Estate And Legacy Planning

Transcription

1 Estate And Legacy Planning An Overview of the Estate Planning Process By: Samuel S. Stalsberg Sjoberg & Tebelius, P.A Woodlane Drive, Suite 101 Woodbury, Minnesota Phone: MVMA LUNCH 'N LEARN PROGRAMS November 8, 2016

2 What Is an Estate Plan? An estate plan is a map The map reflects the way you want your personal and financial affairs to be handled in case of incapacity or death

3 Who Needs an Estate Plan? Chances are, you do Not just for the wealthy Without an estate plan, you can t control what happens to your property if you die or become incapacitated An estate plan makes your wishes clear and helps avoid family disputes Proper estate planning can preserve assets and provide for loved ones Protects beneficiaries from others and themselves Especially needed if: Your spouse isn t comfortable with financial matters You have minor or disabled beneficiaries Your net worth exceeds the federal transfer tax exemption amount ($5,450,000 in 2016) or, if less, your MN exemption amount ($1,600,000 in 2016) You own property in more than one state Privacy is a concern You own a business Second marriages!!!

4 Basic Estate Planning Concepts Health Care Planning for Incapacity Wills and Probate Trusts Property Management Planning for Death Tax Basics Gifting Questions

5 Planning for Incapacity Health Care Failing to plan means: Court appoints a guardian [may not be who you would choose] Increased the burden on your guardian Your guardian s decisions might not be what you would want Attorney's fees, court costs and delays

6 Planning for Incapacity Health-Care Directives Durable Power of Attorney for Health Care Living Will Miscellaneous Directions You designate an agent to make decisions on your behalf Puts your instructions in writing Disposition of Remains, Funeral Services, Organ Donation

7 Planning for Incapacity Financial Management Without appropriate planning for management of your assets during incapacity, a court supervised conservatorship is probably necessary. Time Consuming Expensive Public Record

8 Planning for Incapacity Property Management Tools Joint Ownership Durable Power of Attorney (DPOA) Living Trust Joint owner has the same access to property as you do Lets you designate an agent to make decisions on your behalf Lets a successor trustee take over management of trust property

9 What Happens If You Die Without an Estate Plan? It Depends Some property passes automatically to a joint owner or to a designated beneficiary (e.g., IRAs, retirement plans, life insurance, trusts) All other property generally passes according to state intestacy laws

10 What Happens If You Die Without an Estate Plan? -- Intestacy Intestacy laws vary from state to state Pattern of distribution in Minnesota depends on marital status, and if all children are also children of the surviving spouse. Your actual wishes are irrelevant, the state has essentially prepared a will for with assumptions as to how you want your property divided. Many potential problems

11 Wills & Probate A will is the cornerstone of an estate plan Directs how your property will be distributed upon your death Names personal representative and guardian for minor children Can accomplish other estate planning goals (e.g., estate tax planning, trusts for children) Written, signed by you, and witnessed

12 Wills & Probate -- The Probate Process Most wills must be probated Will is filed with probate court Personal Representative collects assets, pays debts, files tax returns, and distributes property to beneficiaries Typically, process lasts several months to a year

13 Wills & Probate -- Probate Pros & Cons Pros Costs are typically modest Court supervision Protection against creditors Cons Can be time consuming for complex estates Title transfer delays Fees Ancillary probate Public record

14 Wills & Probate -- Avoiding Probate Can you avoid probate? Yes, an estate plan can be designed to control which assets pass through probate, or to avoid probate. Own property jointly with rights of survivorship Complete beneficiary designation forms for property such as IRAs, retirement plans, and life insurance Transfer on death deeds Lifetime gifting Trusts

15 Revocable Trusts Versatile estate planning tool Can protect against incapacity Avoid probate Allow professional management of assets Control over property Can revoke or amend Private FYI - Animal/Pet Trusts are now permitted under MN Law!!!

16 Trusts -- What Is a Trust? Relationship where property is held by one party for benefit of another Parties to a trust: grantor, trustee, beneficiary Living trusts vs. testamentary trusts Revocable trusts vs. irrevocable trusts Trust Agreement Grantor Trust Property Trustee Manages trust property according to trust agreement Beneficiaries Have rights to trust property under terms of trust agreement

17 Revocable Trusts Pros 1. Avoid Probate 2. Incapacity Planning and Asset Management 3. Protects Privacy 4. Reduces Administrative Burden on Loved Ones Cons 1. More Complex 2. More Work Upfront (funding the trust) 3. Higher Initial Cost

18 Tax Basics Transfer taxes include: Federal gift tax - imposed on transfers you make during your life Federal estate tax - imposed on transfers made upon your death Minnesota estate tax - - imposed on transfers made upon your death Federal generation-skipping transfer (GST) tax - imposed on transfers to individuals who are more than one generation below you (e.g., grandchildren) both during your life and upon your death

19 Transfer Tax Basics Federal Top rate 40% 40% 40% Gift and estate tax exemption equivalent amount $5,430,000 $5,450,000 $5,490,000 GST tax exemption $5,430,000 $5,450,000 $5,490,000

20 Tax Basics -- Gift Tax Lifetime Transfer You (Donor) Person Receiving Gift (Donee) Gift tax may apply Federal Gift tax applies to transfers made during your life Certain gifts are excluded $14,000 annual exclusion Gifts for Education Gifts for Medical Expenses Gifts to Spouse, Charity $5,450,000 exempt from all transfers (gifts and estates) combined in 2016 Minnesota Gift Tax [Repealed]

21 Tax Basics -- Federal Estate Tax Transfer at Death Your Estate Beneficiary Estate tax applies to transfers made at death Generally does not apply to transfers made to spouse or charity $5,450,000 exempt from all transfers (gifts and estates) combined in 2016 Any portion of exemption used for gifts will be unavailable to the estate Estate tax may apply

22 Tax Basics -- Federal Estate Tax Exemption is portable for spouses - unused portion left by deceased spouse can be transferred to surviving spouse. $10,900,000 can be left to beneficiaries tax free (in 2016). Note: Portability does not apply to MN state estate tax

23 Tax Basics -- Federal Estate Tax Explanation of Portability Feature 1. Assume Wife owns $7M in assets and Husband owns $3M. Husband dies first. 2. Husband s $3M estate passes to Wife. 3. Wife now owns $10M of assets. Wife can utilize the portable unused $5.45M from Husband and use her own $5.45 M exemption on top. 4. Result: No federal estate tax on $10.9M. NOTE: Minnesota estate tax is still applicable.

24 Tax Basics Minnesota Estate Tax Review of Minnesota Estate Tax Estate Tax Exemption through 12/31/13 - $1M Decedents Dying in $1.2M (9%-16%)* Decedents Dying in $1.4M (10%-16%)* Decedents Dying in $1.6M (10%-16%)* Decedents Dying in $1.8M (10%-16%)* Decedents Dying in $2.0M Over $2M but less than $2.6M 10% of excess over $2M Over $2.6 but less than $7.1 - $60,000 plus 13% of excess over $2.6M *Tax on amounts exceeding the exemption.

25 Tax Basics Tax Planning (Minnesota) A. An estate plan leaving everything outright to a spouse may not be appropriate for a couple with total assets in excess of the Minnesota applicable exclusion amount. B. Example: Husband and Wife each have assets of $2,000,000 and Husband dies in 2016 leaving his entire $2,000,000 estate to his wife outright. No Minnesota or Federal estate taxes are due thanks to the unlimited marital deduction. Wife now owns $4,000,000 worth of assets. Wife dies later that same year. No federal estate tax will be due at her subsequent death because her assets are under the federal exclusion amount. Minnesota estate tax will be due, however, because her assets exceed the Minnesota exclusion amount of $1.6M.

26 Husband dies first in 2016 Tax Basics Tax Planning (Minnesota) H'S ESTATE $2,000,000 NO TAX TO SPOUSE

27 Tax Basics Tax Planning Wife dies second, also in 2016 W'S ESTATE $4,000,000 (Minnesota) BYPASS $0 $4,000,000 TAXABLE Federal Taxes = $0 Minnesota Taxes = $268,000

28 Tax Basics Tax Planning (Minnesota) To reduce MN estate tax, include tax planning in your estate plan Bypass Trust (aka Credit Shelter Trust, Family Trust, B Trust) Formula v. Disclaimer Purpose To use credit to pay tax at death of first-to-die To use a trust to pass property values equal in amount to the exemption equivalent To provide surviving spouse with use of property To avoid tax on property at surviving spouse s death

29 Tax Basics Tax Planning (Minnesota) Example Revisited: Husband and Wife each have assets of $2,000,000. Husband dies in 2016, leaving $1,600,000 to a trust for the benefit of wife and children (Bypass Trust) and the remaining $400,000 passes outright to wife. Taxes at Husband s Death: Federal Estate Tax due = $0 Minnesota Estate Tax due - $0 NO TAX HUSBAND S ESTATE $2,000,000 NO TAX $400,000 MARITAL DEDUCTION $1,600,000 BYPASS TRUST

30 Tax Basics Tax Planning (Minnesota) Example Revisited: Wife dies later that same year. WIFE S ESTATE $ 2,400,000* BYPASS TRUST $1,600,000 $2,400,000 TAXABLE $1,600,000 NON- TAXABLE No Federal Estate Tax Minnesota Estate Tax = $80,000 * Bypass Trust not included in Wife s estate.

31 Tax Basics Tax Planning (Minnesota) Total Minnesota Estate Tax Savings $268,000 - $80,000 = $188,000

32 Lets you see the recipient enjoying your gift Lets you minimize transfer taxes by taking advantage of the $14,000 annual gift tax exclusion and other tax deductions Removes future appreciation of property from your taxable estate BUT no step-up in basis -- your basis in the property carries over instead Lifetime Gifting

33 Lifetime Gifting -- Transfers Excluded from Gift Tax You can give $14,000 to as many individuals as you want federal gift tax free ($28,000 if you and your spouse make the gift together) If you re contributing to a Section 529 plan, you can give $70,000 ($140,000 with spouse) gift tax free No gift tax on amounts paid directly to a school for an individual s tuition No gift tax on amounts paid directly to a medical care provider for an individual s medical care Unlimited exemption for gifts to qualified charities

34 Legacy Planning Gifts to Charity During Lifetime Example: Outright Gift of $25,000 in Stock to the MVMF Supports wonderful causes of MVMF No capital gains tax 100% income tax deductible Lifetime Planned Gifts to Charity Gift Annuities Charitable Remainder/Lead Trusts

35 Gifts In Estate Plan Legacy Planning Use retirement plan beneficiary [most tax efficient] Flat dollar amount by bequest Percentage by bequest Donor Advised Fund

36 Conclusion Have you implemented a plan for incapacity (health and property)? Do you have a valid will? Are transfer taxes a planning concern for you? Does your overall estate plan reflect your current wishes and circumstances? I would welcome the opportunity to meet individually with each of you to address any specific concerns or questions that you may have: Samuel S. Stalsberg Sjoberg & Tebelius, P.A Woodlane Dr, Ste 101 Woodbury, MN Phone: sam@stlawfirm.com