Estate Planning

Checking your estate plan

Downloads for estate planning

Each year the Congress passes new laws, the IRS issues new rulings, etc. all of which affects your estate plan. Checking your estate plan yearly is a good idea to retain the benefits of your planning and to take advantage of new opportunities. Recent tax changes have brought forth diverse and complex tax law changes that may impact a number of areas within a person's financial plan. Estate planning is primarily about controlling personal assets while passing them to heirs in the most efficient manner possible, however most people would associate this solely with not paying or minimizing the estate tax. For this very reason, it may be beneficial for an individual to review their estate plan currently in place to insure they are able to fully take advantage of all of the tax law changes.

Click here to see some of the benefits of checking your estate plan.

Living trusts are powerful estate planning tools that can help many people and provide certain advantages that are not available with other estate planning devices. Technically, living trusts are "revocable inter vivos" trusts. If a trust is "revocable," the person who establishes the trust can change all or any part of the trust, so long as that person is competent. "Inter vivos" is Latin for "during life." Assets owned by living trusts generally are not included as part of the probate process at death. Probate is the court proceeding by which a deceased person's assets are gathered and distributed to his or her beneficiaries.

For more on Living Trusts, Click Here.

Despite the divorce statistics, married life is still a respected and fundamental institution of our society. There are 1,138 specific benefits tied to the word marriage in the tax codes. Marriage even receives favorable treatment under the tax code after death. Generally, an estate may claim an unlimited deduction for the value of all property that passes from a decedent to the surviving spouse upon death. So, a basic "I love you" will, where all property is left to the spouse outright upon death, allows the estate to pay no tax.

Several states are now recognizing or on their way to recognizing the rights of same sex couples to marriage or some form of civil equivalent like Vermont's civil union. Unfortunately This does not cover all the loss of legal protections and benefits by not just using the word marriage. Still, there are actions you can take to protect your loved one and insure that your property passes to them.

For more on estate planning for same sex or non traditional couples, click here

However, there is no marital deduction allowed for the estate of a U.S. resident who leaves property outright to a surviving spouse who is not an American citizen. Congress has provided a couple of ways for deceased Americans to transfer property to their alien spouses. One such way includes using up their unified credit. If the decedent was a U.S. citizen or resident, the estate can still qualify for the unified credit exemption equivalent ($1,500,000 in 2005) allowing up to this amount to be passed tax-free even to a non-U.S. citizen spouse.

Congress has also provided Internal Revenue Code Section 2056A that allows a marital deduction for property placed into a special trust for the benefit of the non-citizen spouse called the Qualified Domestic Trust (QDOT). The IRS section does require that there are safeguards to ensure that the trust property (if not used up by the alien survivor) is eventually subjected to the U.S. estate tax. For more on Alien Spouse Trusts (QDOT) Click Here

Rabbi, Secular, Rabbicular Trusts and more

One of the most popular strategies for protecting non-qualified deferred compensation is the Rabbi Trust. A rabbi trust is an irrevocable trust used to fund deferred compensation benefits for key employees. It is often used to hold certain amounts of an employee's pay until an agreed upon date gives the employee the right to the funds and as a vehicle for providing long-term stock ownership incentives to motivate and retain key executives as well as a means for deferring taxable income. A key negative to the Rabbi Trust is that in order for the value of the assets to not be taxable to the recipient they have to be part of the corporation's assets and are available to pay off creditors in case of a bankruptcy. A secular Trust is similar in that it holds the assets safe but different in that it protects against a bankruptcy, however the assets in trust are taxable to the employee. Rabbicular trusts are Rabbi Trusts that have provisions to convert to a secular trust in certain events before a bankruptcy (loss of a key client, stock going below a set price, etc.) There are other ways to protect the assets of a Rabbi Trust as well.Click here for more information on Rabbi Trusts, Secular Trusts, Rabbicular Trusts, etc.

There are many different ways in which to donate to a charity. One way, Pooled Income Funds,(click here) are sort of a cross between Charitable Remainder Trusts (click here) and mutual funds. In general, pooled income funds and charitable remainder trusts are vehicles through which a donation of cash or appreciated property can be made to a charity in exchange for a life income interest. In this way, a pooled income fund is very similar to a charitable remainder trust. Also, like a charitable remainder trust, the tax deduction for the contribution is based on an actuarial computation of the charity's remainder interest.Click Here for more on Pooled Income Funds. For more on Charitable Trusts, Click Here.

Most financial advisors endorse the idea of owning sufficient life insurance to supply necessary funds to provide for the comfort and support of the family and to pay estate debts and taxes. Too often, however, life insurance planning ends once an adequate amount of life insurance has been purchased. The question of what will happen to the insurance proceeds after death is seldom considered. Acquiring sufficient life insurance coverage should be only the first step to be taken in estate and life insurance planning.

The second step, and often most important, is providing for the disposition of those insurance proceeds after death. It is quite possible that a surviving spouse, children, grandchildren, or other persons whose financial security is important may be dealing with such large sums of money for the first time. Given the dollars that are frequently represented by insurance payouts, will they know how to invest such amounts wisely? It is possible, through inexperience or lack of proper guidance, they may make costly errors that will adversely affect the financial security so carefully planned. Those who are not sure of the answers to these questions should seriously consider the creation of a Life Insurance trust. For More Information on Life Insurance Trusts Click Here

An irrevocable trust is a trust created, generally speaking, during the lifetime of an individual that cannot be changed, modified or terminated by that individual. The individual is commonly called the grantor, which is another name for someone who creates and funds his or her own trust. The grantor, upon funding the trust, actually transfers legal title to the property placed into the trust to the trustee. The trustee is the individual or party responsible for administering the property for the benefit of the trust's beneficiary. In other words, the trustee is responsible for taking care of the property transferred to the trust for the individual beneficiaries the trust was set up to benefit. For more information on Irrevocable Trusts, Click Here

Combining these two is the Irrevocable Life Insurance Trust; a unique trust keeps proceeds from a life insurance policy out of donor's estate and provides beneficiaries with liquidity to pay estate taxes. Its major Advantages are in it's estate tax advantages. and generation-skipping tax advantages. Its major disadvantages include possible gift and estate taxes if there is not sufficient advanced planning, and death benefits paid within 3 years of date policy transferred to trust included in donor's estate. For More Information on Life Insurance Trusts Click Here

The "family home" has long been an asset passed from generation to generation among the wealthy. Yet with estate tax rates a potential hazard and such homesteads appreciating over time, the ultimate taxes due on such family transfers may become a concern. A Qualified Personal Residence Trust (QPRT) may be just the estate planning technique to keep the home in the family at a possibly cheaper tax cost. For More Information on Qualified Personal Residence Trusts Click Here

Many have never heard of a Crummey trust. Don't worry; it's not as bad as it sounds. They're named after an individual involved in a court case establishing their guidelines . . . not their usefulness. Crummey trusts can actually be quite effective in helping investors achieve estate-planning goals. For starters, the federal government allows a donor to transfer a present-interest gift of $11,000 per donee per year (the annual exclusion) free of gift tax. "Present interest" means that the donee must have the right to present use of the corpus. Transfers to trusts that would not ordinarily qualify for the $11,000 per donee exclusion because a trust gives a beneficiary the right to future, not present, use of the assets are allowed with a Crummey trust. Crummey trusts permit $11,000 to be counted as a present-interest gift if the beneficiaries of the trust are given annual notices allowing a 30-day window to withdraw their portion of the principal of the trust. For more information on Crummey Trusts, Click Here

Another trust you may not have heard of is the Qualified Terminal Interest Property Trust (QTIP Trust). This is a "marital deduction trust" often used by remarried individuals; it allows the donor to provide income to second spouse while preserving assets for children of first spouse. Its major advantages include the control of assets after death, and it provides for spouse and children from a different marriage; but its single biggest disadvantage is that the assets are taxed in estate of surviving spouse.

The Credit Shelter Trust is created under a living trust or by will; it reduces estate taxes at death of surviving spouse, provides for both surviving spouse and heirs through use of unified estate and gift tax credit. It's major advantage is that up to $1.2 million can pass tax-free to heirs. while its major disadvantage is that it may not provide sufficient income for surviving spouse.

The Family Partnership is an often overlooked planning technique with some important advantages, and it is a technique frequently used as a means of shifting income from parents to children or other family members. It may also be used to "freeze" the value of an individual's estate by shifting future growth in various assets to other family members. In addition, it is also often used to fractionalize the individual's interest in business assets or real estate to create valuation discounts. For more information on Family Partnerships, Click Here

Top Ten Estate Planning Mistakes

When beginning to plan for leaving their property to heirs, people are confronted and frightened by the high estate tax rates and rush to utilize sophisticated estate planning techniques to avoid them. Yet, there are some simple moves that can frustrate these elaborate plans and are easily avoided. Here are some of the common mistakes to watch out for.

Understanding and avoiding these mistakes can make sure that your wishes can be fulfilled and minimize the tax bite for your heirs. Be sure to work with an experienced financial planner or other professional to help you achieve your estate planning goals

Putting Your Final Affairs in Order

In the event of your death, have you considered the choices that must be made concerning your final affairs? How can you ensure that these decisions will be consistent with your wishes? Did you know, that if die without executing a will your affairs will be settled based on a will that is drafted by the government? Death is a topic that most individuals are uncomfortable talking about. But, with a little planning, you can maintain control and ensure that your estate will be settled consistent with your wishes.

The following documents should be considered:

Purchase enough life insurance to ensure your family will be taken care of. How much you need depends on your age, your assets, how many years you want to provide for your family and your current lifestyle. It is best to consult a financial advisor or insurance agent to determine the proper coverage for your particular situation.

Maintain a relationship with a lawyer, an accountant, and a financial advisor. It's much easier to deal with unexpected problems when a professional knows your situation ahead of time. Experts can also provide you with timely advice, such as whether you need a trust to protect your assets from taxes.

For Richer Or Poorer

Every spousal financial relationship is unique. Through the years, couples develop their own systems for handling financial matters. Sometimes it is one partner's responsibility to manage all finances, sometimes the other's and sometimes a combination. Whatever the situation, certain information should be shared.

Couples should consider mutual responsibility for and knowledge of:

Retirement plans: Take time to fully acquaint each other with employer retirement benefits. Both partners should have current knowledge of pension plans, 401(k) accounts and IRAs. For a complete picture of expected retirement benefits, become familiar with each other's Social Security benefits, as well. Understanding retirement benefit information will bring clarify and facilitate retirement planning.

Credit card documents: This one can be scary. Some may prefer to not know how much credit card debt their spouse has accumulated. But it's wise to know where to find account numbers in case one loses his or her wallet and needs the other to help cancel the card. Also, mutual awareness of credit card debt amounts will help with developing a family's overall financial plan.

Power of attorney: It is generally a good idea to have power of attorney on any individually owned assets, just in case one becomes ill or otherwise unavailable. Power of attorney can be limited to specific functions for a certain period, such as selling stocks or withdrawing money while traveling. A broad document that authorizes each partner to handle almost any situation in the other's absence is also a consideration.

Wills, trusts and life insurance: It's especially important to share information about wills, trusts and life insurance if either has been married before. There could be restrictions on how some assets may be used and beneficiaries left unchanged by mistake. Most important, make sure each partner knows where to find wills and will be able to easily access it if something were to happen.

Health insurance policies: Most insurance companies will cover care administered in the first 24 to 48 hours of a medical emergency, even if the coverage details have not been sorted out. But the situation isn't as clear with hospital visits that are less urgent. If each partner is covered under a different insurance plan, both should be familiarized with the requirement "hoops" they may have to jump through.

Business loans: If one spouse owns a business or is a partner in a professional firm, both should know about any personally guaranteed loans. It is critical to be aware of liabilities since household assets can be hit if the business can't repay the loan.

While many don't necessarily need to know everything about their spouse's finances, maintaining a working knowledge of the above points can help maintain proper, balanced control over a family's financial affairs.

Executor Choices

Death is a topic that most people are uncomfortable thinking about. But we should ideally address this topic in a proactive manner because it may involve passing assets to our family. In order to maximize the benefits for your family, the following questions must be considered: Who's going to carry out your final wishes when you're gone? What qualities must a person have to effectively carry out the responsibilities of an executor? How do I appoint someone to be the executor of my estate?

One of the major benefits of a will is that you can name your estate's executor. Your executor will have the responsibility of taking your estate through probate court, gathering your assets, paying off your estates debts and distributing the remaining assets to your heirs as you instructed in your will.

The ideal executor would be part lawyer, accountant, financial advisor and psychologist. Few people can provide expertise in all these areas so your executor should be willing to work with people who can. In the event that your executor insists on doing everything "solo," the results could be disastrous for your heirs.

It is important that you choose someone who can communicate with your heirs in clear, non-technical language. You should feel comfortable in knowing that you can have complete faith in your executor's competence and integrity in carrying out your wishes.

If you haven't named an executor or you have decided to name someone else, now is the best time to update your will. Planning for disposition of your property after you are gone is a privilege and a responsibility. Often your family's financial security and future happiness may be dependent upon how efficiently your assets are transferred. Efficiently disposing of your property by means of a will requires the selection of a competent and trustworthy executor. Too many people delegate and accept this responsibility based on friendship or family.

When deciding whom to choose as the executor of an estate, it is important to understand the duties of this position to find a qualified person for the task. Here is a partial list of these duties:

These tasks demand financial responsibility, investment expertise, business aptitude, knowledge of accounting, as well as integrity and resourcefulness. An inexperienced executor not equal to the task could make some costly mistakes and destroy an estate plan. Executors are also held accountable as fiduciaries, a provision that will hopefully never need to be addressed.

The selection of a trusted family member or friend may prove sufficient in smaller, less complicated estates. Yet, with larger, more elaborate estates with existing estate plans, the presence of a professional can prove invaluable. A professional executor can provide experience and expertise to efficiently complete the estate settlement process. Of course, the consultation of an attorney or other professional is recommended to help decide which option is best for a particular situation.

The Dreaded Probate Process

Many people hear the word probate and immediately think of negative connotations. However, the decision to purposely avoid probate has become more complex in recent years due to the establishment of a Uniform Probate Code and there are many factors, some positive and some negative, to consider when deciding whether to structure your estate to entirely avoid probate.

Probate has come to mean the entire court process by which the state supervises the orderly distribution of a decedent's probate property. Many people choose to avoid the drawbacks of probate through the use of joint tenancy or a living trust. Let's look at some of the advantages and disadvantages of the probate process.

One benefit of probate is court supervision which can promote fairness through the process. Judges and official clerks are called on to approve major estate activities. Probate also allows for an orderly administration of assets (important for the large number of people who die without a will) and greater protection from creditors. Probate procedures typically require creditors to formally file their claims against probate assets within a certain period of time, such as four months from date of issuance of letters testamentary. Failure to timely file a creditor's claim can forever bar collection from those assets.

There are several drawbacks to probate that must be carefully considered. First, probate can be a complex process requiring petitions, accountings, hearings, and other complicated legal procedures. Most people do not understand their purpose or their operation, and are forced to hire specialists to meet their requirements. The cost of legal supervision under probate can be high. Studies have found that total probate administration expenses range between about 2 and 10% of gross estate assets. These expenses include personal representatives' fees and attorneys' fees. However, contrary to popular belief, probate does not increase estate taxes.

Next, as most of us have heard, probate entails a lack of privacy. Probate is a public process and all probate proceedings are subject to public scrutiny. This is a major concern for many people who wish to keep their affairs private. And lastly, even for smaller estates, probate administration takes considerable time, ranging from nine months to several years before final distribution is made. However, you should know that there has been a trend in recent years for states to use the Uniform Probate Code (UPC). If you live in a state using the UPC, your probate costs and time delays may be significantly reduced.

Of course, this brief article is no substitute for a careful consideration of how to best structure your estate with an experienced estate planning attorney and your financial planner.

Articles

Here's a way to save taxes by simply "playing 'possum." No, I don't mean that there's some tax benefit in wandering out at night into the middle of a well-traveled highway. Actually, I'm referring to the opossum's defense mechanism of "playing dead" in an attempt to fool predators. The use of a "qualified disclaimer" can be useful in keeping the predatory IRS from feasting on your family's wealth. A qualified disclaimer is a device that can be used in postmortem estate planning. Although it does seem like an oxymoron, postmortem estate planning is not only possible, it is often beneficial For more on Qualified Disclaimers click here

People of all shapes and sizes are establishing trusts. Credit shelter trusts, marital trusts, generation skipping trusts, life insurance trusts, charitable remainder trusts and living trusts, are just a few examples of the types of trusts that are in use today. All of these trusts have at least one thing in common--you need a trustee for all of them. The trustee plays an absolutely critical role in whether the trust will be successful. The question is, who should be the trustee? For more on Trustee choice click here

Any good estate planner will tell you that there's no time like the present to consider a program of gifts to loved ones as part of an over-all estate plan. Before embarking on a program of gift giving, it pays to know some of the basic rules of federal gift taxation. For more on Gift Giving as part of estate planning click here

Durable powers of attorney are very useful tools when planning for the possibility of a physical or mental incapacity. Durable powers of attorney allow for the management of one's financial affairs or the making of medical decisions in spite of an incapacity. For more on Durable Powers of Attorney click here

The Mellons, the Fords, Rockefellers, Gettys and lots of other "old money, carriage trade" families have them. Now you can too. Have what? A private foundation. Private foundations are charitable entities created by an individual or family. They are private because they do not solicit contributions from the public. There are two general types of family foundations: operating and non-operating. Operating foundations carry on specific charitable work (e.g., the Jones Home for Battered Children). Most people select non-operating foundations which make cash grants to individuals and organizations as the means of carrying out its charitable purpose. For more on Private Foundations click here

Prior to the Taxpayer Relief Act of 1997, minor estate tax provisions benefited a family-owned business in a decedent's estate. Now, effective for estates of individuals dying after December 31, 1997, an estate tax deduction exists for a qualified family-held business. This deduction is designed to help prevent the liquidation of family-held farms and businesses in order to meet the estate taxes due. For more on the Family-Owned-Business deduction click here.

Wanting to pass on personal property quickly and efficiently to a loved one is a goal common to many. Perhaps you wish to guarantee that your grandchild will inherit the vacation home. Or perhaps you want your brokerage account to pass to your son or daughter, avoiding the probate process completely. In both cases, a common choice is the use of joint ownership with the right of survivorship (JTWROS). At first glance, JTWROS property may seem like a good way to accomplish your goals, but before you use this common solution, consider some potential risks.

One clear and popular benefit of using joint tenancy with rights of survivorship is that upon one owner's death, his or her share is automatically transferred to the surviving owner(s) free of the cost and delay of probate. What may be less popular if understood, however, is that JTWROS property gives each owner an equal "undivided interest" in the entire property. For more on Joint Property click here.

Calculating the step-up in basis of investments at death is usually not that difficult. All individually owned capital assets included in a deceased person's estate receive a new cost basis, generally valued as of the date of death. However, jointly owned property can be trickier.

First, let's cover the step-up in basis of property held between husband and wife in joint tenant with right of survivorship form, which also applies to tenants by the entirety. When the only joint tenants are husband and wife, half of the fair market value at date of death is included in the decedent's estate and the surviving spouse's new basis will equal half the total pre-death basis and half the fair market value at date of death. For more on calculating the basis for property at death click here

Can investors with a large capital gain maintain their investment and receive a full step-up in cost basis? There is one technique that may be applied, however, it unfortunately requires a dire occurrence. When an individual gifts an appreciated investment to another person, the recipient can bequeath the investment back upon the their death. The result of playing "hot potato" with the appreciated investment is a full step-up in the cost basis.

Many issues surround this technique. First, there are gift tax issues if the recipient is not the donor's spouse. And, a step-up in cost basis is not allowed if the recipient dies within one year of receiving the gift and bequeathing it back to the original donor. This is called the Rubber Band Rule. For more on the "Rubber Band" rule and cost basis for gifts click here.