This Estate Planning Summary is designed to provide simple and straightforward descriptions of important and applicable legal terms and processes, as well as Estate Planning options and resources for decision-making. Estate Planning is the process of arranging for the allocation and disposition of assets in an estate. The goal of estate planning is to eliminate uncertainty and maximize the value of the estate. Individuals should use this form to help understand the process and devices of estate planning.
Estate Planning 101 UNDERSTANDING YOUR ESTATE Probate vs. Non-Probate Assets: Your estate consists of two kinds of assets for tax purposes. o Probate Assets: items or property that you own and that will be given to a beneficiary through your Will or intestacy upon your death. Examples include: real estate, vehicles, stocks, and other physical assets. o Non-Probate Assets: items or property that are assigned by contract or beneficiary designation upon your death. They are not governed by your Will. Examples include: life insurance, IRA funds, retirement plans and assets that are held in "joint tenancy with right of survivorship." This Estate Planning Summary is designed to provide simple and straightforward descriptions of important and applicable legal terms and processes, as well as Estate Planning Community Property vs. Separate Property options and resources for decision-making. Estate Planning is the process of o Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin and community property states. an property The goal of estate arranging for the allocationare all disposition of assets inAny estate. accumulated during a marriage is presumed to be community the value of by estate. Individuals planning is to eliminate uncertainty and maximize property (owned the both spouses), unless otherwise proven as separate property. Separate property: assets owned process and as well as of estate planning. should use thisoform to help understand the prior to marriage, devices assets given as gifts or inheritance. o Upon your death, your estate consists of one-half of all community property and all of your separate property. Even if community property was listed under your spouse's name, it is still divided into two upon death. o While community property is divided upon death, during the marriage the spouse whose name the property lists is the exclusive manager over the property. UNDERSTANDING PROBATE Is Probate Complicated? o While many people assume probate is a complicated process, it’s usually not, depending on the state. During probate, a Will is filed with the court after death. The judge admits the Will to probate a few weeks later. Separate from probate, the Will’s executor will manage the estate. Many of the costs that are presumed to be part of the typical probate process are actually a result of problems that occur after death, and may not relate to probate at all. Should I Have a Living Trust? o A living trust serves to transfer your probate assets while living. You can benefit from a living trust throughout your lifetime, and upon your incapacity or death, will disburse your assets to your beneficiaries without the need for a will. o Benefits of a Living Trust: May help you avoid probate Defers to your wishes in case of incapacity Provides a single resource for your beneficiary information May protect against will contests o Disadvantages of a Living Trust: If misused, will not prevent probate May be more expensive than a Will Inconvenient to keep assets in trustee’s name Combining community property and separate property in trust may make assets vulnerable to creditor claims May be more difficult to administer immediately after death UNDERSTANDING THE TRANSFER TAX SYSTEM The System of Estate and Gift Taxes o Traditionally, gift and estate taxes were combined into a single system. The system had a single exemption used for taxable gifts during life, which if not used, was available upon death. o There are a few benefits to making gifts of assets: There is an annual exclusion for gifts up to $13,000 per donee per year. Post-gift income and appreciation avoid transfer tax for the donor. Gift tax is "tax exclusive" while estate tax is "tax inclusive:" estate tax must be paid for the whole estate, including the funds that will be used to pay the tax. Marital Deduction o There no limit to the amount of assets transferred between spouses who are US citizens. The marital deduction applies to outright gifts and qualified terminable interest trusts (QTIP trusts.) No tax is due when the first spouse dies, but the assets will be subject to tax on the death of the surviving spouse. Charitable Deduction o There is no limit to charitable deduction for any assets transferred to charity. Assetes passed to both "public charities" and "private foundations" are equally eligible for the charitable deduction, and there are no percentage limits. The Generation-Skipping Transfer Tax o The generation-skipping transfer tax (GST) is most typically levied in two situations: (1) a grandparent transfers assets to a grandchild, by gift or Will, while the child is still alive (the donor skips a generation) and (2) a trust is created by a parent for the benefit of a child and the assets transfer to the grandchildren upon the child's death. In the latter example, the "generational skip" happens at the child's death. The GST is a flat rate, and equals the highest estate tax rate. FSince lifetime trusts for children provide many benefits, such as marital property protection and creditor protection, maximizing the GST exemption is a very popular estate planning tool. Note: Using the GST exemption will not reduce your estate tax. It simply reduces the estate tax payable when your children die, not when you (and your spouse) die. ESTATE PLANNING For estates of married couples with a combined value of probate and non-probate assets over $2 million, it is recommended to take the full estate tax exemption in the couple’s state, as well as the marital deduction in the estate upon the death of the first spouse. This shelters a great deal of assets and defers estate tax on excess until the death of the surviving spouse. In order to put this estate plan into action, the Will of the first spouse to die should divide his or her estate between a trust that shelters the exemption as well as a marital deduction gift of the remainder of the estate. See the chart below as an illustration of this A-B Trust Plan. © Copyright 2011 Docstoc Inc. registered document proprietary, copy not 2 1 2 3 Exemption Equivalent Bequests Specified Bypasses Trust Residuary Estate to Surviving Spouse (up to $2 million) Goes to Marital Trust Surviving Spouse Dies No taxes Taxes paid paid Trusts for Children or Given Outright to Children Additionally, non-probate assets should be coordinated with this plan, as they will not pass directly under the Will. Here are some examples of how to do this: o Life insurance lists trustee as beneficiary under the Will, and is divided between the surviving spouse and any trusts under the Will of the insured based on the value of the other estate assets. o Retirement benefits may be paid to the surviving spouse as the beneficiary. It may be recommended to continue income tax deferral by rolling over benefits into an IRA. o Any assets held in joint tenancy with right of survivorship may be changed to another form so that they do not bypass the plan. MORE PLANNING SUGGESTIONS The basic estate plan above takes advantage of the marital deduction and provides the full exemption for both spouses. However, for individuals who still have a large tax to pay upon the death of the surviving spouse, here are more techniques that may help reduce this tax. Aggressive Gifting o This may use the unified credit exemption through lifetime gift, as well as aggressive use of annual exclusion gifting. For those with high income, gifts that generate gift tax can help save taxes by taking advantage of the tax exclusive nature of the gift tax. Irrevocable Life Insurance Trusts o While this technique does not reduce tax, it does offer liquidity for its payment or replaces wealth that is lost to tax. Examples of this include joint and survivor life insurance. Generation-Skipping Trusts © Copyright 2011 Docstoc Inc. registered document proprietary, copy not 3 o When gifts are made to children, either in life or through a Will, giving the gift in the form of a trust that skips multiple generations can shelter all or part of the GST exemption. Beneficiaries have access to assets, but the assets will not be taxed in each generation because no beneficiary actually owns them. Family Limited Partnerships o Business and family goals can sometimes complement tax planning goals. This technique does not eliminate assets from your estate, but rather converts assets of a certain value into partnership units that may have a lesser value. This is done for transfer tax purposes because of discounts associated with the restrictions imposed by law on limited partnership interests. Because partnerships are flexible and can help you retain significant control from assets after they are gifted, this is a popular estate planning option. Grantor Retained Trusts o The Qualified Residence Trust, Grantor Retained Annuity Trust, and the Grantor Retained Unitrust are techniques that involve gifting assets and keeping an income or annuity-type interest in them for a set number of years. For tax purposes, the gift is discounted because of the retained interest, but all post-gift appreciation avoids being taxed as long as you live beyond the term of the trust. Charitable Trusts o These trusts are divided between a charity organization and an interest that you retain or gift to a family member. Through this vehicle, you can maintain a partial charitable deduction while still having control of assets. Charitable Remainder Trusts You retain an interest or give interest to a family member and, after death or a fixed number of years, the assets go to charity. You may take a charitable income tax and gift tax deduction for the present value of the gift that occurs in the future. Charitable Lead Trusts The charity receives an interest for a set number of years, after which the assets go back to your control, or are given to a family member. Installment Sales o If it is expected that an asset will significantly appreciate in the future, selling the asset to children or trusts for their benefit can hold the value and allow all future appreciation to benefit the purchasers. With low basis assets where the purchaser is a trust that is taxed for income tax purposes, this method can avoid capital gains tax on the sale by the grantor to the trust. ASSET PROTECTION Asset protection planning is a good accompaniment to estate planning, or can sever well on its own. The majority of asset protection techniques work well if there are no known creditors and when there are other purposes, like estate planning, that justify the efforts. © Copyright 2011 Docstoc Inc. registered document proprietary, copy not 4 Some of the more popular techniques include: Exempt Property o Typically, your home, or homestead property, is exempt, though laws vary by state. o Other items that are typically exempt, based on state laws, include: In and limited personal property, qualified retirement plans and IRAs, life insurance, and some annuities. Marital Property Rules o Creditors of one spouse cannot touch certain types of marital property owned by the other spouse: Contract claims: Creditors cannot access the separate property or sole management community property of the other spouse. o Having separate property for each spouse through periodic partitions can be helpful. A non-pro rata partition can provide for equal value to each spouse, while allocating exempt assets such as the homestead to the spouse with creditors. Gifts and Trusts o You may not create a trust for yourself and gift assets to it in order to keep the trust exempt from creditors. However, you may transfer assets to others through gift, including a spouse. Transferring assets to children additionally provides estate planning strategy. Offshore and Similar Trusts o While the rule on creating a trust for your own benefit applies in most states, it may be possible to create an offshore trust in your own name that is protected from creditors. However, the grantor must have no creditor problems when the transfer to the offshore trust is made. o While offshore trusts may make it easier to shelter large sums of non- exempt assets, grantors may experience a loss of control and high fees and expenses. Family Limited Partnerships © Copyright 2011 Docstoc Inc. registered document proprietary, copy not 5 o The family contributes assets to a partnership so that a creditor of a partner can become only an assignee of the debtor partner, not a substitute partner. This can help control distributions, while the assignee pays taxes on the income. While a family limited partnership may result in settling a claim at a discount, this tool is a creditor deterrent, not protection. Some bankruptcy judges may dissolve the partnership to control cash flow. © Copyright 2011 Docstoc Inc. registered document proprietary, copy not 6
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