ESTATE PLANNING. Estate Planning

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1 ESTATE PLANNING Estate Planning

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3 Why do you need estate planning? Estate planning is a way for your family to create a plan in case something happens to you. It may help you take care of both the financial and practical problems that can occur. For example: n Who will take care of your children if something happens to you? n How will the special needs of a disabled child or elderly relative be handled? n Who will take care of your affairs if you are incapacitated? n How can you know for sure that your wishes about medical care and life support are respected? n Will your money be distributed according to your wishes? n How can you help your beneficiaries make the most of their inheritance while avoiding all those taxes? What else is estate planning good for? n Peace of mind, knowing you can plan your own personal and financial objectives n Maximizes your estate and lets you decide how your estate will be distributed n Minimizes estate taxes and administrative expenses required to settle your estate n Provides liquidity so your beneficiaries can pay taxes and final expenses n Makes provisions for your children (guardianship and financial support) n Evaluates your health care and disability options n Arranges for business succession 1

4 Avoid the probate bite After your death, your estate goes through the probate process, wherein the courts oversee the disposition of your probate assets*, and make sure the other provisions of your will are carried out. If you don t have a will, your probate assets will still be subject to court jurisdiction and will be distributed according to the provisions of your state s intestacy laws. Probate can be expensive, time consuming, and makes your financial situation public. Plus, it can add stress for your loved ones during an already difficult time. Estate planning can help you avoid this. The probate process does have one major benefit, however. It allows for an orderly closing out of your estate, and generally establishes a time limit for creditors to make claims against your estate. That is why some individuals purposely design their estate plan to include some probate assets. *Probate assets are assets in your name that are not jointly owned and that do not pass under the terms of a beneficiary designation. An estate settlement process Your Assets n Personal Property n Real Estate n Financial Assets n Life Insurance n Business Interest What Happens to Your Estate at Death? Estate taxes come due Your heirs will be required to pay the IRS (Internal Revenue Service) in cash within just nine months after the date of your death. Proper estate planning can help them avoid: n Selling assets, possibly at fire sale prices n Borrowing from a bank, possibly at high interest rates n Paying the IRS in installments, if the estate qualifies (business/farm) Fees n Final Expenses n Death Taxes n Accounting Fees n Appraiser s Fees n Debts of the Decedent n Probate Fees n Attorney Fees n Executor s Commission Result Proper estate planning results in more asset going to your heirs less assets going for taxes and fees. Estate planning resources n Wills n Trusts Living/Revocable Testamentary Irrevocable Life Insurance n Power of Attorney for property for healthcare n Estate Tax Exemption n Unlimited Marital Deduction n Charitable Deduction 2

5 What kind of liability might your estate incur? Try this simple exercise to see what might be Uncle Sam s share of your estate at your death.* 1. Add up the current value of everything you own and write that number here 2. Look up the value of your assets in the chart below and enter your estimated estate tax 3. Subtract your estimated estate taxes from your assets to see what s left Simple planning can save you thousands, if not hundreds of thousands of dollars in estate taxes. Table of Estimated Federal Estate Tax Liabilities. Value of Assets Estate Tax 2018 $0 5,000,000 $0.00 $6,000,000 $160,000 $7,000,000 $560,000 $8,000,000 $960,000 $9,000,000 $1,360,000 $10,000,000 $1,760,000 $15,000,000 $3,760,000 $20,000,000 $5,760,000 * This chart may be used for: single people, married couples who have not established an A-B Trust (or similar) estate plan (see following page), or people who own all assets in joint tenancy with right of survivorship or in joint tenancy by the entireties. The American Taxpayer Relief Act of 2012 (ATRA) increased taxpayers exemptions from gift, estate, and generation skipping transfer (GST) taxes to $5 million and indexed these exemptions for inflation. The maximum tax rate was raised to 40%. In addition, ATRA made the Deceased Spousal Unused Exclusion Amount (DSUE) or Portability permanent. DSUE allows an executor of an estate of a married decedent the option to transfer any unused estate tax exemption amount to the surviving spouse. Please discuss this with your estate planning attorney. 3

6 How you can maximize your estate exemption. There is a method that can ensure the maximization of your estate exemption amount and protect your estate from creditors, bankruptcies, lawsuits and divorce settlements. Assume in 2018 the estate exemption is $5,600,000. At the first spouse s death, the first $5,600,000 of assets is left in a B Trust or Family Trust, for the ultimate benefit of the children. The surviving spouse is typically a beneficiary of this trust, but with limited interest making it ineligible for the unlimited marital deduction. This way, the trust uses up the deceased spouse s $5,600,000 estate exemption. The trust and any of its growth are not included in the surviving spouse s estate. The balance of the deceased s property is transferred to the surviving spouse, either outright or in a trust that qualifies for the unlimited marital deduction the A Trust. The spouse has another exemption that he/she can use at his/her death. Altogether, up to $11,200,000 can be sheltered from estate taxes this way. 1 Although the B Trust is established primarily for the benefit of children and future generations, its assets are available to the surviving spouse if needed for specific purposes. Planning with trusts can save your heirs $2,240,000 in estate taxes in certain circumstances. (Assumes deaths occur in 2018) Without Planning $11.2 million Estate Owned JTWROS (Joint Tenancy with Right of Survivorship) At Husband s Death: Husband s Gross Estate 2... $5.49 million Marital Deduction... ($5.49 million) Taxable Estate...$0 At Wife s Death: Wife s Gross Estate... $11.2 million Marital Deduction... $0 Taxable Estate... $11.2 million Estate Tax... $4,425,800 Applicable Credit... ($2,185,800) With Planning $5.6 million Estate Owned by Husband $5.6 million Estate Owned by Wife At Husband s Death: Husband s Gross Estate 3... $5.6 million Marital Deduction... $0 Taxable Estate... $5.6 million Estate Tax... $2,185,800 Applicable Credit... ($2,185,800) Net Estate Tax... $0 At Wife s Death: Wife s Gross Estate... $5.6 million Marital Deduction... $0 Taxable Estate... $5.6 million Estate Tax... $2,185,800 Applicable Credit... ($2,185,800) Net Estate Tax... $2,240,000 Net Estate Tax... $0 1 The American Taxpayer Relief Act of 2012 (ATRA) made the Deceased Spousal Unused Exclusion Amount (DSUE) or Portability permanent. DSUE allows an executor of an estate of a married decedent the option to transfer any unused estate tax exemption amount to the surviving spouse. Please discuss this with your estate planning attorney. 2 At husband s death, wife becomes sole owner of the joint tenancy property by operation of law the value of her estate becomes $11.2 million and her estate is unaffected. 3 At husband s death, the $5.6 million goes to a family trust (or B Trust). 4

7 Frequently Asked Questions Haven t the tax laws nearly eliminated estate taxes? It is more important today than ever to plan. It is true The American Taxpayer Relief Act of 2012 made permanent the estate, gift and generation-skipping transfer tax exemptions and indexed it for inflation. The top transfer tax rate for gift and estates was increased to 40%. For 2018 the exemption amount is $5.6 million (indexed for inflation). Estate planning is not just planning for estate tax. Estate or legacy planning is the process of planning for the accumulation, conservation, and distribution of your estate in the manner that most efficiently and effectively accomplishes your goals and objectives. Planning gives you control over your assets. You choose who will manage your estate, how your estate will be distributed, and to who. Effective planning can avoid unnecessary financial loss, liquidity problems, and even family disputes. Congress has changed estate and gift tax laws numerous times over the years and there is a likelihood that economic conditions and budgetary constraints could cause Congress to further modify the estate tax in the future; therefore, building flexibility into your estate plan is critical. Remember that all assets you own are subject to estate taxes, including your home, personal property, cars, investments, retirement plan assets and more. In addition, inflation and earnings on your investments are likely increasing your estate value each year, so even with the new tax laws, your estate tax exposure may not be significantly reduced. Why do I need a will if everything I have is in joint ownership with my spouse? All the assets you and your spouse own in joint tenancy will go to your spouse when you die. But don t assume you own everything in joint tenancy just because you are married. Joint tenancy without estate planning can also present a difficult situation if you become incapacitated. Your spouse may not be able to liquidate your assets to pay for expenses without getting court approval. Plus, if your spouse dies first, or at the same time as you, who will get custody of your children and what will become of your assets? If either of you has children by a former marriage, a will can help with custody issues and financial support for these children. How can I avoid probate? Probate assets are assets in your name that are not jointly owned and that do not pass under the terms of a beneficiary designation. Jointly owned assets pass directly to the surviving joint tenant if they were owned as joint tenants with right of survivorship or tenants by the entirety. Property owned as tenants in common is subject to probate. Assets that pass under the terms of the beneficiary designation include such assets as life insurance, annuities, pension and qualified retirement accounts. For other assets that are individually owned, you may avoid probate by transferring these assets to a Living Trust. 5

8 A Living Trust is a trust you establish during your lifetime to be the owner of most of your assets. The trust document itself dictates the disposition of the trust assets in the event of your death. This keeps the trust assets out of the probate process. The disposition of trust assets to your heirs may be faster, private and a less expensive transaction. A Living Trust is set up as a revocable trust, which means you can amend the terms of the trust or discontinue the trust at any time during your lifetime. Because the trust is revocable, you have complete control of the trust assets during your lifetime. Also, the taxation of income on the trust assets is no different than if you owned the assets outright. A Living Trust also provides for asset management if you should become incompetent, without going through court proceedings to appoint a guardian. A Living Trust should be considered if you have real property in multiple states. This allows you to avoid multiple probate proceedings. Planning to avoid probate does not necessarily reduce estate taxes. What are advanced health care directives? Advanced health care directives allow you to control the medical procedures that can be performed in the event that you are unable to express your wishes. Depending on your state s laws, one or two documents are commonly used: living wills and durable powers of attorney for health care. A Living Will is a document that provides physicians and hospitals with your wishes regarding the termination of life support, if you should be in a situation where this becomes an issue. Most states have laws allowing health care providers to follow your wishes as outlined in your Living Will. A Living Will is restricted to the situation where you are being kept alive on life support, with no hope of recovery. A document that has a broader scope is known as a Health Care Power of Attorney (HCPA) or Medical Directive. Using this document, you can give another person (usually a spouse or close family member) the power to make the decisions about any type of medical care that you would normally make, in the event that you are unable to do so. This is an important document to have; it enables you to receive the proper care in a timely manner, regardless of the circumstances. It also enables the person you designate to make life support decisions based on guidance you provide in the HCPA. 6

9 Can I avoid estate taxes by giving everything to my kids right now? All the assets you and your spouse own in joint tenancy will go to your spouse when you die. But you can give $15,000 (in 2018); adjusted for inflation periodically per year without any gift tax or estate tax implications to as many beneficiaries as you wish. If you are married, the two of you can give up to $30,000 per year per donee. Anything larger than this is subject to gift taxes although no gift tax will be due until total taxable gifts exceeds $5,600,000 ($11,200,000 if married). However, using some, or all, of your $5,600,000 lifetime exemption during your lifetime reduces the amount you can leave to your heirs estate tax-free at death. Some people give away assets which are likely to appreciate significantly (like real estate or business interests), where the value for gift tax purposes will be the value at the time the gift is made and no future appreciation will be included in your estate. Before making gifts of appreciated property, be sure to consult with your tax advisor. Can I avoid future taxes by giving money to charity now? You can make gifts or bequests of an unlimited amount to qualified charities without gift tax or estate tax consequences. In addition, gifts to charity during your lifetime may qualify for an income tax deduction. If my life insurance benefits are free of tax, why do I have to factor them in when I estimate my estate? Most of the time the death benefits of life insurance policies are free of income tax. However, the death benefits are included in the calculation of your gross estate subject to estate taxes if you own the life policy. If life insurance policies are owned by a properly structured Irrevocable Life Insurance Trust (ILIT), then the proceeds will be income and estate tax free. I m single, so why do I need estate planning? Actually, single people should be just as concerned about estate planning as married people. The state laws are structured to protect a surviving spouse and children. However, as a single person there is no clear obligation on your part to support or benefit any particular person. If you don t specify where you want your assets to go, the courts will transfer the assets in accordance with your state s intestacy laws. 7

10 I already have a will. Do I need to worry about estate taxes? Wills are very important but they are only a part of a comprehensive estate plan and do not shield your estate from taxes. Remember, regardless of which assets pass through probate, everything you own at your death (your gross estate) is counted when calculating how much estate tax is owed. I did an estate plan years ago, so I m all set, right? An estate plan needs periodic evaluation and updating as laws and your personal situation change. If your last estate plan review was more than three to five years ago, or if your life has changed (marriage, divorce, parenthood, death of a family member, change in financial situation), it may be time to review your estate plan. If I can t avoid estate taxes, how can I prevent a huge part of my estate from being reduced? Instead of forcing your heirs to liquidate your assets to pay the estate taxes, you can pre-fund your estate taxes by purchasing a life insurance policy now. At the time of your death, the life insurance proceeds will be available. Plus, there are ways to shelter the life insurance policy itself from estate taxes. One of the most important ways is through the use of an Irrevocable Life Insurance Trust (ILIT) that owns any policies on your life. The payment of the premiums will typically be treated as a gift to the beneficiaries of the trust. However, at your death the death benefit will be excluded from your gross estate. Thus, the full amount of the death benefit will be available to fund estate taxes and other survivor needs. Use of a life insurance policy owned by an ILIT is a very cost effective way to satisfy your estate tax obligation and still pass most of your estate to your heirs. Investing in peace of mind and providing the security your family deserves. 8

11 How Can We Help? Your Allstate Agent can work with you and your team of financial advisors (attorneys, accountants, etc.) to help you create the estate plan that s right for you. We can offer suggestions based on an objective analysis of your estate or your existing plan these services are completely complimentary. We can provide you with a variety of life insurance and annuity products to use as part of your estate plan. This information is not intended to replace advice from your legal or tax advisor, but merely highlights issues for your consideration. We strongly encourage you to consult your advisor (attorney and/or accountant) before starting or changing an existing plan. 9

12 This information is provided for general consumer educational purposes and is not intended to provide legal, tax or investment advice. Life insurance offered through Allstate Life Insurance Company & Allstate Assurance Company, 3075 Sanders Rd, Northbrook IL 60062; American Heritage Life Insurance Company, 1776 American Heritage Life Dr., Jacksonville, FL In New York, life insurance offered through Allstate Life Insurance Company of New York, Hauppauge NY. Securities offered by Personal Financial Representatives through Allstate Financial Services, LLC (LSA Securities in LA and PA). Registered Broker-Dealer. Member FINRA, SIPC. Main Office: 2920 South 84th Street, Lincoln, NE (877) Check the background of this firm on FINRA s BrokerCheck website Allstate Insurance Company allstate.com ALR /17