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  • Basic ep

    1. 1. Basic Estate Planning Determine if Your Estate Plan is in Order By: Roccy DeFrancesco, JD, CWPP, CAPP, MMB Founder: The Wealth Preservation Institute Co-Founder: The Asset Protection Society
    2. 2. The 5 Basic Estate Planning Tools <ul><li>1) Wills </li></ul><ul><li>2) Living Trusts </li></ul><ul><li>3) Legal and Medical Powers </li></ul><ul><li>4) Family Limited Partners (FLPs). </li></ul><ul><li>5) Irrevocable Life Insurance Trusts (ILITs) </li></ul>
    3. 3. Estate Planning Survey* <ul><li>The following statistics are staggering: </li></ul><ul><ul><li>2 or 3 will NOT even have a simple will. </li></ul></ul><ul><ul><li>9 or 10 will NOT have Durable Powers of Attorney. </li></ul></ul><ul><ul><li>5 or 6 will NOT have marital trusts. </li></ul></ul><ul><ul><li>9 or 10 will NOT have a Family Limited Partnership. </li></ul></ul><ul><ul><li>8 or 9 who need an Irrevocable Life Insurance Trust (ILIT) do NOT have one. </li></ul></ul><ul><li>*The Wealth Preservation Institute </li></ul>
    4. 4. Being young is not excuse to procrastinate <ul><li>If you do not have the basic EP tools in place, you risk wasting millions of dollars in taxes and/or probate fees. </li></ul><ul><li>Think about the following statistics : </li></ul><ul><li>Age Odds of Death Before Age 65 </li></ul><ul><li>35 27.5% </li></ul><ul><li>40 26.4% </li></ul><ul><li>45 24.8% </li></ul><ul><li>50 22.4% </li></ul><ul><li>55 18.4% </li></ul>
    5. 5. Wills <ul><li>The most basic estate planning tool. </li></ul><ul><li>Why have one? </li></ul><ul><ul><li>Children under the age of 18 </li></ul></ul><ul><ul><li>If you die without one you die “intestate” and state laws dictate distribution. </li></ul></ul><ul><li>How much should a will cost? </li></ul><ul><ul><li>$150-$250 (so don’t wait) </li></ul></ul><ul><li>When should your will be updated? </li></ul><ul><ul><li>When you get married, have children, get divorced, increase the value of you estate, if a child happens to predecease you, etc. </li></ul></ul>
    6. 6. Durable Powers of Attorney (DPA) <ul><li>Millions of people each year (young and old) become incapacitated because of a physical infirmity or mental incapacity. </li></ul><ul><li>A DPA is a needed document that allows a person or entity, referred to as the attorney in fact, to act on behalf of the person giving the Power. </li></ul>
    7. 7. Types of DPAs <ul><li>Medical </li></ul><ul><ul><li>Allows agent to make medical treatment decisions if the individual is at least 18 years of age. </li></ul></ul><ul><ul><li>The Terri Schiavo case with removing the feeding tube. </li></ul></ul><ul><li>Legal </li></ul><ul><ul><li>Allows agent to sign all necessary legal documents to carry on the business of the client. </li></ul></ul><ul><li>DPAs are time and money savers </li></ul><ul><ul><li>Without a DPA the family typically ends up going to court to have someone appointed. </li></ul></ul>
    8. 8. A&B, Marital, or Living Trusts <ul><li>A&B Trusts* are “revocable” living trusts </li></ul><ul><ul><li>Not an irrevocable trust </li></ul></ul><ul><ul><li>You can move assets in and out of the trust with no gift tax issues. </li></ul></ul><ul><ul><li>These provide NO ASSET PROTECTION. </li></ul></ul><ul><li>*This assumes that the client is married. If not, the client would simply have an A or single trust. </li></ul>
    9. 9. Benefits of revocable Trusts <ul><li>1) Assets in the trust will not be “probated.” </li></ul><ul><ul><li>Your will is still probated. </li></ul></ul><ul><ul><li>Avoiding probate will save (depending on the state) between 1-8% ( 4-6% is average) of the entire value of the estate in probate fees . </li></ul></ul><ul><li>2) Another benefits of having assets pass through a trust vs. through probate is the added privacy. </li></ul><ul><li>* In most states, assets not owned by the trust will still be probated . </li></ul>
    10. 10. Continued <ul><li>3) A&B trusts maximize your estate tax exemptions. </li></ul>Exemptions and Maximum Tax Rates Year Estate Tax Exemption Highest Rate 2008 $2 million 45% 2009 $3.5 million 45% 2010 N/A (taxes eliminated) 0% 2011 $1 million 55%
    11. 11. Example part 1 <ul><li>Mr. Smith and spouse are 50 years old with a $4,000,000 estate. </li></ul><ul><li>What happens at Mr. Smith’s death in 2011 if he has a will but NO living trust? </li></ul><ul><ul><li>Nothing. </li></ul></ul><ul><li>What if Mrs . Smith dies the next week with no Trust? </li></ul><ul><ul><li>Estate taxes $3,000,000 at 55% will be due. </li></ul></ul><ul><ul><li>Why? When Mrs. Smith died she had a $4,000,000* estate and a $1,000,000 estate tax exemption. </li></ul></ul><ul><ul><li>After applying her exemption she still has a $3,000,000 taxable estate. </li></ul></ul>
    12. 12. Example part 2 <ul><li>Same as example one except assume Mr. and Mrs. Smith had A&B trusts . </li></ul><ul><li>At Mr. Smith’s death his trust would apply his $1,000,000 estate exemption and estate taxes would be avoided on that amount. </li></ul><ul><li>When Mr. Smith dies, her trust would apply her $1,000,000 exemption leaving a remaining estate of $2,000,000. </li></ul><ul><li>Therefore, because Mr. and Mrs. Smith used A&B trusts they saved their heirs $550,000 in estate taxes . </li></ul><ul><li>And if funded properly they would avoid probate fees as well. </li></ul>
    13. 13. Irrevocable Life Insurance Trusts (ILIT) <ul><li>Do your have enough life insurance ? </li></ul><ul><li>Most younger married couples, especially those with children, are underinsured . </li></ul><ul><li>Life insurance is used by younger people to protect the family in case of an early death of the (typically of the breadwinner). </li></ul><ul><li>Many younger clients have between $500,000-$1,000,000 in term life insurance for a term of 10-30 years. </li></ul><ul><li>This is not nearly enough to protect the family. </li></ul>
    14. 14. Continued <ul><li>People with estate tax problems almost universally are under insured due to the 55% estate tax that awaits their heirs. </li></ul><ul><li>If you have an estate tax problem you can either </li></ul><ul><ul><li>1) gift assets away; </li></ul></ul><ul><ul><li>2) have your heirs pay 55% estate taxes above your allotted estate tax exemption, or </li></ul></ul><ul><ul><li>3) you can purchase life insurance to pay for the estate taxes. </li></ul></ul><ul><li>If you have an estate over $5,000,000, it is easy to justify the purchase of 2-3 million dollars of death benefit for estate planning. </li></ul>
    15. 15. Tax Free Benefits <ul><li>Most people are aware that life insurance death benefits pass to beneficiaries Income Tax Free . </li></ul><ul><li>Unfortunately, if you have an estate tax problem, the death benefit will be estate taxed*. </li></ul><ul><li>How do you avoid having your DB estate taxed? </li></ul><ul><li>Have your life insurance policy owned by and Irrevocable Life Insurance Trust (ILIT). </li></ul>
    16. 16. Practical use of an ILIT <ul><li>It is typical to set up an ILIT and have the death benefit pour into the ILIT at death. </li></ul><ul><li>The children , if any, are typically the primary beneficiaries. </li></ul><ul><ul><li>Many times the trust has language in it to hold distributions until they reach a certain age. </li></ul></ul><ul><li>Many times the ILIT language will allow the trustee to provide for the well being of the surviving spouse, with the ultimate beneficiary being the children. </li></ul><ul><li>The trust document is limited by your creativity. </li></ul>
    17. 17. Dynasty Trusts <ul><li>While discussing trust, let’s quickly go over Dynasty trusts. </li></ul><ul><li>Many times advisors pitch this as a unique or special EP tool. </li></ul><ul><li>It’s simply an “ irrevocable ” trust with special language. </li></ul><ul><li>They are helpful when trying to avoid estate taxes with a gifting program. </li></ul><ul><li>They are not a cure all as they can create gift tax problems when funding and income tax problems once funded. </li></ul>
    18. 18. Family Limited Partnerships (FLPs) <ul><li>1) Providing a centralized vehicle so the family manage a portion of its wealth usually in a structure so the younger generation can learn the art of running a family business. </li></ul><ul><li>2) Asset Protection </li></ul><ul><li>3) Increasing the efficiencies of both costs and administration of the family’s wealth; </li></ul><ul><li>4) Enhanced wealth transfer planning due to valuation discounts. </li></ul>
    19. 19. FLP Overview <ul><li>An FLP is a separate legal entity created under state law. </li></ul><ul><li>An FLP is a flow through for income tax purposes and each partner is taxed according to their pro rata ownership interest. </li></ul><ul><li>The FLP is governed by the FLP Agreement (which should be formal and outlines withdrawals and how FLP interests can be transferred). </li></ul><ul><li>FLPs cannot own S-Corporation stock (not a qualified shareholder) </li></ul>
    20. 20. FLP Partnership Categories <ul><li>(1) a general partner </li></ul><ul><li>(2)  limited partners </li></ul><ul><li>The GP are liable for all of the FLP’s obligations, debts, and liabilities. </li></ul><ul><ul><li>Many times a second entity is created (typically and LLC) to serve as the general partner to further insulate themselves from personal liability. </li></ul></ul><ul><li>The LPs are not liable for the debt or obligations of the FLP, and they are not entitled to participate in the day-to-day management of the FLP. </li></ul>
    21. 21. Typical FLP Planning <ul><li>By transferring a portion of the family’s assets to an FLP, the family can maintain control over the income , management and divestiture of the assets. </li></ul><ul><li>In a typical estate plan, </li></ul><ul><ul><li>a married couple transfers assets to a FLP and, in return, receives both GP and LP interests. </li></ul></ul><ul><ul><li>Then the couple will gifts LP interests to their heirs in an effort to shrink the taxable estate . </li></ul></ul><ul><ul><li>The couple through the corporate GP can manage and maintain control of the FLP assets. </li></ul></ul>
    22. 22. Typical FLP Gifting <ul><li>You can gift $1,000,000 without incurring gift taxes (and $12,000 per spouse per child per year). </li></ul><ul><li>Discounts </li></ul><ul><ul><li>LP interest are non-controlling and have restrictions on transferability . </li></ul></ul><ul><li>Because of the lack of control and restrictions on who the interest can be sold to, the LP interests are able to receive valuation discounts (FMV). </li></ul>
    23. 23. Example <ul><li>M & D contribute $1,000,000 worth of assets to an FLP and in exchange take a 1% GP interest and 99% LP interests. </li></ul><ul><li>Then M & D gift the 99% LP interest to the heirs. </li></ul><ul><li>The gifted LP interests have no rights of management or control and are subject to transfer restrictions . </li></ul><ul><ul><li>Therefore the LP interest would be discounted. </li></ul></ul><ul><li>Assume a qualified appraiser valued the LP interests with a 30% discount . </li></ul><ul><ul><li>Then the LP gift would be valued at $700,000 instead of $1,000,000 . </li></ul></ul><ul><li>Therefore $300,000 worth of the couple’s lifetime gift tax exemption was preserved which when used will save the heirs $165,000 in estate taxes as valued today at 55%. </li></ul>
    24. 24. Keeping it in the family <ul><li>FLPs can ensure that the family’s wealth stays in the family (with the proper restrictions). </li></ul><ul><li>The restrictions would not allow the FLP interest to satisfy a personal debt; nor can any individual pledge, mortgage, sell, transfer or assign the LP interest without the consent of the other partners . </li></ul><ul><li>Therefore, no outside third parties will become partners in the FLP. </li></ul><ul><li>The bottom line is that FLPs are one of the most powerful estate planning tools at your disposal. </li></ul>
    25. 25. Summary on Basic Estate Planning <ul><li>Virtually everyone should have: </li></ul><ul><ul><li>a will , </li></ul></ul><ul><ul><li>legal and medical powers , and </li></ul></ul><ul><ul><li>living trusts </li></ul></ul><ul><li>It is vital that you have the proper amount of life insurance to protect your family (if any). </li></ul><ul><li>If you have an estate tax problem (or anticipate having one), you should have your EP life insurance policy owned by and ILIT . </li></ul><ul><li>If you want to supercharge your estate plan with a gifting strategy, you should seriously consider using a FLP . </li></ul>

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