Estate and Legacy Planning

Estate and Legacy Planning

Contents Estate Planning 101... 1 Who Needs Estate Planning?... 2 The Tools of Estate Planning... 3 The Problem with Probate... 4 Reducing the Bite of Taxes... 5 Other Planning Tools... 7 Estate Planning Worksheet... 8 To Do List... 9 Estate Planning Leaving a Legacy... 9

Estate Planning 101 You plan for the purchase of a car and a home. For vacations. For your children s educations. For your own retirement. The list is endless. And yet, many people fail to make arrangements for one of life s most important eventualities the passing on of an estate. It s no small oversight. With estate taxes running up to 40% and attorneys fees skyrocketing, a significant portion of the assets you ve worked a lifetime to build could end up somewhere you never intended if you fail to plan ahead. To some, the term estate applies only to those with vast amounts of money, property and other assets. But estate planning is not just about estate taxes. For those families and individuals with more modest estates, estate planning is really about leaving a legacy. Even if your estate is comparatively modest, sound and effective legacy planning can provide for the orderly and financially efficient distribution of your wealth. This ensures the assets you do have get where you want them to go, leaving a legacy for the heirs you choose. Of course, an estate plan isn t just about the protection and distribution of assets alone. A carefully considered estate plan should also provide legacy planning instructions for important, end-of-life health care decisions and help protect your assets from long-term care costs. The bottom line is, estate or legacy planning addresses living issues that are important to you, giving you the peace of mind that in the event of your death or incapacitation your decisions will be carried out, the welfare of your heirs will be protected and your nest egg will be handled with care. Planning. It s a fact of life in the modern world. 1

Who Needs Estate Planning? Everyone! We said it before: Estate planning is for everyone, not merely the wealthiest individuals. Everyone needs to do some planning. To find out why, take a moment, read the following questions, and answer yes or no to each. If you answered no to even one of these questions, you could use at least some estate planning. The question is where to start? 1. If you don t make a decision regarding the guardianship of your minor children, the state court will step in and make this decision on your behalf. Do you feel comfortable that the judge making decisions regarding the guardianship of your children will make the same decisions that you would have made? yes no 2. Chances are, you have assets that you would like to pass to specific beneficiaries, some with a high amount of personal value. If you fail to plan, state law will dictate to whom your assets will pass. Are you confident these assets will be distributed in accordance with your wishes? yes no 3. If you become incapacitated either physically or mentally do you know who will take care of the basic everyday chores like paying bills, getting money from the bank, renewing CDs, filing tax returns? Do you feel comfortable with the court having a say in how your assets are managed? yes no 4. If you can t make decisions regarding your health care, who should make those decisions? Should your care be directed by a family member who may not know your wishes, as opposed to your partner or designated caregiver? yes no 5. In old age, many people want to stay in their homes while avoiding becoming a burden to their children. Are you confident you can achieve both of these goals? yes no 6. In the event your estate is large enough to incur federal and/or state estate taxes, not to mention attorney s fees, tax preparation fees and property transfer fees, do you have strategies in place to minimize these expenses? yes no 2

The Tools of Estate Planning The estate or legacy planning process offers several tools to help make the eventual transfer of your assets smoother and more accurate. Let s look at a few of them. Wills Wills are basic legacy planning documents that serve as instructions to a court as to how a deceased person wants to distribute money and property. Any individual concerned with the way his/her estate will eventually be divided should have a current and valid will. A will states many things including who you are, why you have the right to give away your property, a description of your property itself, and a list of who you want to receive that property. A qualified estate planning attorney is capable of drafting a will. Living Trusts The popularity of living trusts has skyrocketed in recent years, and today they re among the most common legacy planning tools available. Usually drafted by an estate attorney, living trusts are separate legal entities created while you re alive (as opposed to a testamentary trust created after death). Living trusts are popular largely because it s possible to avoid probate if assets are transferred to the trust prior to death. By avoiding probate, assets may be distributed to beneficiaries more quickly, the transfer costs may be minimized and, perhaps most importantly for you, a trust is not a public document. Power of Attorney for Property A power of attorney for property is another legacy planning tool that gives an individual other than yourself the authority to enter into contracts, negotiate, and settle legal matters on your behalf. To help manage issues over the long term, many people turn to a tool called a durable power of attorney for property, which allows someone to act on your behalf even if you re no longer competent to make your own decisions. Medical Power of Attorney Medical power of attorney (also known as a durable power of attorney for health care) is an essential part of a complete plan, because it grants an agent the authority to make necessary health care decisions on your behalf. An agent with a medical power of attorney might, for example, help your doctors determine when life-support should be stopped or continued, in accordance with your wishes. Note, however, that if you grant an individual a medical power of attorney, but not a durable power of attorney for property management, that person will only have the ability to make health care decisions for you, not decisions about other areas of your estate. Is a living trust right for you? Do you seek to: Avoid probate Avoid conservatorship Minimize estate taxes Provide for a disabled child or relative Leave assets to children from a previous marriage 3

The Problem with Probate Probate is a legal process during which your executor goes to court and: n Identifies and catalogs all of your property n Appraises the property, and pays all debts and taxes n Proves that your will is valid and legal, and n Distributes the property to your heirs as the will instructs. That may sound simple, but it s not. First of all, probate can prove lengthy and complicated. Because probate requires a hearing in court, the process can tie up your property for months. And your loved ones may not see a penny of your estate until the probate process is complete. What s more, probate may be expensive. It s usually handled by estate attorneys, whose fees and court costs can eat up a percentage of your estate s value. You should also consider that everything that comes before a judge is public record and your estate is no exception. A will is a personal document, and may reveal private family and financial issues and concerns. But once it is entered into the court record, it becomes public and can be inspected by anyone. Avoiding Probate As we mentioned earlier, there are ways to avoid probate irrespective of the size of your estate. For instance, living trusts generally fall outside of probate pursuant to various laws. If you fund a trust, the trust (not you) owns your property. Therefore, the trust can continue even when you pass away. Another way to potentially avoid probate is to name your heirs as beneficiaries of qualified retirement accounts, life insurance and annuities. When you name a beneficiary on these types of accounts, the proceeds from the account are distributed on the owner s death immediately to the individuals you ve named. The courts generally have no jurisdiction over these types of distributions. Still another way to reduce or eliminate probate is by giving your money away. Uncle Sam allows you to give away up to $15,000 (indexed for inflation) per individual, each year, gift tax-free. That means a married couple can give up to $30,000 per year to each child, grandchild, niece, nephew or friend. Lifetime gifting reduces your taxable estate, and may place your estate under the probate threshold for your particular state. Why Your Estate Should Include Liquid Assets Because probate costs can add up quickly, even before a single distribution to heirs is made, your estate must pay for these costs. However, if your estate consists of many illiquid assets, such as real estate, art, long-term bonds, and the like, those assets will have to be sold to pay for probate. Not only does the sale of illiquid property require appraisal fees and additional delays, it may end up being sold at a below market price to pay for probate. 4

Reducing the Bite of Taxes So, now you know about some of the tools the professionals use to help plan for your legacy. The bad news is that, although many of them are relatively easy to understand and put into place, they don t always offer estates much protection from the most potentially devastating threat of all taxes. At death, everything you own, including insurance, is taxable at its fair market value. Generally, estate taxes are due and payable in cash within nine months after death, and they re based on the value of your estate at the time of death. What does that mean? n Consider all your assets: your home, your cars, your cash and savings, investments, insurance, valuables and even your accumulated retirement funds. n Now deduct from that your final expenses, accounting fees, debts, probate, attorney s fees and any tax deductions such as the charitable deduction and the marital deduction, which allows you to pass your estate to your spouse tax-free. (Non U.S. citizens are not eligible for the marital tax deduction). What s left is your taxable estate. That s the amount that Uncle Sam levies taxes on. Your estate will be taxed at a rate up to 40%. 1 Chances are, your taxable estate might be larger and more vulnerable than you imagine. Life Insurance Personal Property Real Estate Business Interests Final Expenses Accounting Fees Appraiser s Fees Debts to the Decedent Probate Fees Attorney Fees Executor s Commission 1 The American Taxpayer Relief Act (2012 Tax Act) raised the top estate tax rate to 40%. 5

Ways to Save Now, the good news. Everyone may be able to reduce or eliminate estate taxes. The goal is to use tax-reduction tools in a way that minimizes taxes, while still maintaining your estate planning goals. For starters, there s a federal estate tax exclusion. If your taxable estate is worth $11,180,000 (indexed for inflation) or less in 2018, the exclusion amount in essence wipes out any estate taxes due. But what if your estate exceeds that amount? The 2017 Tax Cuts & Jobs Act (TCJA) temporarily increased the federal estate tax exclusion to $11,180,000 per individual ($22,360.000 for a married couple). Effective January 1, 2026, the exclusion amount reverts to $5 million (index for inflation) according to the American Taxpayer Relief Act (2012 Tax Act) which among other things made permanent the $5,000,000 (indexed for inflation) federal estate and gift tax exclusion and raised the top estate tax rate to 40%. It is important to note federal estate tax exclusion is temporary. Most people may not be impacted by federal estate taxes today. When the current exemption sunsets in 8 years, more people may have a federal estate tax they need to plan around. Consider that property that passes to a surviving spouse is eligible for the unlimited marital deduction. So if your entire estate is left to your surviving spouse, no federal tax is due. However, upon the passing of the surviving spouse, if he or she does not remarry, the entire estate will be taxable at death. Essentially, the tax is deferred, not avoided. 2 But you can also shrink your taxable estate by giving it away gift and estate tax-free while you re still alive. An individual can give up to $15,000 per person each year without taxation and a married couple can give $30,000. This amount is indexed for inflation. Estate planning often involves planning to use the annual gift tax exclusion to give away as much as possible during life. 2 The 2012 Tax Act also made permanent Portability whereby the surviving spouse can utilize the deceased spouse s unused applicable exclusion amount. In some instances, it may not be necessary to establish an A/B Trust as discussed on the next page. Please discuss whether this is a viable option with your estate planning attorney. 6

Charitable giving is another way to reduce your taxable estate, while benefiting a favorite charity, and lessen the future impact of taxes on your estate. We ll talk more about charitable giving in the next section. Other Planning Tools A/B Trusts 2 A/B trusts are often used by married couples to help avoid probate and reduce their estate tax liability. On the death of the first spouse, all or part of the estate is put into a B Charitable Remainder Trusts What is a Charitable Remainder Trust, or CRT? It s a tax-exempt trust designed to pay you a stream of income, for life or a term of years. This income stream is either a fixed dollar amount based on a percentage of the trust s initial value, or a percentage of the trust s value at the beginning of each year. Following the death of all the income beneficiaries, all assets that remain in the trust are paid to the charities of your choice. CRTs offer a host of potential benefits for your heirs and the charitable causes you choose. For example, your trustee can sell assets held within a CRT without incurring capital gains tax meaning that more of the CRT s assets remain available to generate income. Then, your trustee can reinvest these assets into an investment vehicle that may be better suited to your circumstances. Plus, you can name a favorite charity as the recipient of the remainder interest once you die. You might also be eligible for an income tax deduction at the time of transfer. CRT: How it Works? Donor Transfers assets to the CRT CRAT n Transfer asset to CRT n Receives either a fixed dollar amount or a fixed % of assets annually n Receives income tax deductions Annual fixed $ annuity payout (CRAT) or fixed % of assets (CRUT) n Trustee sells assets & reinvests for greater return n Pays no capital gain n Trustee pays either a fixed dollar or a fixed % amount annually After beneficiary s death, remaining trust assets pass to the charity Charitable Organization 2 See footnote on page 6. 7

Estate Planning Worksheet Where are you now? And where do you want to go? Use this worksheet to help you understand where your estate stands today and what estate planning steps you need to take to ensure that your goals for your assets will be met and your legacy preserved. Estate Planning Information for: Name Spouse s Name Item Value/ Amount How held? (Husband, Wife or Jointly) Item Value/ Amount How held? (Husband, Wife or Jointly) Assets Business Holdings Cash $ Briefly describe business (Corporation, LLC, Partnership?) Checking accounts $ Savings accounts $ Estimate of fair market value Other bank accounts $ Retirement Securities $ IRA, Profit Sharing, 401(k) etc $ Stock (company/shares) $ Insurance and Annuities US Bonds $ Type (term, etc) $ Mutual funds $ Type (term, etc) $ Other $ Inheritance Other $ Do you or your spouse expect to receive Personal Property any inheritance within the next 10 years? Household goods $ Best estimate of amount Jewelry $ Other assets not listed above Apparel $ Type $ Other $ Type $ Other $ Type $ Real Estate 8 Liabilities Home $ Mortgages $ Recreational $ Car loans $ Investment $ Personal loans $ Other $ Business loans $ Other $ Life Insurance loans $ Other $

To Do List: Based on details you have learned in this booklet, make a to-do list that reflects the needs and goals of your estate plan. Then speak to a qualified tax or legal professional to give you the guidance you need. 1. 2. 3. 4. 5. 6. 7. 8. Estate Planning Leaving a Legacy It s time for you to start planning. By planning today, you may possibly avoid the risk that: n Your assets won t pass according to your wishes; n Your assets will be heavily taxed; n Your heirs will spend time in court before getting their inheritance. By contrast, a sound, effective estate plan can help achieve just the opposite providing for the orderly and financially efficient distribution of your wealth, including: n Transferring your assets to the family, friends and charitable institutions you name; n Establishing how and to whom assets will be distributed; n Eliminating or reducing federal and state taxes; n Solving liquidity problems; n Avoiding probate; n Transferring businesses ownership, if any. The bottom line is, estate/legacy planning helps put the future in your hands and more of your assets in the hands of your loved ones. 9

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