Fundamentals Of Estate Planning

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cn51498112010 ©2009. ING North America Insurance Corporation page 1

Fundamentals of Estate Planning

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Disclosures

Neither ING nor its affiliated companies or representatives give tax or legal advice. For complete details regarding your individual situation consult with your tax or legal advisors.

These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matter addressed in this document. You should seek advice from an independent tax advisor.

Life insurance products are issued by Security Life of Denver Insurance Company (Denver, CO), ReliaStar Life Insurance Company(Minneapolis, MN), and ReliaStar Life Insurance Company of New York (Woodbury, NY). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted, and its productsissued. All companies are members of the ING family of companies.

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Why is an Estate Plan Important?

An Estate Plan can help you to:

Preserve assets and wealth.

Ensure your assets are distributed according to your wishes to the right people at the right time.

Minimize or defer taxation.

Why is an estate plan important? The estate tax is probably the largest single tax you are ever likely to pay. With the highest maximum rate at slightly under 50%, it’s important that you create a plan that’s right for you and your heirs.

An estate plan can help you to:•Preserve assets and wealth.•Ensure your assets are distributed according to your wishes to the right people at the right time.•Minimize or defer taxation.

Let’s take a look at a brief overview of this subject.

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Overview of Estate Planning

What’s included in my estate?

How much to whom?

How is my estate transferred?

What are the costs of estate settlement?

Before you create a plan, it’s important to understand what’s included in your estate.

You also need to consider what you want to leave and to whom.

The mechanics of transferring an estate and the settlement costs involved can be complicated and costly.

Before you can create an effective plan, it’s important to understand how each of these items work and the impact each of these items on your plan.

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Your estate consists of everything you own or control, including…

First of all, your estate consists of everything you own or control, including…

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Tangible Assets

Your home and other real estate

Your vehicles, boats and recreational vehicles

Jewelry and other valuables

Precious metals, coins and collectibles

Personal possessions, furniture, etc.

Business holdings

All of your tangible assets. In fact, your estate is probably made up of 2 different types of assets – tangible and intangible.

Tangible assets include:•Your home and other real estate.•Your vehicles, boats, and recreational vehicles.•Jewelry and other valuables.•Precious metals, coins, and collectibles.•Personal possessions, such as furniture and appliances.•Your business holdings.

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Financial Portfolio

Intangible Assets

Your bank accounts

Annuities

Stocks and bonds

Mutual funds

Retirement plan proceeds

Life insurance death benefits

Your intangible assets might include:•Your bank accounts.•Annuities.•Stock and bonds.•Mutual funds.•Retirement plan proceeds and IRA accounts.•Life insurance death benefits.

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How Much to Whom?

Private Property Real Estate Financial Portfolio

Charity Your Family The Government

Business Holdings

The really important question is: How much of your estate do you want to leave to your family, to charity, or to the government?

The decisions you make as a part of your estate plan will directly impact the answer to this question.

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How is my estate transferred?

Let’s start with the basic issue of how your estate is transferred. Understanding how an estate is transferred is an important step to creating the right plan.

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When you die your assets are legally transferred in 4 ways:

By direct transfer

By joint ownership

Through probate

Through trusts

When you die, your assets are legally transferred in one of 4 ways:•By direct transfer (such as a beneficiary designation on a checking account).•By joint ownership (such as holding the title to your house in both spouses’ names).•Through probate (we will talk more about this later).•And through trusts (we will also cover this topic).

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Direct Transfer Assets

Assets that have a beneficiary designation or a payable-on-death clause are transferred directly to the new owner:

Savings accounts

Certificates of deposit

401(k) and other retirement plans

Traditional and Roth IRAs

Tax-deferred annuities

Life insurance

Direct Transfer assets have a specific beneficiary designation or a payable-on-death clause. These assets are transferred directly to the new owner by law.

Examples of assets that may have a beneficiary designation or a payable-on-death clause include:•Savings accounts.•Certificates of deposit.•401(k) and other retirement plans.•Traditional and Roth IRAs.•Tax-deferred annuities.•Life insurance.

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Joint Tenancy with Right of Survivorship (JTWROS): Two or more people own the same asset with an undivided interest.

Tenants in Common: Two or more people own the same asset, often in different percentages.

Community Property: Assets are owned equally by the husband and wife if the assets were acquired during marriage while living in a community property state.*

*Community property states are AZ, CA, ID, LA, NV, NM, TX, WA and WI.

100%

x % y %

Joint Ownership

The issue of joint ownership is a very important one that many people don’t think about much. A joint ownership designation may preclude your current transfer desires. It’s important to look at how your assets are titled because property that is jointly owned transfers by law based on the nature of the joint ownership designation, rather than by virtue of any wishes you may express in your will.

Joint ownership can be titled in several ways:•Joint Tenancy with Right of Survivorship – This is a common designation for married couples, where both spouses own an undivided interest in the property. When one spouse dies, the other spouse automatically owns the entire asset.•Tenants in Common – This designation allows 2 or more people to own the same asset in designated percentages. When one owner dies, their percentage ownership will pass to their designated heirs as set forth in their will (if they have one) or by state law.•Community Property – This is a common designation in community property states. (Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.)

.

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Probate is the court-supervised process that identifies what you own at death and distributes your assets according to your wishes if you left a will, or else according to state law.

Probate

Transfers also occur through the process that is called “probate.” Probate is the court-supervised process that identifies what you own at death and distributes your assets according to your wishes, if you left a will, or else according to state law.

The more assets that pass through probate, the more costly your settlement costs may be.

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Probate

If you die without a will:The Probate Court determines who administers your estate and cares for your minor childrenA Court appointed conservator manages the assets for minor children and the children will get the assets at age 18.All children are treated equally, even if they have different needs.Stepchildren may be excluded.Remote relatives may receive assets that you wanted to leave to friends or charity.Your estate may pay unnecessary taxes and expenses.

If you die without a will, your estate will pass through probate and the probate court will determine who administers your estate and cares for your minor children. The probate court will appoint a conservator or guardian-ad-litem for those assets that will go to minor children, and the assets will be released to those children when they reach age 18. Regardless of need or ability, all children will be treated equally. And contrary to your wishes, most state law excludes stepchildren from the distribution of your assets. In fact, instead of those closest to you, probate may result in remote relatives receiving assets that you really wanted to leave to friends or charity. Finally, probate may result in your estate paying unnecessary taxes and expenses.

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Probate

If you die with a will, your will allows you to:

Designate the person or institution you want to handle your affairs.Indicate which people or organizations you want to receive specific assets.Control the terms of asset distribution.Indicate who you want to care for your minor children.Take advantage of estate tax-saving strategies.

If you leave a will, your estate will still go through probate, but the process will be much different. The existence of a valid will permits you to:•Designate the person or institution (such as a bank or trust company) that you want to handle your affairs.•Indicate which people or organizations you want to receive specific assets.•Be able to control the terms of asset distribution (such as certain assets at certain ages to your children).•Be able to designate who you want to care for your minor children.•And be able to plan ahead to take advantage of estate tax-saving strategies in your estate plan.

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Probate

In most states, the probate process consists of:

Establishing whether a valid will exists.Appointing an executor or personal representative to manage your estate during probate.Valuing everything you owned at your death.Receiving claims against the estate.Paying taxes and claims.Settling disputes about asset distribution.Distribution of the estate assets.

So how does this probate process work?

In most states, the probate process consists of:•First of all establishing whether a valid will exists.•The appointment of an executor or personal representative to manage your estate during the probate process.•The valuing of everything you owned at your death. This may require appraisals and other expert opinions.•Receiving claims against your estate within a certain time period, or the claims will forever be barred.•Paying your taxes, debts, and the valid claims made against your estate.•Settling any disputes about asset distribution among your heirs or other claimants.•And finally, the distribution of your assets to the persons you designated.

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Intervivosor

Living

Trust

Trusts

An Intervivos or Living Trust:

Is established during your lifetime.

Takes effect when funded.

Provides lifetime financial management of assets owned by the trust.

Transfers assets at death.

Avoids probate.

Remember that I mentioned that assets can also be transferred by trust. Assets that are owned by a trust are distributed outside of probate and are not subject to the probate process.

There are several different types of trusts. The most common type is an intervivos or living trust. This simply means that it is a trust that is established while you are still alive (intervivos). It takes effect when you put assets into the trust (it is funded). What such a trust can do for you is to provide lifetime financial management of all of the assets owned by the trust. Who does that management? You can do it yourself, or you can designate someone else to be the trustee. Those assets owned by the trust transfer at your death according to the terms of the trust, without going through the probate process.

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Testamentary

Trust

Trusts

A Testamentary Trust:

Is established as part of your will.

Takes effect when you die.

Allows you to own and control the assets until your death.

Establishes the conditions under which the beneficiaries will receive the assets (e.g.: age).

Can be used to reduce or defer estate taxes.

A testamentary trust is different from a living trust because it is established as a part of your will when you die. It has no existence or effect until you die. Such a trust does allow you to establish the conditions under which your beneficiaries will receive the assets (for example, the age at which your children will receive certain assets). Such a trust can also be used to reduce or defer estate taxes and some estate settlement costs.

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• Transfers ownership of assets to the trust.

• Legally owns trust assets.

• Follows trust instructions.

• Manages assets for the benefit of the beneficiaries.

• Receive trust assets as specified in the trust document.

Grantor Trustee Beneficiaries

Transfer of Assets to a Trust

So how does a trust work? It’s really quite simple. When you set up a trust, the grantor (you) transfers ownership of his or her assets to the trust.

A trustee is selected by the grantor. That trustee legally owns the trust assets. It’s the trustee’s job to manage the assets for the benefit of the beneficiaries you have designated, according to the specific instructions contained in the trust document.

The beneficiaries then receive the trust assets as specified in the trust document.

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What are the costs ofEstate settlement?

What about the subject of estate settlement costs? What are they, and why do we talk so much about them?

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Estate Settlement Costs

Death triggers a long list of costs that must be paid from your

estate.

Death triggers a long list of costs that must be paid from your estate. These can be quite significant.

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Funeral, medical,

and burial expenses.


They include your funeral, medical, and burial expenses.

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Funeral, medical, and burial expenses: Estate Valuation &

Distribution CostsAppraisals

Court Costs

Business Valuation

Legal & Accounting Fees

Executor/AdministratorExpenses

There are also costs associated with valuation, as well as distribution, of your assets such as:•Appraisals – The assets in your estate must be valued in order to determine whether taxes may be due and also to establish the tax basis of those assets in the hands of your beneficiary.•Court-related costs.•Costs associated with the valuation of business interests.•Legal and accounting fees.•And the costs and expenses associated with the activities of your executor or administrator.

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Funeral, medical, and burial expenses

Estate valuation and distribution costs

Payment of Debts

Appraisals

Court Costs

Business Valuation


Executor/AdministratorExpenses


An important part of the probate process of making sure that all valid debts of the deceased have been properly taken care of. This includes any outstanding personal or business loans, monthly bills, credit cards, mortgages, etc.

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Funeral, medical, and burial expenses

Estate valuation and distribution costs

Appraisals

Court Costs

Business Valuation


Executor/Administrator Expenses

Payment of Debts

Federal & State Estate Taxes


An important part of the probate process of making sure that all valid debts of the deceased have been properly taken care of. This includes any outstanding personal or business loans, monthly bills, credit cards, mortgages, etc.

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But I thought the estate tax was repealed!

But, you might say, I read in the newspaper that the federal estate tax was repealed by Congress. Why should I worry about federal estate taxes?

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Estate Taxes

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA):

Estate taxes are NOT immediately and permanently repealed:• Gradual and temporary reform of estate tax system.• Repeal occurs only for those dying in 2010.• Entire law “sunsets” (terminates) in 2011 unless Congress

enacts new legislation.• States are enacting their own death taxes.

In fact, many people believe that the Economic Growth and Tax Relief Reconciliation Act of 2001 repealed the federal estate tax.

Sound bites heard in the news have caused many people to misunderstand the changes that were brought about by this Act. In fact, the federal estate tax was NOT immediately and permanently repealed. EGTRRA called for a gradual and temporary reform of the federal estate tax system.

Repeal of the federal estate tax only occurs for those dying in 2010 – this is the “Sunset” year. If you have control over the date of your death, then you will be a beneficiary of this legislation. However, if you don’t have such control, or you don’t chose to die in 2010, then if Congress does not enact new legislation before 2011, the old estate tax rates in effect before EGTRRA will return. This means a maximum tax rate of 55% could be in effect when you die.

In the meantime, due to economic constraints and the loss of federal estate tax sharing by the federal government, many states are enacting their own death taxes to make up for shortfalls in their state budgets. And in some cases, these state death taxes may be more than the federal estate tax!

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Highest Federal Estate Tax Bracket

Year Percent

2001 = 55%2002 = 50%2003 = 49%2004 = 48%2005 = 47%2006 = 46%

Year Percent

2007 = 45%2008 = 45%2009 = 45%2010 = 02011 = 55%

It is also important to remember that the federal estate tax is really a transfer tax because it applies to property that is transferred both during your lifetime and at your death. This tax is progressive, which means that as the estate value increases, the estate tax rate increases. For instance, the estate tax brackets start at 18% on amounts above $10,000, while on an estate of $3,000,000 the transfer tax can be as high as 55%.

Since the Economic Growth and Tax Relief Reconciliation Act of 2001 includes a sunset provision, this means that none of the Act’s provisions apply to any tax year beginning after Dec. 31, 2010. In other words, as I mentioned, unless Congress passes new legislation in time, on Jan. 1, 2011, all the provisions contained in EGTRRA revert to the tax laws in effect prior to June 7, 2001. This includes the federal estate tax.

At this point in time, many estate planners are suggesting that people do their estate planning based on the rules that were in place prior to June 7, 2001. By taking this approach and planning for the federal estate tax, the worst case scenario is that your family will end up with more than you planned.

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Sources of funds to pay estate settlement costs:

Use cash

Sell assets

Borrow money

Pre-pay with life insurance

How does your estate find the funds needed to pay your estate settlement costs? There are several sources.

Your heirs can:•Use any readily available cash.•Sell assets contained in the estate.•Borrow money, using estate assets as collateral.•Or, you can pre-pay this expense with life insurance.

Let’s look at each of these possibilities in some depth.

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Cash• Estate must have sufficient cash available.• Assets may have to be sold quickly.• Substantial loss to HEIRS.

Estate Borrows the Money• Money has to be repaid with interest.• Estate assets might have to be used as collateral.• Substantial portion of the estate may not be available to your

HEIRS.

With the first method, cash is taken out of the estate to cover estate settlement costs. For most estates, this is the least likely way to pay the tax. On the average, most estates have only about 3% in liquid assets.

Assets can also be sold, but usually the buyers know there is a motivated seller, and the chances of getting the best price possible for these assets is difficult to accomplish. This may result in a substantial loss to your heirs.

The second way to solve the problem is to borrow the money. In effect, your executor or administrator borrows money and uses the estate’s assets as collateral. This often leaves it up to the heirs to figure out how to service the debt. Downsides to borrowing the money include problems finding a lender, high interest rates, and the dilemma of how the loan be paid off. Your heirs may be saddled with a large debt for years to come.

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IRS Installment Payments• IRS code section 6166 allows payments of taxes plus interest over

14 years.• Closely held business must be a large portion of the estate.• Debt payments could be a substantial burden.

Life Insurance• Plan ahead to pay the taxes.• A small portion of the existing estate provides for settlement costs

and taxes.• Settlement costs and taxes are paid without reducing the value to

the HEIRS.

Internal Revenue Code Section 6166 is another method of financing the estate tax when a closely-held business is a large portion of the estate. It is similar toborrowing the money. Tax-deferral methods such as Section 6166, however, do not reduce the tax. The full tax must still be paid, plus interest on the tax. This method involves a government lien on the estate and business assets until the tax is paid. This results in a more complicated and costly estate settlement. Under certain conditions, the IRS can terminate the Section 6166 extension and demand full payment of the entire balance due.

One of the major disadvantages to this solution is that the estate is not officially closed until the taxes are paid. In the event of default, the government may go after any estate beneficiary for the balance due. This option is not available for non-business assets.

The fourth method is the life insurance solution. You can plan ahead to pay the estate settlement costs and taxes. For pennies on the dollar (as long as the premium is paid) the money is available to pay the estate tax and settlement costs whenever it is due.

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Estate Taxes - A Burden for Heirs

Paid from the estate before any distribution occurs.

Must be paid in cash.

Due in 9 months.

Interest charged on any late payment.

Estate taxes are a burden for your heirs because they must be:•Paid from the estate before any distribution to the heirs can occur.•Paid in cash within 9 months of death.•And the IRS charges interest on any late payments.

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Pay with Discounted Dollars

Life insurance provides:

Cash payment at death.

“Immediate liquidity.”

A dollar of death benefit may be obtained for a reasonable cost per year.

Benefits are received income-tax free.

Benefits may be subject to estate taxes if included in the estate.

You can choose to relieve your heirs of this burden by purchasing life insurance now to pre-pay your estate tax with discounted dollars.

Life insurance provides:•Cash payment at death (when it is needed most).•“Immediate liquidity” (no need to borrow or sell assets).•A dollar of death benefit may be obtained for a reasonable premium cost.•A death benefit amount that is received income tax-free.•A death benefit amount that may be subject to estate taxes if included in the estate.

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Risks of Failing to Plan

Your heirs may owe more money because:• You missed annual exclusion gifting opportunities.• You missed estate tax reduction strategies.

You may lack life insurance because:• You die before purchasing.• You are too old or ill to purchase insurance at a reasonable cost.

Your heirs may have to liquidate assets.

After hearing all of this, what are the risks if you don’t plan? There are several:•Your heirs may owe more money because you missed opportunities to plan, such as annual exclusion gifts and other estate tax reduction strategies.•You may die without life insurance, because you never purchased it, or because when you finally decided that it was an important part of your estate plan, you were too old or too ill to purchase insurance at a reasonable cost.•Your heirs may have to liquidate assets or borrow in order to cover your estate settlement costs, resulting in assets being lost or spent that you intended to go to your family.

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Estate Planning Objectives

Minimize or defer taxation.

Liquidity to pay estate taxes.

Use all available exemptions.

Efficient transfer of personal capital.

If you do decide to go forward and do your estate plan, what are some of the most common objectives?•Minimize or defer taxation.•Liquidity for the payment of estate settlement costs and taxes.•Taking advantage of all possible exemption amounts to reduce taxes.•The efficient transfer of personal capital.

For most people, these are just of few of the topics that need to be covered during the estate planning process. There are also other issues such as business succession planning or the special needs of a particular family member.

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Estate Planning Strategy

Select proper tools and techniques.

Avoid paying estate taxes at first death.

Provide estate liquidity at survivor’s death:• Establish irrevocable life insurance trust (ILIT).

Once you establish your objectives, it is important to select the proper tools and techniques to carry out the estate plan. These tools and techniques may include wills, trusts, distribution arrangements, liquidity planning, and irrevocable life insurance trusts.

By properly designing a plan that incorporates these tools, you may be able to avoid paying federal estate taxes at the first spouse’s death and also minimize taxes at the second spouse’s death. This is often accomplished by combining the marital deduction with a credit shelter trust.

You can also provide your estate with liquidity to pay estate taxes and other estate settlement costs at the surviving spouse’s death. This is accomplished by establishing an irrevocable life insurance trust (an “ILIT”) that owns a life insurance policy insuring your life or jointly insuring the life of you and your spouse.

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Typical Plan:

Use marital deduction to transfer remaining estate to survivor without federal estate tax at first spouse’s death.

Take advantage of the amount exempt from federal estate taxes.

A typical estate plan is designed to take advantage of the amount exempt from federal estate taxes by placing it in a trust known as a credit shelter trust.

The remainder of the estate is transferred to the surviving spouse either directly or in trust. This transfer takes advantage of the unlimited marital deduction to defer all federal estate taxes until the death of the surviving spouse.

While this is often a good first step in planning, it may not provide your estate with the liquidity needed to pay the estate taxes and other estate settlement costs at the death of the surviving spouse. This is where the ILIT may come into play.

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Typical Plan

Irrevocable Life Insurance Trust (ILIT):

Ownership of life insurance to remove policy proceeds from federal estate taxation at the insured(s)’ death(s).

Policy proceeds are estate tax-free source of funds to provide estate liquidity.

Irrevocable Life

Insurance Trust

Life Insurance

PolicyOwns

As the name implies, the ILIT is the vehicle for holding life insurance policies. The primary goal of such an instrument is to have the trust own the life insurance policies as opposed to the insured(s). When properly established, such trust ownership will remove the life insurance policy proceeds from federal estate taxation at the death of both spouses. If the life insurance policy is personally owned by the insured(s) prior to the transfer to the ILIT, a 3-year rule will apply that says that the life insurance policy death proceeds will be removed from federal estate taxation only if the insured(s) lives for at least 3 years following the date of the transfer.

In this way, the trust can have a fund of cash that can be used to loan money to or purchase assets from the executor of the decedent’s estate. This can create the needed liquidity in the estate for payment of estate taxes and other estate settlement costs, without these funds adding to the burden by causing additional estate taxes to be due at either spouse’s death.

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The ILIT

Grantor Irrevocable Life Insurance Trust

Executor

U.S. Treasury Heirs

Let us take a closer look at the ILIT process.

First, with the help of an attorney, you create an ILIT, select a trustee, and then transfer cash or income-producing assets to the trust. Depending upon how the transfer to the trust is structured, this transfer of cash and assets to the trust may be subject to gift taxes.

Second, the trustee purchases and pays premiums for a life insurance policy insuring you, or you and your spouse. Assuming that the trust was properly set up, at your death or the death of your surviving spouse (if the policy purchased was a survivor life policy) the trust receives the policy proceeds free of income and estate taxes.

Next, the executor of your estate or the estate of the surviving spouse borrows money from or sells assets to the ILIT. The executor can then use these funds to pay estate taxes and other estate settlement costs.

In the end, your heirs receive the net estate assets from your estate and the ILIT.

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What Is Being Accomplished?

For You:

Removes life insurance proceeds from taxable estate.

Provides support for heirs after your death.

Preserves bulk of your estate for your heirs.

In summary, with careful estate planning, including the use of an ILIT, you may remove life insurance policy proceeds from the estate of both you and your spouse, provide support for your heirs after your death, and preserve the bulk of the value of your estate for your heirs.

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For the Executor of Your Estate:

Obtains money from trustee to help pay estate taxes and other settlement costs.

Irrevocable Life

Insurance Trust

Life Insurance

PolicyTrustee

Receives Death Benefit

The executor of your estate can sell estate assets to the ILIT or borrow money from the trustee of the ILIT, and use those funds to help pay estate taxes and other estate settlement costs.

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For Your Heirs:

Removes life insurance death benefit proceeds from taxable estate.

EstateLife

InsuranceDeath

Benefit Proceeds

Outside of

Estate

If the policy is owned by a properly drafted and funded ILIT, the trust will receive the policy’s net death benefit proceeds, and such proceeds can pass to your heirs free of estate and income taxes.

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Conclusion

Consider Estate Planning if you:

Want to choose who receives your estate.

Want to maximize the wealth passing to your heirs.

In summary, you should consider planning your estate if you want to choose who receives the benefits of your hard-earned wealth and want to maximize the wealth you pass to your heirs.

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Conclusion

Consider life insurance owned by an ILIT if you:

Want to pass estate tax-free death benefit to your heirs.

Irrevocable Life

Insurance Trust

Life Insurance

PolicyOwns

You can also consider establishing an ILIT to own life insurance on your life if you want the policy's net death benefit proceeds to pass to your heirs free of income and estate taxes.

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Next Steps

Review your current ownership of assets.Review existing beneficiary designations of life insurance or qualified plans.Review employer provided benefits.Review (or create) your will.Consult with your attorney and CPA and create your estate plan:• Restructure ownership of assets if needed.• Create trusts if needed.• Change ownership and beneficiary designations if needed.• Revise your will, if needed.• Consider purchasing life insurance.

What’s the next step?

First of all, review your current ownership of assets.You should also review existing beneficiary designations of life insurance or qualified plans.Review your employer-provided benefits.Review (or create) your will.Consult with your attorney and CPA and create your estate plan:

- Restructure ownership of assets (if needed),- Create trusts (if needed),- Change ownership and beneficiary designations (if needed),- Revise your will (if needed), and- Consider purchasing life insurance.

Fundamentals Of Estate Planning

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