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Estate Planning

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  1. Estate Planning Session 1 of 3 Wills Trusts Planning for Incapacity Property Interests Transfer Methods Estate Planning – 1 of 3

  2. Estate Planning Advice • Only estate planning attorneys can practice estate planning and give estate planning advice. • Financial planners recognize estate planning issues affecting their clients, then work with attorneys to resolve them. Estate Planning – 1 of 3

  3. Estate Planning Process • Estate Planning is a process for preserving and distributing a person’s assets according to their objectives. • Definition of an estate: The rights, titles or interests that a person has in their property • Common objectives: protect, grow and distribute assets while minimizing costs and taxes Estate Planning – 1 of 3

  4. Wills • Wills allow the testator to control the passing of property interests to others. • Property transfers are regulated by state law, not federal law. In the absence of a will, property is distributed according to state laws of intestacy. • Contracts supersede state laws. Example: nuptial agreements Estate Planning – 1 of 3

  5. Legal Requirements for Wills Any person over the age of 18 can make a will. To execute a will, you need “testamentary capacity” or the will is invalid. Testamentary capacity: • Testator must know he’s executing a will • Testator must be aware of what assets he owns • Testator must know and remember his relationship to his beneficiaries Estate Planning – 1 of 3

  6. Invalid Will Provisions Provisions in a will can be invalidated due to: • Fraud • The testator is subject to “undue influence” by someone benefiting from the will • Mistakes in will clauses • The will is not properly executed- signed and witnessed according to state statutes Estate Planning – 1 of 3

  7. Types of Wills • Mutual will- a will made in agreement with another person to dispose of certain property interests • Reciprocal will- each person’s will designates that all property be distributed to the other person • Holographic will- handwritten will • Nuncupative will- oral will Estate Planning – 1 of 3

  8. Pour-over Will Designates the decedent’s trust to receive property left outside the trust. • A trust must be created before death • Property will avoid intestacy • Property will not avoid probate Estate Planning – 1 of 3

  9. Will Terms • Codicil- a separate document added to an existing will to address minor changes • Residuary clause- directs the remainder of a decedent’s estate to a specific person or a trust to avoid partial intestacy Estate Planning – 1 of 3

  10. Per Capita & Per Stirpes • Per Capita- descendants receive equal shares • Per Stirpes- descendants may receive unequal shares Children: A, B, C C’s children: X and Z C dies Per Capita: A, B, X, Z = ¼ share Per Stirpes: A & B = 1/3 share X & Z = split C’s 1/3 share for 1/6 each Estate Planning – 1 of 3

  11. Revoking a Will A testator can intentionally revoke a will. Wills can be revoked by remarriage or divorce in some states. This may cause partial intestacy for the property designated to the ex-spouse. Estate Planning – 1 of 3

  12. Avoiding Will Contests Will contests are initiated through the probate courts. • Pretermitted heir- a spouse or child not named in the will. • Elective share statute- wills cannot disinherit a spouse. The spouse is permitted to take a percentage of the decedent’s estate in lieu of property left to them in the will. Q&A in 2 slides Estate Planning – 1 of 3

  13. Intestacy State law determines the beneficiaries for property in the absence of a will or will substitutes. • Minor children receive equal shares of their parent’s property and take ownership at their state’s age of majority. • Community property states- all property in intestacy passes to the surviving spouse. • A decedent’s estate gets a marital deduction for the percentage of property the surviving spouse receives through intestacy. Q&A Next Slide Estate Planning – 1 of 3

  14. Incapacity Planning An incapacitated person is unable to make or communicate responsible decisions regarding their: • Health • Medical care • Personal care • Property • Legal and financial affairs. Q & A Estate Planning – 1 of 3

  15. Powers of Attorney A principal gives authority to an agent to make business, financial and/or legal decisions on the principal’s behalf. Powers of Attorney over property: • Non-durable POA- ceases when the principal becomes incapacitated or dies • Durable POA - the agent can represent the principal before and after incapacity occurs. • Springing durable POA- the agent cannot act until physicians certify that the principal is mentally incompetent Estate Planning – 1 of 3

  16. Advantages of a Durable POA • A Power of Attorney can be used without the stigma of a declaration of incompetency • The agent may only exercise those powers expressly contained in the document Estate Planning – 1 of 3

  17. Agent’s Authority The agent can: • Transfer the principal’s property into a trust • Run the principal’s business • Buy or sell assets • Make gifts Estate Planning – 1 of 3

  18. Disadvantages of a Durable POA • Agent cannot exercise a power that is not included in the document • The POA is binding when executed • The POA may not be recognized by banks or brokerage firms • The POA cannot be used after death to dispose of property omitted from a will Estate Planning – 1 of 3

  19. POA for Health Care • Health care proxy- grants an agent the power to make health care decisions for the principal • Principal can restrict the agent’s authority • Living wills are not Powers of Attorneys and are not recognized in all states Estate Planning – 1 of 3

  20. Standby Trust Is used to manage a person’s assets if they become incapacitated. 3 parties to a trust: • Grantor- creates a trust by transferring the legal title of the property to the Trustee • Trustee- manages trust property for the beneficiary • Beneficiary- has equitable title to trust property In a stand-by trust, the grantor is the Trustee and beneficiary Estate Planning – 1 of 3

  21. Funded Stand-by Trust Grantor is Trustee and beneficiary • Grantor transfers all property into the trust and manages it. • If grantor becomes incompetent, a successor trustee can manage trust assets without delay. • Financial institutions will recognize trustee’s authority to manage grantor’s property. • Trustee can continue to manage assets after grantor’s death. Q&A in 2 slides Estate Planning – 1 of 3

  22. Unfunded Stand-by Trust Agent of a durable Power of Attorney transfers grantor’s property into trust. • Trustee manages assets for the grantor/beneficiary. • Financial institutions may not honor the POA. • Possible delays and costs associated with transferring property to the trust. Q&A Next Slide Estate Planning – 1 of 3

  23. Fiduciaries Fiduciaries have the authority to perform special acts or duties for others. They can make decisions, carry out directives and manage a person’s property or affairs. • Fiduciaries must perform their duties with utmost care and loyalty towards the beneficiaries. • Fiduciaries can be sued for breach of fiduciary duties in civil court and in criminal court. Q & A Estate Planning – 1 of 3

  24. Types of Fiduciaries • Executor- is a decedent’s personal representative named in the will. The executor admits the will to probate, collects the decedent’s assets, determines asset values and distributes the assets to heirs with court supervision. • Trustee- manages trust property for beneficiaries • Guardian- protects the ward’s property interests and oversees their personal care Estate Planning – 1 of 3

  25. Guardianship A court-supervised arrangement to provide for an incompetent person’s care and to manage their property, in the absence of planning. Types of Guardianships: • Guardianship of the person- provides for the ward’s personal care • Guardianship of the estate- manages the ward’s property and financial affairs • Plenary guardianship- manages both property and personal care for the ward Estate Planning – 1 of 3

  26. Special Needs Trust Disabled individuals who receive Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI) and/or Medicaid need to maintain these cash benefits and the medical insurance they provide. • Income distributions from other trusts to disabled beneficiaries that exceed the government’s income cap for these programs adversely affect benefit amounts. • Special needs trusts preserve eligibility for government benefits and pay for extra services that are not covered by public assistance programs. Q&A in 2 slides Estate Planning – 1 of 3

  27. Benefits of Special Needs Trusts Cover extra services: • Medical expenses not covered by Medicaid • Supplemental attendant and custodial care • Additional therapies • Respite care for family caregivers Pay for: • Telephones • Computers and internet access • Cable TV • Basic household furnishings • Travel and a companion Q&A Next Slide Estate Planning – 1 of 3

  28. Medicaid Planning Medicaid is a joint federal and state entitlement program that pays for medical assistance to certain aged, disabled, and blind individuals, and provides benefits to families with low income and resources. • Individuals cannot have more than $2,000 in countable assets when applying for Medicaid long-term care services. • There is a 5-year “look back” penalty period for assets transferred to trusts, individuals or charities. States withhold Medicaid payments for nursing home care for a number of months, depending on the value of the property transferred. Q & A Estate Planning – 1 of 3

  29. Property Interests Sole Ownership: • Owner has complete lifetime and testamentary control over property • Income produced by the property is taxable to the owner • The FMV of the property is included in the owner’s gross estate and probate estate Estate Planning – 1 of 3

  30. JTWROS • Two or more joint tenants share equalownership • Property passes by Operation of Law • Property avoids probate • Income from the property or the proceeds of a sale must be split equally, or a gift is made to the other joint tenants Estate Planning – 1 of 3

  31. Disadvantages of JTWROS • Property can be terminated by one JT without the consent of other JT to form a Tenancy-in-Common. • Creditors can reach a joint tenant’s interest. Estate Planning – 1 of 3

  32. JTWROS with Spouses • 50% of the FMV of the property is included in the decedent spouse’s estate. • The property in the decedent’s estate will get a marital deduction to offset an estate tax. Estate Planning – 1 of 3

  33. JTWROS Estate Tax Gross Estate- 50% of JTWROS property Minus: expenses, debts, taxes, losses Adjusted Gross Estate Minus: marital deduction- 50% of JTWROS property Taxable Estate = 0

  34. Step-up Basis for Spouses The surviving spouse’s basis is not stepped-up to FMV Husband and wife bought a home for $40,000. Each has an original basis of $20,000. • At husband’s death the FMV of the home is $200,000 so $100,000 is included in his gross estate. • Wife inherits ½ of the home ($100,000) but her original basis is not stepped-up. • If she sells the home today her new basis is $120,000 and $80,000 is subject to capital gains tax before applying the exclusion. Estate Planning – 1 of 3

  35. Disadvantages of JTWROS with Spouses • If one spouse becomes incompetent, the other spouse does not have total access to the property without a durable POA or guardianship. • Decedent’s estate is “over-qualified” for the marital deduction. Decedent cannot use his unified credit to offset an estate tax. This may cause higher estate taxes at the surviving spouse’s death. Estate Planning – 1 of 3

  36. Marital Deduction Gross Estate- 50% of JTWROS property Minus: expenses, debts, taxes, losses Adjusted Gross Estate Minus: marital deduction- 50% of JTWROS property Taxable Estate = 0 Estate tax unified credit- not used Federal Estate Tax payable = 0

  37. Basis Rules for Non-spouses Property can be held as JTWROS with non-spouses. • The amount included in a JT’s gross estate is based on their proportional contribution when the property was acquired • The amount in the gross estate gets a complete step-up in basis at the decedent’s death. Estate Planning – 1 of 3

  38. Stepped-up Basis Example 1 A mother buys property and titles it JTWROS with her son. • The FMV of the property is included in her gross estate at death since she paid for it. • The son will receive a full step-up in basis for the FMV of the property. • Mother made a gift of 50% of the FMV of the property when she titled the deed JTWROS Estate Planning – 1 of 3

  39. Step-up Basis Example 2 Jim and Bob buy land together for $100,000. Jim pays $80,000 and Bob pays $20,000. • At Jim’s death the FMV of the property is $200,000. Therefore 80% or $160,000 is included in Jim’s gross estate. • Bob will inherit Jim’s property worth $160,000. • Bob will add the $160,000 to his original basis of $20,000 for a new basis of $180,000. Q&A in 2 slides Estate Planning – 1 of 3

  40. Tenancy by the Entirety Property owned by a husband and wife • The property passes to the surviving spouse by Operation of Law. • 50% of the property is included in the decedent’s gross estate, which gets a marital deduction and a step-up in basis. • A spouse must have the consent of the other spouse to terminate ownership or convert the title to sole ownership or a Tenancy in Common. • Property cannot be attached by creditors to satisfy individual debts, but property may be attached by the couple’s joint creditors. Q&A Next Slide Estate Planning – 1 of 3

  41. Tenancy in Common • Owners can have unequal ownership. • Each tenant owns a separate, fractional interest which is included in the decedent’s estate. • Property interests can be sold, gifted, or transferred at death, and income is based on ownership share. • Property interests pass through a will. • Property goes through probate. • Gifts occur if other property is converted to a Tenancy in Common or if income is divided disproportionately. Q & A Estate Planning – 1 of 3

  42. Community Property States • Texas • Louisiana • Nevada • New Mexico • Alaska Quasi-Community Property States: • California • Idaho • Arizona • Washington • Wisconsin Estate Planning – 1 of 3

  43. Community Property Interests • Income earned by spouses after marriage • Income earned by one spouse after marriage • Separate property commingled with community property assets • Property acquired during marriage but titled in one spouse’s name • Appreciation of separately owned property due to the contributions of the non-owner spouse Estate Planning – 1 of 3

  44. Not Community Property • Property owned by spouses prior to marriage • Income earned on the spouse’s separately owned assets • Separate property used to acquire other property during marriage • Property received as a gift for one spouse • Property inherited by one spouse • Spousal agreements- property acquired after marriage can become separate property Estate Planning – 1 of 3

  45. Characteristics of Community Property • Each spouse has a vested interest in one-half of the property acquired during marriage, which is divided equally at divorce or death. • A Will is needed to bequeath property to a spouse or a 3rd party, or the property goes through intestacy. • Community property outside a trust goes through probate. Estate Planning – 1 of 3

  46. Estate Tax for Community Property • 50% of community property is included in the decedent’s gross estate and receives a marital deduction if bequeathed to the surviving spouse. • 100% of the property gets stepped-up to FMV at the spouse’s death. Estate Planning – 1 of 3

  47. Step-Up in Basis The surviving spouse’s basis is stepped-up to FMV Husband and wife bought a home for $100,000. Home is worth $800,000 at wife’s death. • $400,000 is included in wife’s gross estate • Husband inherits ½ of home worth $400,000 • Husband’s original basis of $50,000 is stepped-up to $400,000 • Husband owns 100% of home with a new basis of $800,000 Estate Planning – 1 of 3

  48. Moving Rules • The character of the property acquired in a community or a quasi-community property state does not change when a married couple moves to a common law state. Example: A couple sells a home in Nevada and buys a new home in NY with proceeds from the sale. The property is community property in NY. II. The character of the property acquired in a common-law state does not change when a married couple moves to a community property state. Example: A couple sells a home in Vermont. The sale proceeds are separate property. When they move to Texas and buy a new home, it is not community property. Estate Planning – 1 of 3

  49. Quasi-Community Property • Property initially acquired by spouses in a common law state that is treated as community property when the couple moves to certain community property states: California, Arizona, Idaho, Washington, and Wisconsin. • Quasi-Community Property is an exceptionto the moving rule. Estate Planning – 1 of 3

  50. Moving to Quasi-Community Property States Property acquired in a common law state is treated as community property if: The property could have been classified as “community property” when it was originally acquired. *Look back to see how the property was initially acquired. Q&A in 2 slides Estate Planning – 1 of 3