account) – Stock broker (TOD Account) – Retirement Plan Each form may differ in what happens if a beneficiary does not survive Each time you want to change your beneficiaries, requires filling out multiple designation forms 31

Drawbacks to Beneficiary Designations (Cont’d) Example: You have designated your children, A, B & C, as TOD beneficiaries in equal shares of your account at a stock brokerage. A has 2 children; B has 3 children, and C has no children – If A does not survive you, does A’s share pass to A’s 2 children, or is it divided between B & C? – If neither A nor B nor C survive you, would you like their children to receive equal shares (1/5 each) or would you want A’s children to get 1/6 each and B’s to get 1/9 each? – If shares pass to anyone who is young, would you want them to receive their share outright, or should it be managed by a trustee or custodian? 32

Drawbacks to Beneficiary Designations (Cont’d) Each beneficiary designation form may have different results as to these issues. It is up to you to coordinate all the beneficiary designation forms to carry out your intentions 33

Drawbacks to Living Trusts Inconvenience: If you “fund” (i.e., transfer assets into) your living trust while you are alive, from then on you need to deal with those assets as trustee, rather than in your individual capacity Probate: If the purpose of the trust is to avoid probate, but at the date of your death not all your assets are in the trust, a probate may be required anyway 34

Simplifying Matters The goal is to find a way to – Keep things simple during your lifetime by avoiding the necessity of dealing with your own assets through a living trust – Achieve the benefit of avoiding probate Note: For some individuals, especially professionals, going through a probate provides significant benefits 35

The Solution Create a living trust, but do not fund it – Certain exceptions to this rule Use beneficiary designations to name your trust as beneficiary, with transfers to take place at time of your death but outside of probate 36

Benefits of the Unfunded Living Trust Avoids the “Drawbacks to Beneficiary Designations” – The trust sets forth what happens when a beneficiary does not survive you – The trust can be amended from time to time, without having to go back to amend multiple beneficiary designation forms – The Trust can provide for asset management for beneficiaries who are too young or for any other reason unable to manage finances There is no need to fund the trust while you are alive 37

The Unfunded Living Trust Designate the Trust as the beneficiary where possible – Beneficiary of TOD Account – Beneficiary of POD Account – Beneficiary of Beneficiary Deed – Beneficiary of Life Insurance – Beneficiary of Retirement Plan Caution: Often the surviving spouse is the preferred designated beneficiary of a retirement plan 38

The Unfunded Living Trust Transfer assets into the Trust when necessary – Tangible personal property Personal and household effects Automobile titles – Stock in closely held corporations (not held at stock brokerage) where permitted Beware of any agreements restricting transfer 39

You Still Need a Will Even with an unfunded living (revocable) trust, you still need a Will, in case you leave probate assets The Will is where a guardian is nominated if you have any minor children But the Will is very simple, when used in conjunction with a Living trust 40

Tax Considerations No federal estate tax on estates under $5 Million – Scheduled to drop to $1 Million exemption in 2013 – Probably will not change as scheduled – If stays at $5 Million, most can plan their estates without taxes as a concern No Montana inheritance tax 41

Tax Considerations (Cont’d) Gift tax on gifts over $13,000 / year / person – $26,000 / year /person for a married couple – Lifetime exemption of $1 Million Cuts into $3.5 Million Estate Tax exemption 42

Some Other Tools Durable General Power of Attorney Durable Health Care Power of Attorney Living Will Guardianship Conservatorship 43

Durable General Power of Attorney Designates an agent who is authorized to act on your behalf The agent is to act in your best interests The agent does not supplant your authority, cannot override you The agent can, however, do many things that would otherwise require appointment of a guardian – Sign your income tax return – Have access to your bank account – Buy and sell assets in your name – Transfer assets into your living trust 44

Durable General Power of Attorney “Durable” if it has language that provides it is to continue even if you become incompetent Can choose whether it is effective immediately, or only once you become incompetent – Advantages and disadvantages to both, but generally recommend making it effective immediately Power of Attorney terminates upon your death; effective only while you are alive 45

Durable Health Care Power of Attorney Same idea as Durable General Power of Attorney, but limited to medical decisions If you are unable to consent to medical procedure or treatment, someone can be named to give consent and make decisions on your behalf 46

Living Will Limited to the decision whether life support should be provided when: – You have a terminal condition – Without life support, your death would be imminent Usually provides that life support can be withdrawn, but can provide that life support is to be continued Can name agent to make this decision, or leave it to the doctors Define “life support” 47

Guardianship You are no longer competent to handle your own affairs You lose control to the guardian (vs. agent) Requires court hearing as to competency, so lawyers, doctors, witnesses If established, requires periodic accounting to the court 48

Conservatorship Similar to Guardianship, except conservator is responsible for management of your finances, while guardian is responsible for your person 49

Questions 50