part 5: life cycle issues chapter 17 estate planning: saving your heirs money and headaches

PART 5:LIFE CYCLE ISSUES

Chapter 17Chapter 17Estate Planning: Saving Your Estate Planning: Saving Your Heirs Money and HeadachesHeirs Money and Headaches

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The Estate Planning The Estate Planning ProcessProcess

Step 1: Determine the Value of Your EstateStep 1: Determine the Value of Your Estate Determine the value of your assets.Determine the value of your assets. Use the life insurance proceeds amount Use the life insurance proceeds amount

(the death benefit) to determine value of (the death benefit) to determine value of life insurance. life insurance.

Include employer-sponsored death Include employer-sponsored death benefits.benefits.

In 2006, the first $2 million of an estate In 2006, the first $2 million of an estate can be passed tax-free.can be passed tax-free.

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Step 2: Choose Your Heirs andStep 2: Choose Your Heirs andDecide What They ReceiveDecide What They Receive

Once you know what you have, you Once you know what you have, you can decide who’s going to get it. can decide who’s going to get it.

In addition to a spouse, consider the In addition to a spouse, consider the special needs of your dependents. special needs of your dependents.

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Step 3: Determine the CashStep 3: Determine the CashNeeds of the EstateNeeds of the Estate

Before distributing property to heirs, Before distributing property to heirs, must pay medical costs, funeral must pay medical costs, funeral expenses, legal fees, outstanding expenses, legal fees, outstanding debt, and taxes. debt, and taxes.

Use liquid funds to cover tax needs.Use liquid funds to cover tax needs.

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Step 4: Select and Implement YourStep 4: Select and Implement YourEstate Planning TechniquesEstate Planning Techniques

Decide which estate planning tools Decide which estate planning tools are most appropriate to achieve your are most appropriate to achieve your goals. goals.

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Estate Planning ToolsEstate Planning Tools

Will.Will. Trust.Trust. General durable power of attorney.General durable power of attorney. Durable power of attorney for health Durable power of attorney for health

care.care. Living will.Living will. Disposition of last remains.Disposition of last remains.

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More Estate Planning More Estate Planning ToolsTools

Lifetime gifts.Lifetime gifts. Life insurance.Life insurance. Joint ownership.Joint ownership. Family ownership.Family ownership.

Family limited partnership.Family limited partnership. Family LLC.Family LLC.

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TaxesTaxes

Income tax.Income tax. Form 1040.Form 1040.

Estate tax.Estate tax. Gift tax.Gift tax. Generation-skipping tax.Generation-skipping tax.

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Understanding and Understanding and Avoiding Estate TaxesAvoiding Estate Taxes

The estate tax exemption (unified tax The estate tax exemption (unified tax credit) is $2 million for years 2006 – credit) is $2 million for years 2006 – 2008 (46% tax rate for 2006 and 45% 2008 (46% tax rate for 2006 and 45% tax rate for 2007-2009).tax rate for 2007-2009). For 2009, the exemption is $3.5 million.For 2009, the exemption is $3.5 million. Year 2010 – no estate tax.Year 2010 – no estate tax. Year 2011 – exemption is $1 million and Year 2011 – exemption is $1 million and

tax rate is 55%tax rate is 55%

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Understanding and Understanding and Avoiding Estate TaxesAvoiding Estate Taxes

Move towards estate tax planning as Move towards estate tax planning as net worth climbs above the tax-free net worth climbs above the tax-free transfer threshold.transfer threshold.

The uncertainty of the estate tax rate The uncertainty of the estate tax rate and the exemption amount make and the exemption amount make estate planning more difficult. estate planning more difficult.

As the exemption amount increases, As the exemption amount increases, the demand for complex estate plans the demand for complex estate plans decreases.decreases.

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Gift TaxesGift Taxes Gifts are an excellent way of transferring Gifts are an excellent way of transferring

wealth before you diewealth before you die.. The recipient is not taxed.The recipient is not taxed.

Gift tax exclusion is $12,000 annually per Gift tax exclusion is $12,000 annually per recipient.recipient.

The gift tax and the estate tax work together The gift tax and the estate tax work together with a total lifetime exemption from tax of $2 with a total lifetime exemption from tax of $2 million (currently).million (currently). There is a $1 million lifetime tax-free gift limit.There is a $1 million lifetime tax-free gift limit. This does not include tax-free gifts made using the This does not include tax-free gifts made using the

annual gift tax exclusion (currently $12,000).annual gift tax exclusion (currently $12,000).

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Unlimited Marital Unlimited Marital DeductionDeduction

There is no limit to the size of estate There is no limit to the size of estate transfers between spouses on a tax-free transfers between spouses on a tax-free basis. basis. Spouse must be U.S. citizen. Spouse must be U.S. citizen.

Estates up to $2 million can be transferred Estates up to $2 million can be transferred tax-free to any other beneficiary. tax-free to any other beneficiary.

Use special estate planning techniques Use special estate planning techniques available to spouses to reduce estate available to spouses to reduce estate taxes.taxes.

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The Generation-Skipping The Generation-Skipping Transfer TaxTransfer Tax

An additional tax is imposed on gifts An additional tax is imposed on gifts that skip a generation. that skip a generation. From grandparent to grandchild.From grandparent to grandchild.

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WillsWills A legal document that describes how to A legal document that describes how to

transfer your property to others.transfer your property to others. Designate:Designate:

Beneficiaries – those who are willed Beneficiaries – those who are willed property.property.

A personal representative (executor) who A personal representative (executor) who will carry out the will’s provisions.will carry out the will’s provisions.

A trustee if the will creates a trust at A trustee if the will creates a trust at death.death.

A guardian – who will care for children A guardian – who will care for children under the age of 18.under the age of 18.

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IntestateIntestate

The decedent did not leave a will, or The decedent did not leave a will, or the will is invalid.the will is invalid.

The court appoints the personal The court appoints the personal representative (executor).representative (executor).

After expenses and taxes are paid, After expenses and taxes are paid, assets are distributed in accordance assets are distributed in accordance with state law.with state law.

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Colorado Intestacy LawsColorado Intestacy Laws

If a person leaves no valid will:If a person leaves no valid will: Surviving spouse receives the estate.Surviving spouse receives the estate. If no surviving spouse, then children If no surviving spouse, then children

share equally.share equally. If no spouse or children, then parents If no spouse or children, then parents

share equally.share equally. If no surviving parents, then siblings or If no surviving parents, then siblings or

their children share equally.their children share equally.

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Wills and ProbateWills and Probate Probate is the legal process of distributing Probate is the legal process of distributing

an estate’s assets.an estate’s assets. Probate validates the will.Probate validates the will. Probate court appoints a personal Probate court appoints a personal

representative (executor), generally the representative (executor), generally the one designated in the will.one designated in the will. Letters Testamentary.Letters Testamentary.

Once the expenses and taxes have been Once the expenses and taxes have been paid, the assets are distributed and the paid, the assets are distributed and the estate is closed.estate is closed.

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ProbateProbate

AdvantagesAdvantages Validates the will.Validates the will. Resolves disputes Resolves disputes

concerning the will.concerning the will. In terrorem clause.In terrorem clause.

Allows for an orderly Allows for an orderly distribution of assets if distribution of assets if intestate.intestate.

DisadvantagesDisadvantages Costs (legal fees, PR Costs (legal fees, PR

fees, court filing fees).fees, court filing fees). Slow, time consuming Slow, time consuming

process, especially if process, especially if there are challenges or there are challenges or tax problemstax problems..

Probate codes are a Probate codes are a state law concept; state law concept; some states have more some states have more onerous probate codes onerous probate codes than others.than others.

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Wills and Estate Wills and Estate PlanningPlanning

Why do you need a will?Why do you need a will?A Will CanA Will Can

Assure that a child with Assure that a child with special needs is taken care special needs is taken care of.of.

Make sure assets are Make sure assets are transferred according to transferred according to your wishes.your wishes.

Make special gifts or Make special gifts or bequeaths.bequeaths.

Select PR, trustee, Select PR, trustee, guardians, and guardians, and conservators.conservators.

Create testamentary trusts.Create testamentary trusts.

Without a WillWithout a Will The court will The court will

appoint a guardian appoint a guardian for any children.for any children.

The court appoints The court appoints the personal the personal representative.representative.

State law controls State law controls who will receive who will receive your assets.your assets.

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Wills in ColoradoWills in Colorado You must be at least 18 years and of sound mind.You must be at least 18 years and of sound mind. You must have testamentary capacity.You must have testamentary capacity. You must make the will under your own free will.You must make the will under your own free will. A will can be typed or handwritten (holographic A will can be typed or handwritten (holographic

will).will). A will must be dated and signed by the testator.A will must be dated and signed by the testator. Two disinterested persons must sign the will in Two disinterested persons must sign the will in

your presence as witnesses.your presence as witnesses. All signatures should be notarized.All signatures should be notarized.

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Writing Your Own WillWriting Your Own Will

Do not write your own will.Do not write your own will. Drafting a will requires special skill; Drafting a will requires special skill;

have an attorney draft your will.have an attorney draft your will. Holographic wills are often found to Holographic wills are often found to

be ambiguous or defective, which be ambiguous or defective, which causes delay, expense, and litigation.causes delay, expense, and litigation.

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Writing a WillWriting a Will A will should contain:A will should contain:

Introductory statement.Introductory statement. Payment of expenses and taxes clause.Payment of expenses and taxes clause. Disposition of property clause.Disposition of property clause.

Personal property.Personal property. Residual estate.Residual estate.

Appointment clause.Appointment clause. Common disaster clause.Common disaster clause. Attestation and witness clause.Attestation and witness clause.

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Updating or Changing a Updating or Changing a Will – The CodicilWill – The Codicil

A codicil is an attachment to a will that A codicil is an attachment to a will that alters or amends a portion of the will. alters or amends a portion of the will. Make sure your will conforms to your present Make sure your will conforms to your present

situation.situation. Substantial changes warrant a new will.Substantial changes warrant a new will.

A codicil should be drawn up by a lawyer, A codicil should be drawn up by a lawyer, witnessed, and attached to the will.witnessed, and attached to the will.

Codicil vs. amending and restating the Codicil vs. amending and restating the will.will.

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Letter of Last Letter of Last InstructionsInstructions

A letter of last instructions is A letter of last instructions is generally written to the surviving generally written to the surviving spouse.spouse.

It is not a legally binding document.It is not a legally binding document. It provides information and It provides information and

directions with respect to the directions with respect to the execution of the will.execution of the will.

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Letter of Last Letter of Last InstructionsInstructions

The letter of last instructions may The letter of last instructions may contain:contain: Location of the will, legal documentsLocation of the will, legal documents Location of financial assetsLocation of financial assets Names of those to notify of the deathNames of those to notify of the death Listing of personal propertyListing of personal property Funeral and burial instructionsFuneral and burial instructions Organ donationsOrgan donations

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Selecting an ExecutorSelecting an Executor

An executor has a dual role:An executor has a dual role: Making sure your wishes are carried Making sure your wishes are carried

out.out. Managing your property until the Managing your property until the

estate is passed on to your heirs.estate is passed on to your heirs.

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Selecting an ExecutorSelecting an Executor The executor will:The executor will:

Deal with personal mattersDeal with personal matters Pay taxes Pay taxes Manage the financial matters of the Manage the financial matters of the

estateestate Distribute assetsDistribute assets Make a final accounting to the Make a final accounting to the

courts courts

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Other Estate Planning Other Estate Planning DocumentsDocuments

A A general durable power of attorneygeneral durable power of attorney provides for someone to manage your provides for someone to manage your financial affairs should you become financial affairs should you become incapacitated.incapacitated.

A A durable power of attorney for health durable power of attorney for health carecare provides for someone to make provides for someone to make health care decisions for you should health care decisions for you should you become incapacitated.you become incapacitated.

A A living willliving will allows you to state your allows you to state your wishes regarding medical treatment in wishes regarding medical treatment in the event of terminal illness or injury.the event of terminal illness or injury.

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Avoiding ProbateAvoiding Probate

Probate is essential to validate your Probate is essential to validate your will and ensure your provisions are will and ensure your provisions are carried out. It can also be time carried out. It can also be time consuming and expensive.consuming and expensive.

Depending on state law, it might be Depending on state law, it might be a good idea to avoid probate.a good idea to avoid probate.

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Avoiding ProbateAvoiding Probate

Life insurance.Life insurance. Retirement plans.Retirement plans. Joint ownership.Joint ownership. Trusts.Trusts.

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Designating Designating BeneficiariesBeneficiaries

Life insurance.Life insurance. Retirement plans.Retirement plans. Name primary and contingent Name primary and contingent

beneficiaries.beneficiaries. Review these designations from time Review these designations from time

to time.to time.

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Joint OwnershipJoint Ownership

Jointly-owned assets transfer to the Jointly-owned assets transfer to the surviving owner without probate.surviving owner without probate.

3 forms of joint ownership:3 forms of joint ownership: Joint tenancy with right of survivorship – Joint tenancy with right of survivorship –

ownership passes to survivor, bypasses the ownership passes to survivor, bypasses the will.will.

Tenancy in common – decedent’s interest Tenancy in common – decedent’s interest passes under the will.passes under the will.

Community property – surviving spouse Community property – surviving spouse receives ½ of all property acquired during the receives ½ of all property acquired during the marriage.marriage.

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TrustsTrusts

A legal entity that holds and manages an A legal entity that holds and manages an asset for another person.asset for another person.

Is created when an individual, a grantor, Is created when an individual, a grantor, transfers property to a trustee for the transfers property to a trustee for the benefit of one or more beneficiaries.benefit of one or more beneficiaries. The trustee can be an individual, an The trustee can be an individual, an

investment firm, or a bank.investment firm, or a bank. Any asset can be placed in a trust.Any asset can be placed in a trust.

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TrustsTrusts Why use a trust?Why use a trust?

Trusts avoid probate.Trusts avoid probate. Trusts are more difficult to challenge in court.Trusts are more difficult to challenge in court. Trusts can reduce estate taxes, but so can wills.Trusts can reduce estate taxes, but so can wills. Trusts allow for professional management.Trusts allow for professional management. Trusts can hold money for a child with special Trusts can hold money for a child with special

needs or until a child reaches maturity.needs or until a child reaches maturity. Trusts can ensure that children from a previous Trusts can ensure that children from a previous

marriage will receive an inheritance.marriage will receive an inheritance.

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Living TrustsLiving Trusts

Revocable Living TrustsRevocable Living Trusts Place assets in trust Place assets in trust

while alive, withdraw while alive, withdraw them later if you them later if you wish.wish.

You retain title and You retain title and have control over have control over assets.assets.

No tax advantages.No tax advantages.

Irrevocable Living Irrevocable Living TrustsTrusts

Trust is permanent.Trust is permanent. It becomes a legal It becomes a legal

entity, paying taxes entity, paying taxes on gains produced.on gains produced.

Not part of estate, Not part of estate, bypasses probate, no bypasses probate, no estate taxes but estate taxes but possibly gift taxes.possibly gift taxes.

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Testamentary TrustsTestamentary Trusts

A testamentary trust is created by a will. A testamentary trust is created by a will. It exists once probate has been completed.It exists once probate has been completed.

Common types:Common types: Marital Trusts and Family Trusts – used to Marital Trusts and Family Trusts – used to

reduce estate taxes.reduce estate taxes. Qualified Terminable Interest Property Trust Qualified Terminable Interest Property Trust

(QTIP) – often used in second marriages.(QTIP) – often used in second marriages.

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Estate PlanningEstate PlanningChecklist 17.1Checklist 17.1

Do you and your family know…Do you and your family know… Location of your will, power of attorney, and living Location of your will, power of attorney, and living

will?will? The name of your attorney and accountant?The name of your attorney and accountant? Where to find your letter of last instructions?Where to find your letter of last instructions? Location of safety deposit box?Location of safety deposit box? Whereabouts of deeds and titles to property?Whereabouts of deeds and titles to property? Site of your investments?Site of your investments? All account numbers?All account numbers? Last year’s income tax return?Last year’s income tax return? Pension and retirement benefits?Pension and retirement benefits?

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A Last Word on Estate A Last Word on Estate PlanningPlanning

Many put off estate planning Many put off estate planning because it is complex and deals because it is complex and deals with death.with death.

Go to a professional – don’t do your Go to a professional – don’t do your own estate planning.own estate planning.

Make sure your family knows Make sure your family knows where your estate planning where your estate planning documents are.documents are.