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Estate Planning Developing a plan to administer and distribute assets after death in accordance with deceased’s wishes and needs of survivors while minimizing taxes

Estate Planning

Who Needs Estate Planning anticipate psychological and financial needs of family provide enough income or capital or both to ensure a continuation of their way of life People planning Asset planning to make sure your assets will go to the desired beneficiaries

Why Does An Estate Break Up? Death-related costs Inflation Lack of liquidity Improper use of vehicles of transfer Disabilities

Probate estate - all property that can be transferred by a will –or intestate laws if no valid will Gross estate - all property subject to federal estate taxes upon death –both probate and nonprobate Nonprobate estate - property which passes by means other than by a will What is Your Estate?

The Estate Planning Process 1. Assess family situation and set goals 2. Gather comprehensive and accurate data 3. List assets and determine value of estate 4. Designate beneficiaries of estate’s assets 5. Estimate estate transfer costs 6. Formulate and implement your plan 7. Review and revise as necessary

Wills A will is a written, legal declaration of a person's wishes concerning the disposition of his/her property upon death

Absence of a Valid Will: Intestacy State law of intestate succession determines how property passes Decedent’s spouse Children and other offspring If none of the above then parents, siblings will receive a share property Otherwise property escheats to the state

Preparing the Will 1. Plan for distributing assets in accordance with testator’s wishes, needs of beneficiaries, and federal and state and tax laws 2. Consider changes in family circumstances that might occur after execution 3. Be concise and complete in describing testator’s desires

Common Features of a Will Introductory clause Direction of payments Disposition of property Appointment clause Tax clause Simultaneous death clause Execution and attestation clause Witness clause

Requirements of a Valid Will Mental Capacity Freedom of Choice Proper Execution must be of sound mind no undue influence over the testator must meet state requirements and be free from fraud

Changing or Revoking a Will: Codicils Codicil - modify a will without revoking it Reasons for changing a will –Health or financial circumstances change –Births, deaths, marriages, or divorces –Testator moves to another state –Executor, trustee, or guardian can no longer serve –Substantial changes occur in the tax law

Changing or Revoking a Will: Codicils Will may be revoked by testator, or law, when 1. Later will expressly revokes prior wills 2. Codicil expressly revokes all wills earlier than one being modified 3. Later will is inconsistent with a former will 4. Physically mutilating, burning, tearing, or defacing the will with the intention of revoking it

Letter of Last Instruction Informal memorandum - not a legal document Details items not included in a will –Location of will and other documents –Funeral and burial instructions –Explanation of will provisions –Legal and accounting services –Disposition of smaller items –Personal matters

Administration of an Estate Court oversees probate process –liquidation of estate Executor or court-appointed administrator acts as personal representative Executor inventories assets, pays debts and taxes (both income and estate), and distributes remaining assets according to will

Other Estate Planning Documents Power of Attorney - to handle financial affairs Living Will - wishes of medical treatment Durable Power of Attorney for Healthcare - agent to make medical decisions Ethical Will - informal document to share morals, ethics, experiences, with loved ones

Joint Ownership Joint tenancy with right of survivorship – ownership passes to other tenant at death either tenant can sever the tenancy Tenancy by the entirety – only between husband and wife With each, co-owners have equal interests, and property passes automatically by operation of law

Other Types of Ownership Tenancy in common no right of survivorship each tenant can leave his/her share to anyone can have unequal interests Community Property marital ownership in some states where spouses equally own all assets acquired during marriage either can leave their half to anyone With both, the will controls property disposition

Trusts A trust is a legal relationship that facilitates the transfer of property and the income from that property to another party

Why Use a Trust? Income and estate tax savings Managing and conserving property

Selecting a Trustee Trustee should: possess sound business knowledge and judgment have intimate knowledge of beneficiary’s needs and financial situation Trustee must be: skilled in investment and trust management available to beneficiaries able to make impartial decisions

Types of Trusts Living (inter vivos) Trust - created during grantor's lifetime; last for a limited period or continue after grantor's death Revocable Living Trust - grantor may revoke trust and regain property; grantor pays income taxes Irrevocable Living Trust - grantor forfeits all rights to trust property; trust pays income taxes

Types of Trusts Irrevocable Living Trust  Management continuity and income flow are ensured; no probate necessary  Trustee assumes burdens of investment decisions and management responsibility  Terms and amount of assets placed into trust do not become public knowledge

Living Trusts and Pour-Over Wills A pour-over will passes the remainder of estate property to a previously established living trust Assures all estate assets will be managed by the trust, including those left out or acquired after trust was established

Types of Trusts Testamentary Trust created after death according to will provisions no tax savings since grantor owns property until death Irrevocable Life Insurance Trust created while living and funded with life insurance removes proceeds of policy from grantor's estate usually used to pay estate taxes or care for family

Federal Unified Transfer Taxes Gift tax - lifetime gifts Estate tax - death-time gifts Tax rate the same for gifts and estates - Unified rate schedule

Federal Unified Transfer Tax Rates

Unified Credits and Applicable Exclusion Amounts for Estates and Gifts

Is it Taxable? Annual Exclusion - Gifts up to $13,000 (indexed) can be given yearly to any number of individuals tax free Gift Splitting – Gift given by one spouse can be treated as if each had given half of it Not everything transferred by an individual is subject to a gift tax

Gift Splitting Charitable and marital gifts –Free from gift and estate taxes –Reduce value of donor’s estate for estate tax purposes –Do not reduce exemption amount that can be transferred to others tax free Charitable Deduction - Unlimited amount to qualified charity Marital Deduction - Unlimited amount given to a spouse (if U.S. citizen)

Reasons for Making Lifetime Gifts Gift tax annual exclusion Gift tax exclusion escapes estate tax Appreciation in value Credit limit Impact of marital deduction

Calculating Estate Taxes Estate taxes assessed on –value of property transferred to others at death –certain transfers made during a person’s lifetime Estates are taxed at federal and state levels Estate tax rates are higher than income tax rates

Computing Federal Estate Tax 1.Determine the gross estate - all property in which decedent had an interest 2.Subtract funeral and administrative expenses, debts, and other allowable expenses to get adjusted gross estate 3.Subtract any marital or charitable deductions to get taxable estate

4. Add back any taxable gifts made during deceased's lifetime after 1976 to get estate tax base use unified rate schedule to compute tentative tax 5. Apply any gift taxes previously paid and unified tax credit to determine total death taxes 6. Subtract state death tax credit to determine federal estate tax due Computing Federal Estate Tax

Estate Planning Techniques Dividing Giving income-producing property to children –either outright or in trust Establishing a corporation Properly qualifying for federal estate tax marital deduction

Deferring Nonqualified deferred-compensation plans Private annuities Qualified pension and profit-sharing plans Government Series EE bonds Stocks with no or low dividends Life insurance policies Depreciable real estate Installment payment of federal estate taxes Estate Planning Techniques

Life Insurance as an Estate Planning Tool If someone other than insured owns the policy, proceeds can pass to decedent’s beneficiaries free of income tax, estate tax, inheritance tax, and probate costs After insured’s death, trustee uses insurance proceeds to benefit surviving family members