There’s a new feature of the exemption that is potentially very important to married couples. <Click> The exemption is portable. That means that any portion of the exemption that is not used by a deceased spouse can be transferred to the surviving spouse. In prior years, that was not the case, so married couples with larger estates had to do what is referred to as bypass planning, typically using a trust. But for 2011 and 2012, such planning will not be necessary for transfer tax purposes, although there are other good reasons to use a bypass trust, but that is more than we want to discuss today. Suffice it to say that <Click>together, a married couple can pass along $10 million tax free as long as the estate of the deceased spouse makes the proper election on the estate tax return.<Click> Portability is scheduled to expire in 2013, unless Congress passes a new law extending this feature.
Cascadia Wealth Management Mc Dowell Estate Planning Basics June 2011
Estate Planning BasicsA Foundation for Success
What Is an Estate Plan? An estate plan is a map This map reflects the way you want your personal and financial affairs to be handled in case of incapacity or death
Who Needs an Estate Plan?Chances are, you do Especially needed if: Not just for the wealthy Your spouse isn’t comfortable with financial matters Without an estate plan, you can’t control what happens You have minor children to your property if you die or Your net worth exceeds the become incapacitated federal transfer tax exemption amount ($5 million in 2011), or, An estate plan makes your if less, your state’s exemption wishes clear, and helps amount avoid family disputes You own property in more than Proper estate planning can one state preserve assets and provide Financial privacy is a concern for loved ones You own a business
Basic Estate Planning Concepts Planning for Incapacity Property Management Planning Health for Death Care Wills and Lifetime Probate Gifting Trusts Tax Basics Life Insurance
Planning for Incapacity Incapacity can strike anyone at any time Failing to plan means a court would have to appoint a guardian Lack of planning increases the burden on your guardian Your guardian’s decisions might not be what you would want
Planning for Incapacity – Health-CareDirectives Durable Power of Do Not Resuscitate Living Will Attorney for Health Care (DNR) Order (Health-Care Proxy) Directs that Lets you designate Puts your resuscitative an agent to make instructions measures be decisions on your in writing withheld or behalf withdrawn Not all types of health-care directives are effective in all states, so be sure to execute the one(s) that will be effective for you.
Planning for Incapacity – PropertyManagement Tools Durable Power ofJoint Ownership Living Trust Attorney (DPOA) Joint owner has Lets you designate Lets a successor the same access an agent to make trustee take over to property as decisions on your management of you do behalf trust property
What Happens If You Die Without anEstate Plan? Some property passes automatically to a joint owner or to a designated beneficiary (e.g., IRAs, retirement plans, life insurance, trusts) All other property generally passes according to state intestacy laws
What Happens If You Die Without anEstate Plan—Intestacy Intestacy laws vary from A typical intestate distribution state to state pattern looks like this: Typical pattern of distribution divides Husband / Father property between surviving spouse and children Your actual wishes are irrelevant ½ ¼ ¼ Many potential Wife Child Child problems
Wills & Probate A will is the cornerstone of an estate plan Directs how your property will be distributed Names executor and guardian for minor children Can accomplish other estate planning goals (e.g., minimizing taxes) Written, signed by you, and witnessed
Wills & Probate – The ProbateProcess Most wills must be probated Will is filed with probate court Executor collects assets, pays debts, files tax returns, and distributes property to heirs Typically, process lasts several months to a year
Wills & Probate – Probate Pros &Cons Pros Cons Time and costs are Can be time consuming typically modest for complex estates Court supervision Title transfer delays Protection against Fees creditors Ancillary probate Public record
Wills & Probate – Avoiding Probate Own property jointly Can you avoid with rights of probate? survivorship Complete beneficiaryYes, an estate plan can be designation forms fordesigned to control which property such as IRAs,assets pass through retirement plans, andprobate, or to avoid life insuranceprobate. Use trusts Make lifetime gifts
Tax Basics Transfer taxes include: Federal gift tax - imposed on transfers you make during your life Federal estate tax - imposed on transfers made upon your death Federal generation-skipping transfer (GST) tax - imposed on transfers to individuals who are more than one generation below you (e.g., grandchildren) both during your life and upon your deathTransfer taxes imposed on the state level tend to affect smaller estates
Tax Basics – Federal Gift Tax Lifetime Transfer Gift tax applies to transfers made during your life Certain gifts are excluded You (e.g., $13,000 annual gift tax (Donor) exclusion) $5 million exempt from all transfers (gifts and estates) combined in 2011 (The $5 Person million exemption is the Receiving largest in the history of the Gift (Donee) federal gift and estate tax, but it is set to drop to $1 Gift tax may apply million in 2013.)
Tax Basics – Federal Estate Tax Estate tax applies to Transfer at Death transfers made at death Generally does not apply to transfers made to spouse or Your Estate charity $5 million exempt from all transfers (gifts and estates) combined in 2011 Any portion of exemption used for gifts will be Beneficiary unavailable to the estate $5 million indexed for inflation in 2012; scheduled Estate tax may apply to drop to $1 million in 2013
Tax Basics – Federal Estate Tax New feature important for married couples Exemption is “portable” - unused portion left by deceased spouse can be transferred to surviving spouse $10 million can be left to beneficiaries tax free (in 2011) Portability scheduled to expire in 2013
Tax Basics – Federal GST Tax Transfer During Life The generation-skipping or at Death transfer (GST) tax may apply to transfers made to someone more than one You / Your Estate generation below you $5 million GST tax Child exemption in 2011 (Donee / Beneficiary) $5 million adjusted for inflation in 2012 Scheduled to drop to $1 Grandchild (Skip Donee / Beneficiary) million in 2013 NOT portable GSTT may apply
Tax Basics – An Uncertain Future 2009 2010 2011 2012 2013Top rate 45% 35% 35% 35% 55% (?)Gift and $3.5 $1 million for $5 million $5 million, $1 million (?)estate tax million gift tax indexed forexemption purposes inflation $5 million for estate tax purposes (estates can elect out of the estate tax)GST tax $3.5 $5 million (but $5 million $5 million, $1 million (?)exemption million taxed at a 0% indexed for rate) inflation
Lifetime Gifting Lets you see the recipient enjoying your gift Lets you minimize transfer taxes by taking advantage of the $13,000 annual gift tax exclusion and other tax deductions Removes future appreciation of property from your taxable estate But, no “step-up” in basis – your basis in the property carries over instead
Lifetime Gifting – Transfers Excludedfrom Gift Tax If you’re contributing to a Section 529 plan, you can give $65,000 ($130,000 with spouse) gift tax free No gift tax on amounts paid directly to a school for an individual’s tuition No gift tax on amounts paid You can give $13,000 to as directly to a medical care many individuals as you provider for an individual’s want federal gift tax free medical care ($26,000 if you and your spouse make the gift together)
Trusts Versatile estate planning tool Can protect against incapacity, avoid probate, minimize taxes Allows professional management of assets Provide safeguards for minor children, elderly parents, other beneficiaries Can protect assets from future creditors Control over property
Trusts – What Is a Trust? Legal entity that holds Grantor property Parties to a trust: grantor, trustee, Trust Trust Property beneficiary Agreement Living trusts vs. testamentary trusts Trustee Manages trust property according Revocable trusts vs. to trust agreement irrevocable trusts Beneficiaries Have rights to trust property under terms of trust agreement
Life Insurance Can provide instant estate Can provide needed estate liquidity Life insurance proceeds are included in your estate for federal estate tax purposes unless your estate plan addresses this issue Key issue is ownership of policy
Life Insurance – Irrevocable LifeInsurance Trust (ILIT) During Your Life Insured Irrevocable Trust Insurance Company1. You (the insured) 2. Trustee purchases create an irrevocable life insurance trust and name a policy on your life – Beneficiaries trustee and policy owned by beneficiaries trust 4. Beneficiaries3. You make regular cash technically can gifts to trust 5. Trustee uses cash withdraw cash gifts to pay premiums gifts during limited window of time
Life Insurance – Irrevocable LifeInsurance Trust (ILIT) At Death Insurance Irrevocable Trust Beneficiaries Company 1. ILIT receives proceeds of life insurance policy 2. Proceeds not subject to estate tax 3. Proceeds distributed according to terms of trust 4. Beneficiaries receive full proceeds, free of estate tax
Conclusion Have you implemented I would welcome the a plan for incapacity opportunity to meet (health and property)? individually with each of Do you have a valid you to address any will? specific concerns or Are transfer taxes a questions that you may planning concern for have. you? Does your overall estate plan reflect your current wishes and circumstances?
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