Estate PlanningA Guide to Understanding Estate Planning

FACTORS to Consider in Estate Planning• The objectives of the plan• The portion of the estate required by the

surviving spouse to provide sufficient income• Plans that will work regardless of who dies first• Provisions that should be make in case the

surviving spouse should remarry• Estate planning requires legal documentation

with specific legal requirements• Estate plans can be changed and should be

reviewed annually

Why?• Everyone in America has a will, even if they've never

paid for one. – Every state has laws dictating how the value of your house,

your bank accounts, cars, furniture and other possessions will be divided if you die without a document that spells out your wishes.

• You NEED a plan; it directs where your property goes

• You can do that in many ways—– For example - wills, insurance policies or trusts for minor

children, special bequests, or by naming beneficiaries or joint owners.

• Which tools you use depend on what you have and where you want it to go.

Who?• Everyone needs a will and should think about a

plan for the dispersal of their property

• Over 40 percent of Americans age 45 or older have not drawn up a will.

• 2003 AARP survey found; that figure rises to 57% among all adult Americans, according to the FindLaw legal website.

• The excuses people give for this are as creative as the ones kids use with their teachers.

http://www.aarp.org/bulletin/yourmoney/a2004-03-17-estate_planning.html

Three Levels of Concern:

• What to do with the property if. . . . . . .

• 1. One spouse should die?

• 2. Both spouses should die?– Custody of minor children is important!– Minor children can’t manage property –

establish a trust!

• 3. The entire immediate family should die?– Property goes to the heirs of the person who

dies LAST!

Transferring of Legal Ownership

• Wills– a legal statement of a person’s wishes concerning the disposal of property after death.

• Gifts – Land may be given away by a deed that is properly signed. Personal property can be given away by handing over the property with the apparent intention of making the recipient the present owner

• Trusts – a way of transferring your assets with stipulations on how or when the assets can be used

5 Components of Estate Planning

• Wills-

• Gifts-

• Trusts-

• Life Insurance-

• Business structures-

Wills

• Facts about wills:– They have no force or effect until the maker

dies

– They must control only the property individually owned by the maker of the will

– They do not become effective immediately upon the death of the maker

Wills• Reasons for having a will

– They allow you to distribute assets as you wish, not as the law of descent decree

– They reduce costs and time of settling an estate

– You can name your own executor/executrix of the will to save time and money

– You can name a guardian for minor children

– You can establish trust funds

– The family can avoid internal conflict among its members

– Can be amended at any time

Living Will

• Gives directive to doctors and family of your wishes as to what medical interventions should or should not be used to prolong your life.

• Increases your chances of advocating your wishes when you cannot– but does not guarantee you wishes will be met.

• A healthcare agent may be better than your family members because of the stress of making the tough decisions if you are incapacitated

Gifts• You may give up to $12,000 a year to an

individual (or $24,000 if you're married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred.

• If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.

Life Insurance• Life insurance may be an extremely important

asset in building your estate plan and should be coordinated with it. 

• Tax consequences should be reviewed with your attorney.  – Cooperation between your life insurance underwriter

and your attorney is important in getting the best answers to some of the following questions: 

• Do I need life insurance for my family security, to guarantee payment of a mortgage, to provide cash for taxes and administrative costs after my death or to provide for long-term care?

Life Insurance

• Should I place any of my insurance policies in trust during my lifetime?

• Who should own the life insurance policy and who should be the beneficiary of its proceeds?

• Is life insurance subject to taxation as part of my estate?

Life Insurance provides:• Family needs money for expense if your assets

are tied up for a time after your death

• Can provide mortgage payment and debt relief especially for unexpected death

• Beneficiary gets the cash and it does not become a part of your estate if they own the policy

• Life insurance is not to make money during your lifetime but is avoid burden during your death

Trusts

• Trusts are designed for people who have sizeable assets in real estate or business.

• Allow you to stipulate certain conditions be met before heirs receive inheritance

• Want to support your spouse or family even if the remainder of the estate goes to others

Trusts

• You want to maximize your tax exemptions

• You have a disabled relative or minor children to care for

• Continuity of the family operation (farm) and bypass as much tax as possible

5 Standard forms of Trusts

• Credit Shelter Trust– you write a will bequeathing an amount to the trust up to the amount of your estate-tax exemption then pass the rest to your spouse tax-free

• Generation-Skipping Trust– allows you to transfer a substantial amount of money tax-free to your grandchildren

• Qualified Person Residence Trust– will remove the value of you residence from your estate

5 Standard forms of Trusts

• Irrevocable life insurance trust– removes your life insurance from your estate

• Qualified terminable interest property trust– will direct your assets to particular relatives

Business Structures

• Corporation – the individual interest in the corporation is all that is passed on and taxed. The corporate plan can dictate the transfer of shares

• Cooperative or LLC’s – the bylaws dictate the extent of tax liability and how the assets will be passed on to heirs before or after death of a shareholder

Tax Laws• Estate-Tax Phaseout The federal government's tax

window closes over the next decade as the top estate-tax rate drops and the amount each person can pass free of federal estate taxes increases. The tax expires in 2010, though possibly for just one year.

Year Exemption Rate• 2004 1.5 million 48%• 2005 1.5 million 47%• 2006 2 million 46%• 2007 2 million 45%• 2008 2 million 45%• 2009 3.5 million 45%• 2010 repealed 0• 2011 1 million 55%

Benefits in Agriculture of Proper Estate Planning• Proper estate planning can help to get your estate to fit

into the schedule.

• There can be savings especially in large estates when proper planning takes place.

• Estate planning tools make it possible for even large estates to pass onto their heirs much of the estate without tax liability.

• Many agricultural estates are large because of the land involved in the operation. Even though they are valued at a high amount, there is usually not much cash or liquid assets that could go to pay for the estate tax.

• Many farming operations end up selling part or all of the assets so they can pay the estate tax. What is left may not be a viable farming operation for one to carry on.

Gift Tax

• Each person also gets a lifetime gift exemption of $1 million.

• Taxable gifts -- those more than the $11,000 annual exclusion -- count against that limit.

Summary

• Everyone should have a will

• Estate planning can give you a preferred and carefully planned out conveyance of your assets and your wishes

• Financial planners are people who can help with planning you estate

• A good lawyer should be consulted to make the plan legal and prevent any problems in the distribution of the estate