Estate Planning Tutorial

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Update on estate tax and trust law, overview of estate planning and common estate planning mistakes.

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Estate Planning Tutorial

  1. 1. By: Mike Adams, CPA, JD, LLM Williams, McDaniel, Wolfe, and Womack 5521 Murray Ave, Memphis TN 38119 901-767-8200 1
  2. 2. Pursuant to Treasury Department Circular  230, this is to advise you nothing herein can be used for the purpose of avoiding tax- related penalties. If you wish to engage this firm to provide formal written advice regarding federal or state tax issues please contact the author. 2
  3. 3. Direct where and how your assets go.   Direct who is in charge of money.  Direct who gets custody of children.  Prevent court supervised guardianship.  Protect children from themselves.  Protect children from divorce & lawsuits.  Asset Protection for self.  And… 3
  4. 4. By the IRS,  By Probate Court,  By lawsuits and creditors,  By your children’s spouses,  By the wrong heirs,  By overcharging lawyers.  4
  5. 5. By Joint property w/ Right of Survivorship  By Beneficiary Designation  ◦ Life Insurance ◦ Retirement Accounts By POD and TOD for Bank Accounts  By Living Trusts  ◦ Also good for incapacity ◦ More expensive than wills. 5
  6. 6. Fed taxes anything > $3.5M (for now)  TN taxes anything > $1M  ALL assets (including life ins.)  Due 9 months after death  Fed Tax Rate = 45%  TN Rate = 9.5%  6
  7. 7. $3M $3.0M H W Joint -1.0M (dies first) ________ Taxed  $2.0M TN Tax of $195k 7
  8. 8. .5M 1.5M $0 1.5M H W Joint -1.0M ________ 1.0M Taxed  $1.0M Family Trust Fed Tax of $0k -Holds $1M -Spouse controls for family . TN Tax of $84k 8
  9. 9. Imposed on FMV of gifts when given.  Annual Exemption: $13k/yr per person.  Unlimited exemption for health & education, IF  paid directly to school or health care provider. TIP: Make sure grandparents know about this.  $1M Lifetime Exemption  9
  10. 10. Tennessee has NO Lifetime Exemption:  Gifts more than $13k cause immediate tax.  TRAP: Adding someone’s name to the deed of  your house is a taxable gift. Tax can be 5.5% to 16% of the gift.  10
  11. 11.  Planning for Death  (Docs, Life Ins, Assets)  Planning for Disability  (PoA, Disab. Ins, LTC)  Asset Protection  (Liab. Ins & Docs) 11
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  13. 13. April 29, 2009: Congress passes $3.4  Trillion budget: ◦ 1/3 of Budget financed by borrowing. ◦ Fixes Federal Estate Tax Exemption at $3.5M ◦ Tax Rate remains at 45% ◦ The budget plan sets the parameters for subsequent tax and spending bills. 13
  14. 14. TN Trust law amended in July 1, 2007  Allows child to be beneficiary AND  trustee: Protects from Creditors  Protects from Lawsuits  Protects from Divorce  Saves taxes at children’s death.  14
  15. 15. Co-Trustees = stronger protection.  Child should have right to resign.  Trust must have spendthrift clause.  Trust Must have ascertainable  distribution standards. 15
  16. 16. This problem can cause up to $225,000  in TN tax when first spouse dies! Problem: TN Exemption < Fed. Exemption  Solution: Update will to address new law so that two  trusts for spouse are created instead of one. One trust holds $1M for Tennessee exemption, the other holds the difference between the TN and Federal exemptions. 16
  17. 17. You can now modify irrevocable trust.  (TCA 35-15-411(a)) If Settlor is alive and Settlor, Trustee, and  Qualified Benes agree, then no court approval is necessary to change trustee, even if inconsistent with material purpose of the trust. If Settlor is deceased, change must be within  original purpose of trust & court must approve.
  18. 18. Direct distribution from 401k to charity is not  taxed as income. Person must be over 70 ½  Counts for required distribution from 401k  Available 2008-09 only (for now).  18
  19. 19. Effective July 1, 2007  Irrevocable  4 year waiting period from transfer before  assets are exempt, if transfer was fraudulent. Independent Trustee required  Settlor can retain many powers over trust.  19
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  21. 21. Joint Ownership: Too Much (Estate taxes)  Joint Ownership: Too Little  (Unnecessary Probate) Joint Ownership: Wrong People  21
  22. 22. Beneficiary Is Deceased  Beneficiary Is a Minor  Beneficiary is now the ex-wife, etc.  Not coordinated with the Will. (taxes)  22
  23. 23. Auto insurance caps too low.  No “umbrella” policy.  No Long Term Care Insurance.  No Earthquake Insurance.  23
  24. 24. Child eligible for governmental benefits.  ◦ Medicaid, SSI, TennCare, etc. Assets disqualify them from benefits.  Trust preserves benefits and provides a  way to supplemental gov’t benefits. 24
  25. 25. Support of a Spouse  ◦ (In the Standard of Living SHE Deserves) Support and Education of Children  How Long Do You Plan to Be Dead?  25
  26. 26. Assets Increase – Should add complexity.  Assets Decrease – Should reduce complexity.  How You Own Assets Changes  Kids Grow Up and/or Marry  Age & Health Changes may make Revocable  Trust appropriate. 26
  27. 27. 2001 Tax Act Changed Everything  ◦ Federal and TN Exemptions are not equal now. TN Adopts Uniform Trust Code.  ◦ Better opportunity to protect children’s inheritance ◦ Can amend an IRREVOCABLE trust if all parties agree. TN Inheritance Tax - Unlikely to be Repealed.  27
  28. 28. Who Declares You To Be Incompetent?  Who Manages Your Financial Affairs?  Who Pays For Your Care?  28
  29. 29. Who Makes Medical Care decisions?  Do You Want Artificial Feedings?  Artificial Life Support?  Document What You Want!  29
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  32. 32. Mike Adams, JD, LLM, CPA 901-767-8200 madams@wmww.com Williams, McDaniel, Wolfe, & Womack 5521 Murry Ave Memphis, TN 38119 32

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