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    • 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. The 5 Basic Estate Planning Tools
      • 1) Wills
      • 2) Living Trusts
      • 3) Legal and Medical Powers
      • 4) Family Limited Partners (FLPs).
      • 5) Irrevocable Life Insurance Trusts (ILITs)
    • 3. Estate Planning Survey*
      • The following statistics are staggering:
        • 2 or 3 will NOT even have a simple will.
        • 9 or 10 will NOT have Durable Powers of Attorney.
        • 5 or 6 will NOT have marital trusts.
        • 9 or 10 will NOT have a Family Limited Partnership.
        • 8 or 9 who need an Irrevocable Life Insurance Trust (ILIT) do NOT have one.
      • *The Wealth Preservation Institute
    • 4. Being young is not excuse to procrastinate
      • If you do not have the basic EP tools in place, you risk wasting millions of dollars in taxes and/or probate fees.
      • Think about the following statistics :
      • Age Odds of Death Before Age 65
      • 35 27.5%
      • 40 26.4%
      • 45 24.8%
      • 50 22.4%
      • 55 18.4%
    • 5. Wills
      • The most basic estate planning tool.
      • Why have one?
        • Children under the age of 18
        • If you die without one you die “intestate” and state laws dictate distribution.
      • How much should a will cost?
        • $150-$250 (so don’t wait)
      • When should your will be updated?
        • When you get married, have children, get divorced, increase the value of you estate, if a child happens to predecease you, etc.
    • 6. Durable Powers of Attorney (DPA)
      • Millions of people each year (young and old) become incapacitated because of a physical infirmity or mental incapacity.
      • 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.
    • 7. Types of DPAs
      • Medical
        • Allows agent to make medical treatment decisions if the individual is at least 18 years of age.
        • The Terri Schiavo case with removing the feeding tube.
      • Legal
        • Allows agent to sign all necessary legal documents to carry on the business of the client.
      • DPAs are time and money savers
        • Without a DPA the family typically ends up going to court to have someone appointed.
    • 8. A&B, Marital, or Living Trusts
      • A&B Trusts* are “revocable” living trusts
        • Not an irrevocable trust
        • You can move assets in and out of the trust with no gift tax issues.
        • These provide NO ASSET PROTECTION.
      • *This assumes that the client is married. If not, the client would simply have an A or single trust.
    • 9. Benefits of revocable Trusts
      • 1) Assets in the trust will not be “probated.”
        • Your will is still probated.
        • 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 .
      • 2) Another benefits of having assets pass through a trust vs. through probate is the added privacy.
      • * In most states, assets not owned by the trust will still be probated .
    • 10. Continued
      • 3) A&B trusts maximize your estate tax exemptions.
      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. Example part 1
      • Mr. Smith and spouse are 50 years old with a $4,000,000 estate.
      • What happens at Mr. Smith’s death in 2011 if he has a will but NO living trust?
        • Nothing.
      • What if Mrs . Smith dies the next week with no Trust?
        • Estate taxes $3,000,000 at 55% will be due.
        • Why? When Mrs. Smith died she had a $4,000,000* estate and a $1,000,000 estate tax exemption.
        • After applying her exemption she still has a $3,000,000 taxable estate.
    • 12. Example part 2
      • Same as example one except assume Mr. and Mrs. Smith had A&B trusts .
      • At Mr. Smith’s death his trust would apply his $1,000,000 estate exemption and estate taxes would be avoided on that amount.
      • When Mr. Smith dies, her trust would apply her $1,000,000 exemption leaving a remaining estate of $2,000,000.
      • Therefore, because Mr. and Mrs. Smith used A&B trusts they saved their heirs $550,000 in estate taxes .
      • And if funded properly they would avoid probate fees as well.
    • 13. Irrevocable Life Insurance Trusts (ILIT)
      • Do your have enough life insurance ?
      • Most younger married couples, especially those with children, are underinsured .
      • Life insurance is used by younger people to protect the family in case of an early death of the (typically of the breadwinner).
      • Many younger clients have between $500,000-$1,000,000 in term life insurance for a term of 10-30 years.
      • This is not nearly enough to protect the family.
    • 14. Continued
      • People with estate tax problems almost universally are under insured due to the 55% estate tax that awaits their heirs.
      • If you have an estate tax problem you can either
        • 1) gift assets away;
        • 2) have your heirs pay 55% estate taxes above your allotted estate tax exemption, or
        • 3) you can purchase life insurance to pay for the estate taxes.
      • 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.
    • 15. Tax Free Benefits
      • Most people are aware that life insurance death benefits pass to beneficiaries Income Tax Free .
      • Unfortunately, if you have an estate tax problem, the death benefit will be estate taxed*.
      • How do you avoid having your DB estate taxed?
      • Have your life insurance policy owned by and Irrevocable Life Insurance Trust (ILIT).
    • 16. Practical use of an ILIT
      • It is typical to set up an ILIT and have the death benefit pour into the ILIT at death.
      • The children , if any, are typically the primary beneficiaries.
        • Many times the trust has language in it to hold distributions until they reach a certain age.
      • 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.
      • The trust document is limited by your creativity.
    • 17. Dynasty Trusts
      • While discussing trust, let’s quickly go over Dynasty trusts.
      • Many times advisors pitch this as a unique or special EP tool.
      • It’s simply an “ irrevocable ” trust with special language.
      • They are helpful when trying to avoid estate taxes with a gifting program.
      • They are not a cure all as they can create gift tax problems when funding and income tax problems once funded.
    • 18. Family Limited Partnerships (FLPs)
      • 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.
      • 2) Asset Protection
      • 3) Increasing the efficiencies of both costs and administration of the family’s wealth;
      • 4) Enhanced wealth transfer planning due to valuation discounts.
    • 19. FLP Overview
      • An FLP is a separate legal entity created under state law.
      • An FLP is a flow through for income tax purposes and each partner is taxed according to their pro rata ownership interest.
      • The FLP is governed by the FLP Agreement (which should be formal and outlines withdrawals and how FLP interests can be transferred).
      • FLPs cannot own S-Corporation stock (not a qualified shareholder)
    • 20. FLP Partnership Categories
      • (1) a general partner
      • (2)  limited partners
      • The GP are liable for all of the FLP’s obligations, debts, and liabilities.
        • Many times a second entity is created (typically and LLC) to serve as the general partner to further insulate themselves from personal liability.
      • 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.
    • 21. Typical FLP Planning
      • 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.
      • In a typical estate plan,
        • a married couple transfers assets to a FLP and, in return, receives both GP and LP interests.
        • Then the couple will gifts LP interests to their heirs in an effort to shrink the taxable estate .
        • The couple through the corporate GP can manage and maintain control of the FLP assets.
    • 22. Typical FLP Gifting
      • You can gift $1,000,000 without incurring gift taxes (and $12,000 per spouse per child per year).
      • Discounts
        • LP interest are non-controlling and have restrictions on transferability .
      • 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).
    • 23. Example
      • M & D contribute $1,000,000 worth of assets to an FLP and in exchange take a 1% GP interest and 99% LP interests.
      • Then M & D gift the 99% LP interest to the heirs.
      • The gifted LP interests have no rights of management or control and are subject to transfer restrictions .
        • Therefore the LP interest would be discounted.
      • Assume a qualified appraiser valued the LP interests with a 30% discount .
        • Then the LP gift would be valued at $700,000 instead of $1,000,000 .
      • 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%.
    • 24. Keeping it in the family
      • FLPs can ensure that the family’s wealth stays in the family (with the proper restrictions).
      • 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 .
      • Therefore, no outside third parties will become partners in the FLP.
      • The bottom line is that FLPs are one of the most powerful estate planning tools at your disposal.
    • 25. Summary on Basic Estate Planning
      • Virtually everyone should have:
        • a will ,
        • legal and medical powers , and
        • living trusts
      • It is vital that you have the proper amount of life insurance to protect your family (if any).
      • If you have an estate tax problem (or anticipate having one), you should have your EP life insurance policy owned by and ILIT .
      • If you want to supercharge your estate plan with a gifting strategy, you should seriously consider using a FLP .