Death Taxes & Planning. Fill in the Blank Multiple Choice. Take a pencil/pen in hand. FSA Financial Production and Financial Management Training

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1 FSA Financial Production and Financial Management Training Tools of Estate Planning 11 1 Marsha A. Goetting Ph.D., CFP, CFCS Professor & Extension Family Economics Specialist Department of Agricultural Economics & Economics goetting@montana.edu 22 2 Fill in the Blank Multiple Choice Take a pencil/pen in hand answer questions on the handout throughout the webinar 3 3 Consider a variety of transfer planning tools Joint Tenancy Contracts Payable on Death (PODs) Transfer on Death (TODs) Beneficiary Designations Beneficiary Deeds Separate listing of tangible personal property Life estates QTIP Trust Gifting 4 Death Taxes & Planning Question: Fill in Blank What % of Montanans do you think paid an inheritance tax in 2014? %

2 Question: Fill in Blank What % of a Montanans deceased person s estate do you think paid a federal estate tax in 2011? Less than % of Montana residents 9,117 deaths paid Planning Technique Die in appropriate year, but what year?????? Federal Estate Tax Exclusion Year Applicable Exclusion 2011 $5,000, $5,120, $5,120, $5,340, $5,430,000 Question: Fill in Blank Federal Estate Tax What is married couples exemption? Married couples exemption $ million Married couples New Term to learn Portability of applicable credit for surviving spouse 14 Dad dies with $5.43 Million Estate Credit not used-2015 Dad s Death Estate Value $5,430,000 Marital Deduction $5,430,000 Taxable Estate 0 Tentative Tax 0 Applicable Credit $2,117,800 Estate Tax

3 Mom s Future Estate Inherited $5.43 million from husband Filed portability form She dies 8 years later Estate has increased to $10,860,000 Million Applicable credits (unified) Mom has two applicable credits (unified): Her s $2,117,800 Dad s $2,117, $10.86 Million Estate using Marital Portability Estimate Mom s & Dad s Applicable Credit Estate Value $10,860,000 Marital Deduction $0 Taxable Estate Estate Tax $10,860,000 $4,235,600 Mom s Credit Dad s Credit $2,117,800 $2,117,800 Applicable Credit $4,235,600 Question: Fill in Blank Federal Estate Tax- Predictions The tax will not impact % of Americans Estate Tax Basis in land/property At death By gift 21 Value of land Grandpa dies (2015) with ranch land Paid $50,000 in 1949 Valued at $6 million at death 22 3

4 Written Will Grandpa bequests land to grandson What value is subject to the federal estate Question: Multiple Choice What is the value subject to the federal estate tax? $50,000 Grandpa paid for land $6,000,000 Fair market value date of Death $5,950,000 Difference between the two tax? Value of property Property is valued at the fair market value at the date of property owner s death Grandpa s FMV of land Grandpa dies with $6 Million Estate Estate Value $6,000,000 Marital Deduction $0 Taxable Estate $6,000,000 Tentative Tax $2,345,800 Applicable Credit $2,117,800 Estate Tax $ 228,000»$6 million Tool of Estate Planning Step Up in Basis 28 Stepped up Basis Grandma bequests ranch to grandson Ranch passes grandson at stepped up value in 2015 $5.43 million 29 4

5 Grandma dies with $5.43 Million Estate in 2015 Estate Value $5,430,000 Marital Deduction 0 Taxable Estate 0 Tentative Tax $2,117,800 Applicable Credit $2,117,800 Estate Tax Question: Fill in Blank Stepped up Basis Grandson sells for $5.43 M in 2015 Is there a Montana Inheritance Tax? Is there a Federal Estate Tax? Is there a Capital Gains Tax? 31 Later Sale Grandson sells for $8 M in 2019 Capital Gain amount $2,570,000 $385,500 (estimated tax) 33 Gifting Situation Grandma gifts land to grandson in 2015 Land valued at $5.43 million Grandma inherited land valued at $100, Question: Multiple Choice What is the grandson s basis in the property? $100,000 value Grandma inherited $5,430,000 Fair market Value Date of Gift $5,330,000 Difference between the two Valuation For Gifts Donee assumes donor s basis in property Grandma s Basis = $100,000 Fair Market Value at transfer is used for gift tax calculation purposes 37 5

6 Question: Fill in Blank Carry over basis IF, Grandson sells for $5.43 M in 2017 after Grandma dies Is there a Montana Inheritance Tax? Is there a Federal Estate Tax? Is there a Capital Gains Tax Tool of Estate Planning Gifting to the next generation Federal Gift Tax Question What is the maximum amount that can be gifted yearly without a federal gift tax? Question: Fill in Blank Annual Gifts $ : 2015 To as many people as you wish Tax free 43 Question: Fill in Blank Gift-splitting Spouse may join in gift $ in 2014/

7 Taxation Gifting Gifts are not subject to state or federal income taxation by the recipient From a family health & tax perspective Grandma gives $14,000 to married adult grand daughter Total Gift Adult Married Grand Daughter = $14,000 MSA Wife $3,000 MSA Husband $3,000 IRA Wife $5,000 First-Time Homebuyer $3,000 Total Gifts $14, Total Gifts = $14,000 Grand Daughter s Tax Savings MT Tax Savings on $ 897 MSA, FTHB, IRA Fed Tax Savings (IRA) + $1,100 Total Tax savings $1, Question: Fill in Blank What is the maximum amount a person can put in an MSA? $ maximum per year $ married couple 51 MSA reduces income for Montana tax purposes Contributions: Reduce Montana income by amount deposited 53 7

8 Example: Barbara January 31 $3,000 deposited in MSA at her bank Had $2,000 eligible medical expenses during year Barbara s Montana Income Reduced by $3,000 Not $2,000 withdrawn Adjusted income $ 42,000 MSA deposit - $3,000 Taxable Income $ 39, MSA Saves on Montana Income Taxes Taxes saved depend on your tax bracket 56 Tax Brackets & Rates Montana At Least But less Than Then your tax is: $0 $2,800 1% $2,800 $5,000 2% $5,000 $7,600 3% $7,600 $10,300 4% $10,300 $13,300 5% $13,300 $17,100 6% $17,100 or more 6.9% 57 MT Tax Savings with MSA vs Regular Savings Account Deposit: $3,000 Taxable Income more than $17,100 (6.9% tax bracket) Savings Savings Deposit $3,000 Interest Rate: x.0005 Earnings $1.50 MSA Savings Deposit $3,000 Tax Bracket: x.069 Tax Savings: $ What are eligible medical expenses? Montana accepts any health care expense allowed as a deduction on federal income tax return as eligible IRS Publication

9 MSA & Death What happens to my MSA when I die? 60 Beneficiary Designation POD Payable on Death designation allowed on MSA 61 Inherited MSA, can use as own MSA Spouse Children Grandchildren Tool of Estate Planning Variety of contracts What Determines Who Gets Your Real & Personal Property When You Die???? Depends on Montana laws: Contracts Wills Trusts If no will or trust, Montana Law Intestate Succession Statutes

10 Payable on Death Designation (POD) Payable on Death Designation (POD) Accounts at financial institutions Savings Accounts Certificates of Deposit Checking Accounts 6666 At death ownership passes to POD beneficiaries No Probate 6767 Payable on Death Designation (POD) Sole Ownership of account Marsha A. Goetting POD Debbie Buczinski and Donna Chamberlain, equally 6868 Joint Tenancy & POD Wording on account Barb Miller & Jack Miller joint tenants with right of survivorship POD Charles Miller and Kathy Miller, equally 69 Married Couple: POD Sam Sara 70 Beneficiary Sam has $50,000 CD Designates Sara as his POD beneficiary 71 10

11 Later Sam Writes Will I bequest my CD to my son, Chris Shelton. 72 Question: Multiple Choice Who gets $50,000? Sara, POD Beneficiary Chris, Devisee in will written more recently Transfers on Death (TOD) Registration No probate Stocks, publicly traded Bonds Mutual Funds 75 Tool of estate planning for Real Property Transfer: Montana Beneficiary Deed 76 What is a Beneficiary Deed? A way to convey real property to one or more grantee beneficiaries upon death without the What is a Grantee Beneficiary? Party to whom an owner grants interest in Montana real property cost of probate

12 Grantee Beneficiary Rights? NONE Effective only upon death of owner Can t use for collateral Can t sell Beneficiary Deed Recorded Before death of owner Clerk and Recorder Montana county where property is located Is not owner Who can be a grantee beneficiary? Spouse Children Relatives Friends Corporation Charity What happens if grantee beneficiary dies before owner? Owner options Specify a successor beneficiary 83 Mark files & records Mark (Dad) Owner Evan (Son) Grantee Beneficiary Luke Successor Beneficiary

13 Evan Successor Luke as Successor Mark (Dad) Owner Mark (Dad) Owner Evan (Son) Grantee Beneficiary Evan (Son) Grantee Beneficiary Luke Successor Beneficiary Luke Successor Beneficiary Charity as Successor Mark Fox (Dad) Owner Evan Fox (Son) Grantee Beneficiary Montana 4-H Foundation What about Beneficiary Deed and a will? Example: Father files deed naming daughter as grantee beneficiary Gary (Father) Owner Linda (Daughter) Grantee Beneficiary Gary later wrote a will leaving property to his son Matt Gary (Father) Owner Linda (Daughter) Grantee Beneficiary Matt (Son) Named in will

14 Question: Choose Linda or Matt Who gets the property when Gary dies? Linda (Grantee Beneficiary) Matt (named in the will that was written later) Can there be more than one grantee beneficiary? Yes, owner should: Specify form of ownership after death: Joint tenants with right of survivorship Tenants in common Filing more than one deed John files beneficiary deeds: 2011 & 2015 On same land Names a different beneficiary each time Question: Select date Which deed is effective? June 25, 2011 Grantee: Susan Smith March 25, 2015 Grantee: Lucy Anderson Tools of Estate Planning: Mom inherits all Mother Husband Dad Wife ALL Life Estates & Trusts 97 Their child Their child Their child Property Sole Ownership 98 14

15 Concern What if Mom marries the good looking hunk down the road? Concern What if Dad marries the wow-wow floosie in town? Estate Planning Goal Provide financial protection for spouse & Estate Planning Tool to Achieve Goal Life Estate Life Tenant Remaindermen children Estate Planning Tool--Life Estate & Remarriage HUSBAND CHILD A HIS Land CHILD B HIS Land WIFE Home for life CHILD C HERS Remaindermen his children receive home after wife dies CHILD D HERS Estate Planning Tool QTIP Trust Q ualified T erminable I nterest P roperty Trust

16 $2 Million Estate HUSBAND CHILD A CHILD B Trust for kids $1,000,000 $1,000,000 QTIP Trust CHILD C HERS CHILD D HERS $2 Million Estate: QTIP ultimately ends up with kids HUSBAND CHILD A $500,000 Child A $500,000 CHILD B $500,000 Child B $500,000 Wife QTIP Trust $1,000,000 CHILD C HERS CHILD D HERS Tool of Estate Planning: Reminder: 7 out of 10 do not have a will Written Will What is a will? A written document describing how its maker wants property distributed after his or her death Montana Requirement Age 18 or more years of age

17 Montana Requirement Montana Requirement Can t be under undue influence Sound mind Know nature of property Know those to whom he/she would give property Here is your DAD S will Being of sound mind I spent it all. Holographic Wills Signature & material provisions in handwriting of the testator No witnesses are necessary Dad s Will Minor Children To my son I leave the pleasure of earning a living. For 25 years he thought the pleasure was mine. He was mistaken.. Nominate: Guardian Takes care of child Health decisions, home Conservator: Handles the assets

18 15 Adopted Children Have same rights as your biological children Can will be changed? Yes, changed or revoked As long as testator remains competent Changing will 1. Revoke will 2. Make entirely new will 3. Add codicil to present will Does Montana Law allow you to disinherit your spouse? Yes No Question: Yes or No Right to an Elective Share Married up to 8 years Right to an Elective Share Married years # of Years married But Less than Years % of augmented estate Less than 1 year Supplemental Amount Only 1 2 3% 2 3 6% 3 4 9% % % % # of Years married % of augmented estate But Less than Years % % % % % 15 years or more 50%

19 Heinrich Heine made his wife sole beneficiary on the condition that she remarry because then there will be at least one man to regret my death Separation decree Is not considered as a divorce under Montana Uniform Probate Code Any bequest to spouse is still effective John s will bequeaths his entire estate to his wife, Millie. But they are divorced Son John Son Former WIFE Millie Daughter grandchild grandchild grandchild grandchild grandchild grandchild Question: Multiple Choice John Dies. Who gets the property? Millie, his Former wife Sara, his present wife John s children John s parents Montana Divorce Revokes bequest of property to former spouse John s children receive the assets Age 18 Child has right to his/her inheritance without regard to financial competency

20 Tool of Estate Planning: Testamentary Trust 131 Testamentary Trust Established by a written will Why Testamentary Trust? Minor Children Manage assets until they reach certain age Why Testamentary Trust? Financially incapacitated/ incompetent heir: Can t manage money Addiction problems Trust Agreement Written document containing instructions to trustee Discretionary Standard: Trustee judgment Health Education Maintenance Support

21 Trustee Decision Chris wants to take a trip during the summer to Europe It would be a very educational experience, he says Thinking Question: Yes or No You are the trustee will you provide funds for Chris from the Trust? Yes No Mandatory Standard- - dictated by trust instrument Distribute at predetermined date or occurrence Occurrence Upon reaching certain age 25 or 30 or?? At intervals Ages 25, 30, Distribution of Trust Income or Principal Use percentages instead of dollar amount in case values of assets change Percentages 75% to my son, John Jones 25% to Montana State University Extension

22 Inheritance????? Self Sufficiency Trust Child who inherits assets of more than $2,000 becomes ineligible for SSI & other benefits For special needs children who receive or may later be entitled to receive public benefits Montana Parents Let s Unite for Children Montana's Self Sufficiency Trust Guide Tool of Estate Planning: Separate listing of tangible personal property 146 Non-Titled Property Owner is not identified with a written document Tangible Personal Property Guns Tools Furniture Special Dishes Linens & needlework Collections

23 Personal Belongings Wedding photographs Baseball glove Books Christmas decorations Jewelry Montana Law: Separate Listing Tangible Personal Property Paragraph in will I have a separate listing of tangible personal property Separate Listing Item my Grandma Ray s Opal Ring my niece, Bethany Buczinski my Montana Sapphire Ring my friend, Barbara Miller Date Signature Jack s coin collection? Safe deposit box with John as joint tenants with right of survivorship Separate listing with will leaving coin collection to Susan Thinking Question: Choose John or Susan Who do you think receives Jack s coin collection? John as JT on Safe deposit box Susan Separate Listing

24 Conflict between two Montana statutes: A Thought Should safe deposit box be in joint Tool of Estate Planning: Life Insurance tenancy? Why Life Insurance Married Couple Provide for spouse & kids Buy out Pay Estate Tax 157 Bill Vere Beneficiary designation Bill has $100,000 life insurance policy Designated Vere as his primary beneficiary Bill later changes his mind & writes will I bequest all life insurance proceeds to my son, Chris Shelton

25 Question: Choose Vere or Chris Who gets $100,000? Vere? Designated Beneficiary Chris? Devisee in will that was written more recently Contract Law You can t undo a contract with a will!!!!! Tool of Estate Planning: Power of Attorney 164 Power of Attorney Financial Business transactions Money Medical Health Care Decisions What is a Power of Attorney? Written, notarized document in which one person gives another power to conduct certain acts on his/her behalf Who needs POA? Anyone who has assets that would need to be managed if they should become incapacitated

26 Incapacitated Motorcycle accident Car accident Alzheimer s/dementia Alcoholism Drug Dependency Question: Multiple Choice What percent of Americans age 55 to 64 have a Power of Attorney? 69% 52% 38% 20% 15% Montana Uniform Power of Attorney Act Effective October 1, 2011 Provisions for Creation Provides Safeguards 171 Forms Montana Statutory Power of Attorney Agent s Certification as to the Validity of Power of Attorney and Agent s Authority 172 Responsibilities of Agent Principal should inform agent what authority (power) has been given in the POA form Important Information for Agent Agent s Duties & Circumstances Potential liability for any losses caused by agent s violations

27 The Montana Uniform Act provides: List of transaction categories that can be included in the agent s general authority Page 2 of MontGuide List of Transaction Categories Real property Tangible personal property Stocks & Bonds Commodities & Options Banks & other financial institutions List of Transaction Categories, cont d. List of Transaction Categories, cont d. Operation of entity or business Insurance & Annuities Estates, trusts & other beneficial interests Claims & Litigation 177 Personal & family maintenance Benefits from government programs Civil or Military Service Retirement Plans Taxes 178 Additional Powers Additional powers con d. Create, amend, revoke, or terminate a revocable living trust Make a gift Create or change right of survivorship Waive the principal s right to be a beneficiary of a joint and survivor annuity Including survivor benefit from retirement plan Disclaim property

28 Agent is not permitted to: Write a will Represent the principal in court 181 Authority to more than one person? Principal may designate two or more persons to act as: Coagents Use authority independently 182 Consequences of giving authority to coagents (2 or more) Disagree about action May result in attorney s fees & court costs 183 Successor Agent Principal may designate a Successor Agent, if the original agent: Resigns Dies Becomes incapacitated Is not qualified to serve Declines to serve 184 Question: Fill in Blank How long does POA last? Until revoked Once the principal the POA is 185 Probate in Montana

29 What is probate? Process of settling the estate to be sure Property is transferred to appropriate heirs Debts paid Taxes paid What would be the maximum dollar amount ($$$$) Montana law allows to an attorney to settle $200,000 estate? CDs Mutual Funds House Question: Multiple Choice Attorney maximum settle $200,000 estate $65,300 $45,800 $25,600 $15,500 $10,900 $ 6, Cost of probate Montana Statutory limits for personal representative 3% of first $40,000 2% in excess of $40, Cost of probate Montana Statutory limits for attorney 1 ½ times amount that was allowable to the personal representative 193 $200,000 estate & Fees Personal representative $4,400 Attorney $6,600 TOTAL = $11,

30 Taxable Income Personal representative must include PR fee as income Montana/Federal 195 Hourly Fee Basis Based on time involved in settlement of estate Ask attorney about method used 196 Cost of probate $2 million estate Personal representative $40,400 Attorney $60,600 TOTAL = $101, Cost of probate $4 million estate Personal representative $80,400 Attorney $120,600 TOTAL = $201, Minimize Probate Costs? Tools of Estate Planning CDs POD Mutual Funds TOD House, Land Beneficiary Deed Property titles Sole, JT, TC Business arrangements Partnerships, LLC, S Corp PODs/TODs Life Insurance Gifts Beneficiary Deeds Power of Attorney

31 Best wishes as you proceed with your estate planning Marsha 201 Contact Information Extension Economics P.O. Box Bozeman, MT Phone: