Planning for Life & Death Wills, Trusts and Estates Claralyn Martin Hill Attorney at Law

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<ul><li> Slide 1 </li> <li> Planning for Life &amp; Death Wills, Trusts and Estates Claralyn Martin Hill Attorney at Law </li> <li> Slide 2 </li> <li> Goals of Estate Planning 1. Live life fully u Provide for yourself (&amp; spouse) u Provide for others according to your values u Provide for own possible incompetence 2. Pass property according to desires u Provide for administration (who does the work) u Provide for disposition (who gets what) </li> <li> Slide 3 </li> <li> Goals of Estate Planning, cont. 3. Provide for guardianship of minor children 4. Avoid probate if desired or use probate strategically 5. Decrease or eliminate taxes u Income tax (capital gains basis problems) u Gift &amp; estate tax </li> <li> Slide 4 </li> <li> Live Life Fully Provide for own incompetence n Advance Directives u Living Will u Special Power of Attorney for Health Care n Other Powers of Attorney: Durable, Special, General--Exercise caution n Trust provisions </li> <li> Slide 5 </li> <li> Pass Property at Death According to Desires n How do we pass property during life? DEED Grantor grants Black Acre to grantee. Signed, Grantor </li> <li> Slide 6 </li> <li> Pass Property at Death According to Desires n Probate. What is it? It is the court procedure for transferring title and settling claims after death. </li> <li> Slide 7 </li> <li> n Probate is necessary for: u Transfer of land or titled property over $25,000 (amount varies by state) u Other reasons (e.g. contested will) u We can avoid these by funding a well drafted trust. n Probate may be necessary or desirable for: u Establishing guardianship of minors u Cutting off creditors or avoiding later lawsuits u Clearing clouded title to land Pass Property at Death According to Desires </li> <li> Slide 8 </li> <li> n There are four ways designate where property should go after death: u Will--does not transfer property, so must be probated u Law--(the state writes your will)--does not transfer property, so must be probated u Contract (e.g. life insurance) bypasses probate u Trust or other scheme that actually transfers property during life, but doesnt make a complete gift Pass Property at Death According to Desires </li> <li> Slide 9 </li> <li> Pass Property at Death According to Desires By Will n ...And to my faithful servant Sidney, who I promised to remember in my will, Hi, there, Sidney! </li> <li> Slide 10 </li> <li> Pass Property at Death According to Desires By Will n By will you can u Appoint personal representative u Appoint guardians and conservators for minor children u Provide for disposition of property at death u Keep a separate updated list of tangible personal property dispositions in some states u Revoke or change an earlier will </li> <li> Slide 11 </li> <li> Pass Property at Death According to Desires By Will n Some states allow holographic wills u All in your own handwriting u Date at top, signature at bottom u Name a guardian, alternates, disposition of assets u No notary or witnesses u Caution: Consult attorney about language u Caution: Use only if you dont have significant assets or a complicated family situation. n Holographic wills are valid in Utah </li> <li> Slide 12 </li> <li> Do Your Own Holographic Will: n In your own hand, write the date at the top of the page. n I, (your full name), being over 18 years of age, of sound mind and not acting under duress, declare this my last will and testament, revoking all prior wills &amp; codicils. n I am married. My husbands (wifes) name is (full name). We have the following children, who are issue of our marriage: (list names &amp; birth dates.) (Or state that you are single, no children) </li> <li> Slide 13 </li> <li> Do Your Own Holographic Will: n I intend to dispose of all my property at the time of my death through this will. n I give (list specific items &amp; who you want them to go to). n I give the residue of my estate to (if married, my husband/wife), (state full name). If (name) does not survive me, I give the residue to my minor children, to be distributed equally (per stirpes/capita). n I have intentionally omitted any existing heirs who are not specifically mentioned here. Any who shall contest this will shall receive only one dollar. </li> <li> Slide 14 </li> <li> Do Your Own Holographic Will: n If any part of this will is invalid, such invalidity shall not affect any other provision. n My estate shall be administered by one Personal Representative. I nominate the following to serve as Personal Representative to administer my estate, to serve without bond in the order in which listed: (List about 3 people, in order of choice.) n My Personal Representative is authorized to do whatever is necessary to administer my estate. </li> <li> Slide 15 </li> <li> Do Your Own Holographic Will: n If my spouse does not survive me, I nominate the following, in the order listed, to act as guardians of &amp; conservators for my minor children: (List about two or three, in order of choice, the same as spouses list.) n In witness whereof, I voluntarily sign my name this day. n Sign the document at the bottom and keep it in a place where it can be found. n Spouse should do a similar document. </li> <li> Slide 16 </li> <li> Pass Property at Death According to Desires By Contract n Examples: u Third party contracts F Insurance F Pay on Death accounts F IRAs, pension plans, etc. u Deeds F Joint tenancy -- rights of survivorship F Tenancy in common -- no rights of survivorship n Avoid probate n Do not avoid tax consequences </li> <li> Slide 17 </li> <li> Typical Ways to Hold Title: Pass Property at Death According to Desires Tenancy in Common </li> <li> Slide 18 </li> <li> Typical Ways to Hold Title: Pass Property at Death According to Desires Joint Tenancy </li> <li> Slide 19 </li> <li> Typical Ways to Hold Title: Pass Property at Death According to Desires Joint Tenancy </li> <li> Slide 20 </li> <li> Typical Ways to Hold Title: Pass Property at Death According to Desires Joint Tenancy Characteristics Your interest can be attached for the other persons debts and taxes. </li> <li> Slide 21 </li> <li> Typical Ways to Hold Title: Pass Property at Death According to Desires Joint Tenancy Characteristics A joint tenancy circumvents will or trust provisions. </li> <li> Slide 22 </li> <li> Typical Ways to Hold Title: Pass Property at Death According to Desires Joint Tenancy Characteristics A joint tenancy only postpones probate until the second joint tenant dies. </li> <li> Slide 23 </li> <li> Typical Ways to Hold Title: Pass Property at Death According to Desires Joint Tenancy Characteristics A joint tenancy only postpones probate until the second joint tenant dies </li> <li> Slide 24 </li> <li> Typical Ways to Hold Title: Pass Property at Death According to Desires Joint Tenancy Characteristics It creates a gift for tax purposes when a childs name is added. </li> <li> Slide 25 </li> <li> Typical Ways to Hold Title: Pass Property at Death According to Desires Joint Tenancy Characteristics It creates capital gains income tax problems. </li> <li> Slide 26 </li> <li> Typical Ways to Hold Title: Pass Property at Death According to Desires Joint Tenancy Characteristics It creates transfer problems if one person becomes incompetent. </li> <li> Slide 27 </li> <li> Typical Ways to Hold Title: Pass Property at Death According to Desires Joint Tenancy Characteristics Creating a joint tenancy with a nonspouse means LOSS OF CONTROL </li> <li> Slide 28 </li> <li> Pass Property at Death According to Desires By Contract Joint tenancy characteristics u JT interest can be attached for other JTs debts &amp; taxes u JT circumvents will or trust provisions u JT only postpones probate until the second JT dies u JT creates a gift for tax purposes when childs name is added u JT creates capital gain income tax problems u JT creates problems if one JT becomes incompetent u Creating JT with nonspouse means loss of control </li> <li> Slide 29 </li> <li> 2. Pass Property at Death According to Desires By Trust How a Trust is Created title use title use </li> <li> Slide 30 </li> <li> 2. Pass Property at Death According to Desires By Trust How a Trust is Created title use title use </li> <li> Slide 31 </li> <li> 2. Pass Property at Death According to Desires By Trust How a Trust is Created title use title use </li> <li> Slide 32 </li> <li> A Trust is Just an Empty Box Family Living Trust Stock </li> <li> Slide 33 </li> <li> Advantages of a Revocable Living Trust Advantages of a Revocable Living Trust u It can avoid probate - multiple properties in several states u It can avoid probate if funded properly u It can reduce or eliminate estate taxes u It can allow for privacy u It can facilitate advanced planning u It can handle complex family situations u It can provide for a smooth transition in case you become incapacitated by avoiding court competency proceedings u It can create other trusts &amp; control a number of other issues 2. Pass Property at Death According to Desires By Trust </li> <li> Slide 34 </li> <li> Avoid Taxes </li> <li> Slide 35 </li> <li> Internal Revenue Code Section 341 contains a single sentence that is longer than the entire Gettysburg Address. Peter L. Faber If Patrick Henry thought that taxation without representation was bad, he should see how bad it is with representation. The Old Farmers Almanac When Congress talks about simplification, taxpayers may well be reminded of Emersons comments regarding an acquaintance, the louder he talked of his honor, the faster we counted our spoons. Michael J. Graetz </li> <li> Slide 36 </li> <li> Avoid Taxes Income Tax Stepped-Up Basis 199520002005 Dad buys real estate Dad adds son as JT1. Dad sells house for $150,000 $50,000 basis Son: $50,000 taxable income Dad: $50,000 taxable income 2. Dad dies, house worth $150,000 Son gets house Dads interest stepped up Son owes $50,000 taxable income </li> <li> Slide 37 </li> <li> Avoid Taxes Income Tax Stepped-Up Basis 19952000 2005 Dad buys real estate 1. Dad sells house for $150,000 $50,000 basis No tax consequences for son Trust names son as beneficiary on death 2. Dad dies, house worth $150,000 Son gets house Sons entire interest stepped up Son owes no taxable income Bottom line: There may be basis issues for any transfers or gifts prior to death </li> <li> Slide 38 </li> <li> Avoid Taxes Unified Gift &amp; Estate Tax n A small estate, for estate tax purposes, is anything under $1.5M (2005) n Annual exclusion for gifts=$11,000 per donor per donee n Example: u Grandfather ---&gt; Grand child 1$11,000 u Grandmother ---&gt; Grand child 1$11,000 u Grandfather ---&gt; Grand child 2$11,000 u Grandmother ---&gt; Grand child 2$11,000, etc n No gift tax consequences n Anything over adds up for estate tax purposes, triggers form 709 </li> <li> Slide 39 </li> <li> Avoid Taxes Unified Gift &amp; Estate Tax 2003$1M 2004 $1.5M 2006$2M 2009$3.5M 2010 Estate (not gift) tax repealed Stepped up basis disappears ($1.3M exemption) 2011$1M restored 2012--&gt;$1M Year Exclusion Amount Total Lifetime Exclusion </li> <li> Slide 40 </li> <li> Avoid Taxes Unified Gift &amp; Estate Tax 2001$4.92M 2009$2.93M 2010 $0 (except gift &amp; capital gains taxes) 2011$4.8M 2012--&gt;$4.8M Year Tax On a $10M Estate </li> <li> Slide 41 </li> <li> Avoid Taxes Unified Gift &amp; Estate Tax Jane Bryant Quinn: Ailing parents will keep their bedroom doors locked when their children are in the house. Its going to be a great year to die. The Year 2010--Push Dad Out of the Lear Jet Year </li> <li> Slide 42 </li> <li> Avoid Taxes Unified Gift &amp; Estate Tax Confused? You are not alone. </li> <li> Slide 43 </li> <li> Avoid Taxes Unified Gift &amp; Estate Tax The Estate Tax probably wont actually be repealed. It may settle somewhere around the 2009 $3.5M exemption, but for now it will settle at $1M. States may fill in the void by creating more state estate taxes. Some Predictions by Experts: </li> <li> Slide 44 </li> <li> Example In the year 2006, A gives land valued at $511,000 to B and $611,000 to C. A has not made any previous gifts. As gift tax payable for the year is $41,000: B $511,000 - $11,000 (annual exclusion)$500,000 C $611,000 - $11,000 (annual exclusion)$600,000 Taxable gifts $1,100,000 Tax (@ 35%)$386,800 Less Unified Credit ($345,800) Tax Payable$ 41,000 </li> <li> Slide 45 </li> <li> Example In the year 2007, A dies with a taxable estate of $3M. The $1.1M of gifts he has already given are added back into his estate for purposes of the total tax base.: Taxable estate$2,000,000 Taxable gifts$1,100,000 Total tax base$3,100,000 </li> <li> Slide 46 </li> <li> Avoid Taxes Unified Gift &amp; Estate Tax n Definitions: u Tax base = Taxable estate + prior taxable gifts u Taxable estate = Gross estate (including insurance proceeds, stocks, personal property, everything Deceased had control over when he died) minus deductions (e.g., marital deduction) u Estate tax payable: F Tax on base F minus gift tax payable on prior gifts F minus unified credit F minus other credits n What about married couples? </li> <li> Slide 47 </li> <li> Hypothetical Situation #1 (No Trust) $3,000,000 House, life insurance, retirement benefits, business, investments $3,000,000 Husband dies 2004 to wife 1 year later wife dies $3,000,000 left in estate Taxes = $555,000 Heirs receive $2,445,000 </li> <li> Slide 48 </li> <li> Hypothetical Situation #2 (Trust) $1,500,000 House, life insurance, retirement benefits, business, investments, etc. $3,000,000 Husband dies 2004 1 year later wife dies Taxes = $0 Heirs receive $3,000,000 Trust A Trust B $1,500,000 Trust A Trust B $1,500,000 Saves $555,000 </li> <li> Slide 49 </li> <li> Other Uses for Trusts n Wealth replacement (ILITs) n Charitable gifting n Avoidance of GST n Valuation discounts &amp; freezing appreciated assets n Grantor retained annuity trusts n Personal Residence Trusts n Medicaid &amp; Special Needs Trusts n Etc. </li> <li> Slide 50 </li> <li> Other estate planning tools n LLCs &amp; FLPs n Retirement Plans n Annuities n Etc. </li> <li> Slide 51 </li> <li> Conclusions n Probate and taxes are not the same thing. Plan for both. n Other considerations may trump either tax or probate avoidance n Plan ahead. Everyone goes sometime n Under all circumstances, plan for the possibility of death while you still have minor children n Live life fully! </li> <li> Slide 52 </li> </ul>