Estate Planning: Saving Your Heirs Money and Headaches

1
Chapter 17

• Estate Planning Saving Your Heirs Money and
  Headaches

2
The Estate Planning Process

• Step 1 Determine the Value of Your Estate
• Determine the value of your assets.
• Use the life insurance proceeds amount (the death
  benefit) to determine value of life insurance.
• Include employer-sponsored death benefits.
• In 2006, the first 2 million of an estate can be
  passed tax-free.

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The Estate Planning Process

• Step 2 Choose Your Heirs andDecide What They
  Receive
• Once you know what you have, you can decide whos
  going to get it.
• In addition to a spouse, consider the special
  needs of your dependents.

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The Estate Planning Process

• Step 3 Determine the CashNeeds of the Estate
• Before distributing property to heirs, must pay
  medical costs, funeral expenses, legal fees,
  outstanding debt, and taxes.
• Use liquid funds to cover tax needs.

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The Estate Planning Process

• Step 4 Select and Implement YourEstate Planning
  Techniques
• Decide which estate planning tools are most
  appropriate to achieve your goals.

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Estate Planning Tools

• Will.
• Trust.
• General durable power of attorney.
• Durable power of attorney for health care.
• Living will.
• Disposition of last remains.

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More Estate Planning Tools

• Lifetime gifts.
• Life insurance.
• Joint ownership.
• Family ownership.
• Family limited partnership.
• Family LLC.

8
Taxes

• Income tax.
• Form 1040.
• Estate tax.
• Gift tax.
• Generation-skipping tax.

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Understanding and Avoiding Estate Taxes

• The estate tax exemption (unified tax credit) is
  2 million for years 2006 2008 (46 tax rate
  for 2006 and 45 tax rate for 2007-2009).
• For 2009, the exemption is 3.5 million.
• Year 2010 no estate tax.
• Year 2011 exemption is 1 million and tax rate
  is 55

10
Understanding and Avoiding Estate Taxes

• Move towards estate tax planning as net worth
  climbs above the tax-free transfer threshold.
• The uncertainty of the estate tax rate and the
  exemption amount make estate planning more
  difficult.
• As the exemption amount increases, the demand for
  complex estate plans decreases.

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Gift Taxes

• Gifts are an excellent way of transferring wealth
  before you die.
• The recipient is not taxed.
• Gift tax exclusion is 12,000 annually per
  recipient.
• The gift tax and the estate tax work together
  with a total lifetime exemption from tax of 2
  million (currently).
• There is a 1 million lifetime tax-free gift
  limit.
• This does not include tax-free gifts made using
  the annual gift tax exclusion (currently 12,000).

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Unlimited Marital Deduction

• There is no limit to the size of estate transfers
  between spouses on a tax-free basis.
• Spouse must be U.S. citizen.
• Estates up to 2 million can be transferred
  tax-free to any other beneficiary.
• Use special estate planning techniques available
  to spouses to reduce estate taxes.

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The Generation-Skipping Transfer Tax

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

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Wills

• A legal document that describes how to transfer
  your property to others.
• Designate
• Beneficiaries those who are willed property.
• A personal representative (executor) who will
  carry out the wills provisions.
• A trustee if the will creates a trust at death.
• A guardian who will care for children under the
  age of 18.

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Intestate

• The decedent did not leave a will, or the will is
  invalid.
• The court appoints the personal representative
  (executor).
• After expenses and taxes are paid, assets are
  distributed in accordance with state law.

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Colorado Intestacy Laws

• If a person leaves no valid will
• Surviving spouse receives the estate.
• If no surviving spouse, then children share
  equally.
• If no spouse or children, then parents share
  equally.
• If no surviving parents, then siblings or their
  children share equally.

17
Wills and Probate

• Probate is the legal process of distributing an
  estates assets.
• Probate validates the will.
• Probate court appoints a personal representative
  (executor), generally the one designated in the
  will.
• Letters Testamentary.
• Once the expenses and taxes have been paid, the
  assets are distributed and the estate is closed.

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Probate

• Advantages
• Validates the will.
• Resolves disputes concerning the will.
• In terrorem clause.
• Allows for an orderly distribution of assets if
  intestate.

• Disadvantages
• Costs (legal fees, PR fees, court filing fees).
• Slow, time consuming process, especially if there
  are challenges or tax problems.
• Probate codes are a state law concept some
  states have more onerous probate codes than
  others.

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Wills and Estate PlanningWhy do you need a
will?

• A Will Can
• Assure that a child with special needs is taken
  care of.
• Make sure assets are transferred according to
  your wishes.
• Make special gifts or bequeaths.
• Select PR, trustee, guardians, and conservators.
• Create testamentary trusts.

• Without a Will
• The court will appoint a guardian for any
  children.
• The court appoints the personal representative.
• State law controls who will receive your assets.

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Wills in Colorado

• You must be at least 18 years and of sound mind.
• You must have testamentary capacity.
• You must make the will under your own free will.
• A will can be typed or handwritten (holographic
  will).
• A will must be dated and signed by the testator.
• Two disinterested persons must sign the will in
  your presence as witnesses.
• All signatures should be notarized.

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Writing Your Own Will

• Do not write your own will.
• Drafting a will requires special skill have an
  attorney draft your will.
• Holographic wills are often found to be ambiguous
  or defective, which causes delay, expense, and
  litigation.

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Writing a Will

• A will should contain
• Introductory statement.
• Payment of expenses and taxes clause.
• Disposition of property clause.
• Personal property.
• Residual estate.
• Appointment clause.
• Common disaster clause.
• Attestation and witness clause.

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Updating or Changing a Will The Codicil

• A codicil is an attachment to a will that alters
  or amends a portion of the will.
• Make sure your will conforms to your present
  situation.
• Substantial changes warrant a new will.
• A codicil should be drawn up by a lawyer,
  witnessed, and attached to the will.
• Codicil vs. amending and restating the will.

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Letter of Last Instructions

• A letter of last instructions is generally
  written to the surviving spouse.
• It is not a legally binding document.
• It provides information and directions with
  respect to the execution of the will.

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Letter of Last Instructions

• The letter of last instructions may contain
• Location of the will, legal documents
• Location of financial assets
• Names of those to notify of the death
• Listing of personal property
• Funeral and burial instructions
• Organ donations

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Selecting an Executor

• An executor has a dual role
• Making sure your wishes are carried out.
• Managing your property until the estate is passed
  on to your heirs.

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Selecting an Executor

• The executor will
• Deal with personal matters
• Pay taxes
• Manage the financial matters of the estate
• Distribute assets
• Make a final accounting to the courts

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Other Estate Planning Documents

• A general durable power of attorney provides for
  someone to manage your financial affairs should
  you become incapacitated.
• A durable power of attorney for health care
  provides for someone to make health care
  decisions for you should you become
  incapacitated.
• A living will allows you to state your wishes
  regarding medical treatment in the event of
  terminal illness or injury.

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Avoiding Probate

• Probate is essential to validate your will and
  ensure your provisions are carried out. It can
  also be time consuming and expensive.
• Depending on state law, it might be a good idea
  to avoid probate.

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Avoiding Probate

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

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Designating Beneficiaries

• Life insurance.
• Retirement plans.
• Name primary and contingent beneficiaries.
• Review these designations from time to time.

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Joint Ownership

• Jointly-owned assets transfer to the surviving
  owner without probate.
• 3 forms of joint ownership
• Joint tenancy with right of survivorship
  ownership passes to survivor, bypasses the will.
• Tenancy in common decedents interest passes
  under the will.
• Community property surviving spouse receives ½
  of all property acquired during the marriage.

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Trusts

• A legal entity that holds and manages an asset
  for another person.
• Is created when an individual, a grantor,
  transfers property to a trustee for the benefit
  of one or more beneficiaries.
• The trustee can be an individual, an investment
  firm, or a bank.
• Any asset can be placed in a trust.

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Trusts

• Why use a trust?
• Trusts avoid probate.
• Trusts are more difficult to challenge in court.
• Trusts can reduce estate taxes, but so can wills.
• Trusts allow for professional management.
• Trusts can hold money for a child with special
  needs or until a child reaches maturity.
• Trusts can ensure that children from a previous
  marriage will receive an inheritance.

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Living Trusts

• Revocable Living Trusts
• Place assets in trust while alive, withdraw them
  later if you wish.
• You retain title and have control over assets.
• No tax advantages.

• Irrevocable Living Trusts
• Trust is permanent.
• It becomes a legal entity, paying taxes on gains
  produced.
• Not part of estate, bypasses probate, no estate
  taxes but possibly gift taxes.

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Testamentary Trusts

• A testamentary trust is created by a will.
• It exists once probate has been completed.
• Common types
• Marital Trusts and Family Trusts used to reduce
  estate taxes.
• Qualified Terminable Interest Property Trust
  (QTIP) often used in second marriages.

• annual income over 100,000
• 70 completed college
• 4 times more likely to hold postgraduate degrees
• married couples head 85 of wealthy households

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Estate Planning

• Checklist 17.1
• Do you and your family know
• Location of your will, power of attorney, and
  living will?
• The name of your attorney and accountant?
• Where to find your letter of last instructions?
• Location of safety deposit box?
• Whereabouts of deeds and titles to property?
• Site of your investments?
• All account numbers?
• Last years income tax return?
• Pension and retirement benefits?

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A Last Word on Estate Planning

• Many put off estate planning because it is
  complex and deals with death.
• Go to a professional dont do your own estate
  planning.
• Make sure your family knows where your estate
  planning documents are.