Basic Estate Planning Concepts


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Do you have a written estate plan? If you do not have a written estate plan, including a will, power of attorney, and a healthcare surrogate designation/living will directive, now is the time to create one. If you have a written plan, perhaps it’s time for a review. By Jim Dressman, DBL Law

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Basic Estate Planning Concepts

  1. 1. Estate Planning ConceptsJames A. Dressman, IIIDressman Benzinger LaVelle
  2. 2. Probate is the process by which the Probate Court: Verifies (“proves”) the authenticity of the offered will Authorizes a personal representative for estate(Executor/trix or Administrator) Ensures that the estate administration is handledproperly (Supervises the personal representative) Payment of debts Distribution of probate assets to beneficiaries either via willor via statute of descent and distribution if no will
  3. 3. Two Types of Assets Upon Death: Probate: Assets titled solely in the name of thedecedent (e.g. bank accounts, stock, real estate andpersonal items) These assets must pass through the probate process. Non-Probate: Assets that transfer directly tobeneficiaries upon the decedent’s death (e.g. lifeinsurance policies, joint bank accounts, transfer ondeath deeds, assets transferred to a revocable livingtrust prior to death & investment accounts withbeneficiary designations These assets are not subject to the probate process.
  4. 4. Probate assets can pass to beneficiaries in oneof two ways: Testate Succession: Through a properly executed will.Intestate Succession (i.e. no properly executed will): Intestate Succession: State statute of descent anddistribution governs who receives property from adeceased person State statute of descent and distribution may be quitedifferent from decedent’s actual preferences Lose opportunity to select an executor/trix of estate andguardian for minor children or other dependent
  5. 5. State statute of descent and distribution generally in Kentucky: ½ to surviving spouse, if any. Remainder in the following order: Children and their descendants Parents Brothers and sisters Surviving spouse State statute of descent and distribution generally in Ohio: ½ to surviving spouse or 1/3 if two or more children. Remainder inthe following order: To children, if no surviving spouse To surviving spouse, if all surviving children are of survivingspouse etc., etc.
  6. 6. Basic Estate Plan Last Will & Testament Financial Power of Attorney Healthcare Power of Attorney/Living Will Intervivos (living) Trust Special treatment of real estate in another state LLC Revocable trust
  7. 7. Will & Testament Dictate how property is distributed at death Appoint trusted relative or friend to wind up youraffairs (Executor/rix) Appoint guardian for minor children or otherdependent Establish testamentary trust for minor or specialneeds children (or for other purposes) Charitable bequests
  8. 8. Power of Attorney Appoint a trusted individual (“attorney-in-fact”) tomanage your finances in the event of incapacity. Consider naming multiple “back-ups” to primaryattorney-in-fact.
  9. 9. Power of Attorney/Living Will Appoint a trusted individual to make health-caredecisions in the event of incapacity. To avoid uncertainty, authorize (or do not authorize) namedrepresentative to withdraw life support when you are in aterminal condition or permanently unconscious state. Consider naming one or more “back-ups” to your namedrepresentative. Well drafted Healthcare POA acts as a living will ifrepresentatives not available
  10. 10. (Living) Trusts Revocable Irrevocable
  11. 11. Intervivos (Living) Trust A revocable intervivos trust is a document created during lifetime fortrust asset management in the event of disability or death Trust can be terminated or trust terms can be changed at any timeduring lifetime Grantor can also act as Trustee and have complete control over thetrust assets until disability or death. Name a Successor Trustee in the trust – The Successor Trustee willtake control of the trust upon disability or death and distribute the trustassets according to the terms of the trust (without need of probate) Integrate with will and other estate planning documents (a “pour-over” will) Can hold real estate in another state
  12. 12. Living Trust Purposes include: Avoid probate Establish benchmarks for distributions (e.g.beneficiary must reach a certain age) and establishcriteria for earlier distributions (education, new home,health issues, etc.) Provide for special needs beneficiaries withoutjeopardizing qualifications for government programs(Medicaid)
  13. 13. Living Trust Must actually transfer all assets into the trust ordesignate trust as beneficiary to avoid probate Types of assets typically transferred to a trust: bankaccounts, homes, and non-titled assets such as furniture,art, jewelry, etc. It may not be advisable to transfer some of your assetsinto a trust (e.g. 401ks, IRAs) because of certain incometax characteristics and options It may be more advantageous for the trust to be thebeneficiary of an asset, rather than the owner (e.g. lifeinsurance, annuities);
  14. 14. Intervivos (Living) Trusts Cannot be revoked or amended Used to “complete” gifts for tax planning and charitable giving “Crummey” trust Takes advantage of $13,000 ($26,000) annual gift tax exclusion Life insurance trust (known as “ILIT”) Keep life insurance proceeds out of taxable estate Dynasty trust Benefits multiple generations and takes advantage of generationskipping tax exemption (credit) Charitable remainder or lead trust Tax exempt – avoids income tax on sale of appreciated assets Grantor/Trustee may retain powers to name charitable beneficiaries Grantor or other non-charitable beneficiaries retain an interest (incomewith remainder trust, remainder with lead trust) Many variations
  15. 15. Federal Tax Law Credit Exemption Equivalent of $5,000,000 ($10,000,000 formarried couples) extended and indexed for inflation. For 2013,credit exemption equivalent is $5,250,000 ($10,500,000 for marriedcouples) Portability made permanent Estate and Gift Tax increased from 35% to 40% Estate, Gift, & Generation skipping unified credit made permanent Extends capital gains and dividend rates on incomes under$400,000 (individual), $425,000 (heads of households), and$450,000 (married filing joint). Rate is 20% on those with higherincomes Tax free distributions from IRAs of up to $100,000 per taxpayer forthose 70½ or older to charity extended to calendar year 2013. Ohio recently abolished its estate tax. Kentucky has a limitedinheritance tax which exempts transfers to children, grandchildrenand siblings.
  16. 16. Charitable Giving Techniques Charitable remainder or lead trusts and annuities: Income tax favored Tax exempt trust pays no income tax on sales of appreciated assets Provides income stream to non-charitable beneficiaries Life insurance Lowest cost, big benefits 401K/IRA Built up ordinary income tax and federal estate tax avoided Could leave less than 1/3 to a non-charitable beneficiary after reduction forfederal and state income and death taxes. Direct transfers to charities: (1) must be at least 70½; (2) limited to $100,000; (3)must complete by 12/31/13; and (4) limited to IRAs. Legacy bequests To substitute for support of regular lifetime giving Outright gifts Especially appropriate for appreciated securities
  17. 17. – What is on your mind?James A. Dressman, IIIDressman Benzinger LaVelle psc859-426-2150 •