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Estate Planning

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your worldly possessions and financial wealth less any debts you owe.

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Estate Planning

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Estate Planning: definite arrangements made during your lifetime that are consistent with your wishes for the administration, disposition, and transfer of your wealth and worldly possess

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Estate Tax Planning

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using techniques to reduce estate taxes by: 1. Transfer of assets to reduce a persons taxable assets or 2. Replacement of assets that are loss to taxes through the purchase of insurance.

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Objectives of Estate Planning

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1. Distribute property 2. Provide for dependents 3. Select guardians for minors 4. Minimize estate and inheritance taxes 5. Minimize settlement costs, including legal and accounting fees 6. Appoint power of attorney in case of physical or mental impairment

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How Your Estate is Transferred

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1. Testate - Deceased had a valid will. Court probates (proof) the will and puts legatee in legal possession. 2. Intestate No will, will not valid, or property is not covered by will or by contract. Property transfers to heirs by operation of law. 3. By Pass Contracts & Beneficiary designations, Titling

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How Your Estate is Transferred cont.

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1.Probate Court: special court specifically charged to conduct the distribution of assets of people who have died. -Probate court-supervised process that allows creditors to present claims against an estate and ensures the transfer of a decedent's assets to the rightful beneficiaries.-Succession (in LA) No special court. Handled in district court where the deceased person was domiciled or had physical (real) property.

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Nonprobate property

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property that does not go through probate.

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Nonprobate property consist of...

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1. Contracts & Beneficiary designations -IRAs and Insurance products (life and annuity) -Trusts - income and principal beneficiaries. 2. Titling -Bank accounts - Joint ownership (Tenants in Common, Tenants by Entirety, & Joint Tenants), JTROS, TOD, POD.

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Ways to Avoid Probate

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Joint ownership Gifts Name beneficiaries in contract Trust

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Joint ownership

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-tenancy by the entirety -joint tenancy with the right of survivorship -tenancy in common -- will controls distribution of deceased's share -community property -- state law and will control distribution of the property

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Gifts

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-Exception for life insurance policies -Unlimited gift tax exclusion on payments made for medical and educational expenses Charities

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Trust

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Trusts Living -- take effect before death Testamentary -- take effect upon death

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Transfer Your Estate by Contracts

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Beneficiary contract Property Ownership Contract Joint Tenancy Payable at Death Contract

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Beneficiary

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A person or organization designated to receive a benefit.

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Beneficiary designation

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legal form signed by the owner of an asset providing that the property goes to a certain person or organization in the event of the owners death

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Contingent (or Secondary) Beneficiary

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The beneficiary in case the first-named beneficiary has died.

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Joint Tenancy with Right of Survivorship (or Joint Tenancy):

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each person owns the whole of the asset, and can dispose of it without the approval of the other owner.

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Transfers by payable-at-death contract designation Payable-at-Death Designation:

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status granted to individuals who are not joint tenants and who might need to access accounts without going through probate.

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Testator, Codicil, Executor

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Testator: writer of a will and owner of the estate. Codicil: legal instrument with which one can make minor changes to a will. Executor (or Personal Representative): Person responsible for carrying out the provisions of a will and managing the assets until the estate is passed on to heirs.

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Purposes of the probate process

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-appoint an executor, if one is not named -validate the will -allow for challenges to the will -oversee the distribution of assets -file a report with the court and close the estate

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Disadvantages of the probate process

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-Numerous costs and fees - legal fees, executor fees, court fees - that can run to 1% to 8% of the estate value -Process can be slow, especially if there are challenges to the will or tax problems -In LA, these disadvantages are minimal.

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Why Do You Need a Will?

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So state law will not dictate the distribution of your assets custody of children or care for those with special needs

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Why Do You Need a Will?.

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To avoid a court-appointed administrator and associated costs In LA, you can petition for Independent Administration. Does not require court approval for decisions for the succession.

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The Basics of Writing a Will

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-Wills can be handwritten, computer generated, or oral -The safest way is to have a will drawn up by a lawyer -Wills must be signed, witnessed by 2 or more people, and notarized -Wills should be stored in a safe place; however, a safety deposit box is not always a good place because it may be sealed upon your death. Note: Always tell someone you trust where your will is so it can be found upon your death.

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The Basic Organization of a Will

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Introductory statement Payment of debt and taxes clause Disposition of property clause Appointment clause Common disaster clause Attestation and witness clause

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Requirements of a Valid Will

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-Mental competence -Under no undue influence from another person -Will must conform to the state laws In LA, 2 types of will are valid. Notarial & Olographic (or Holographic)

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Notarial

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Typed, signed by maker, witnesses, and notary. No other writing.

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Olographic (or Holographic)

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Written in maker's own hand-writing, dated, and signed by maker.

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Updating or Changing Your Will -- The Codicil

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-Institutes minor changes in the original will -Must be signed, witnessed, and attached to the original will -Note: If the changes are major then a new will should be drafted.

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Letter of Last Instruction

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Not a legally binding agreement Provides information and direction, Including the location of your will Lists the people to be notified of your death Lists the location of all pertinent legal documents Contains funeral and burial instructions

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The Duties of an Executor

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Ensures that the deceased's wishes are carried out Sends copies of the will to all beneficiaries Publishes the death notice Pays debts and liabilities on behalf of the estate Manages the deceased's property until the will is executed and the estate closed

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Trusts

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Grantor (or Settler, Donor or Trustor) Trustee Corpus (principal) Beneficiary (income) Remainder Beneficiaries (principal)

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Tust, Grantor, Trustee

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-Trust: legal arrangement between you as the creator of the trust and the trustee, the person designated to manage any assets in the trust. -Used to transfer assets and reduce estate taxes; also used to manage the assets of someone that can't do it themselves. -Grantor (or Settler, Donor, or Trustor): creator of a trust. -Trustee: Person charged with carrying out the trust for the benefit of the grantor(s) and heirs.

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Types of Trust

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-Living Trust: a trust that takes effect while the grantor is still alive. -Inver vivos (during life) trust -Testamentary Trust: become effective upon the death of the grantor according to the terms of the grantor's will or a revocable living trust. Typically in a person's will.

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Living Trusts

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Revocable trust Irrevocable living trusts

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Revocable Trusts

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Grantor maintains the right to change the trust's terms or cancel it at any time, for any reason, during his or her lifetime. Allow for unlimited control by the trust's owner, because the owner retains title to all the assets in the trust. Do not provide any tax advantages. Do not pass through probate. Provide greater ease and privacy of distribution upon death.

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Irrevocable Living Trusts

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Arrangement in which the grantor permanently gives up ownership and the right to control of the property, to change the beneficiaries, and to change the trustees. Can not be changed by the owner once established, because the trust becomes another entity which owns all the assets contained in the trust. Are not subject to estate taxes. Do not pass through probate.

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Testamentary trusts

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-Standard family trusts -Qualified terminable interest property (Q-TIP) trusts -Sprinkling trusts

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The Benefits of Using Trusts for Estate Transfer

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-Avoid probate -Are much more difficult to challenge in court than are wills -Reduce estate taxes -Allow for professional management -Provide for confidentiality -Can be used to provide for children with special needs Can be used to hold money until a child reaches maturity -Can assure that children from a previous marriage will receive some inheritance

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Sprinkling Trusts

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Distributes assets on a need basis rather than according to some preset plan to a designated group of beneficiaries.

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Estate Rights

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-Spouses have legal rights to each other's estates (common law). -Partnership Theory of Marriage Rights: Presumes that wedded couples intend to share their fortunes equally.

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Community Property Laws

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-assume that the surviving spouse owns half of everything that both partners earned during the marriage. -consists of property acquired during marriage, except for separable property.

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Estate Right (Usufrautuary)

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Spouses do not inherit in civil law jurisdictions, such as LA, if there are surviving children. The surviving spouse (Usufructuary) receives a usufruct over community assets. The surviving children receive the naked ownership. Usufruct happens by operation of law or by will.

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Separate Property

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a property wholly owned by the one spouse. Assets that are acquired prior to marriage. Inheritance; however, earnings from inheritance are considered community property unless a reservation is made. Insurance and lawsuit settlements.

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Other Estate -- Planning Documents

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Prepare advance directive documents in case you become incapacitated! -Durable power of attorney (POA) -Living will -Health care proxy or POA

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Duarable Power of Attorney

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A document in which you appoint someone, called an attorney-in-fact, to handle your legal or business matters and sign his or her name to documents in the event you should become mentally or physically incapacitated. This document is separate from the will and goes into effect before death. Lapses upon the persons death. This document should be very specific as to which legal powers it transfers. Rights regarding real property (real estate) has to be specifically given, can't be general. Limited (or Special) Power of Attorney: narrower in scope and could be restricted to one specified act or a certain time period. Springing Power of Attorney: "jumps" into effect when a specified event occurs.

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Living Will

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A living will states your wishes regarding medical treatment in the event of a terminal illness or injury with no hope of survival and unable to express your wishes. In LA, called declaration. Based on Terry Schiavo case in Florida. Requires 2 doctors to say a person is terminal. No life sustaining measures will be taken.

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Health Care Proxy

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A health care proxy designates someone to make health care decisions should you be unable to do so for yourself.

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The Estate Planning Process

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Step 1: Determine what your estate is worth. Estate net worth = value of estate's assets - value of estate liabilities Step 2: Choose your heirs and decide what they receive. Step 3: Determine the cash needs of the estate. Liquid assets are needed to pay estate taxes Step 4: Select and implement your estate planning techniques.

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Understanding and Avoiding Estate Taxes

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Estate taxes Gift taxes Unlimited marital deduction The generation-skipping tax Calculating estate taxes

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Federal Estate Tax (Estate & Inheritance Taxes)

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Assessed against a deceased person's estate before property is transferred to heirs or assigned according to terms of a will or state intestacy laws.

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Exclusion Amount (Estate & Inheritance Taxes)

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Exclusion Amount: The value of assets that may be transferred to heirs without incurring an estate tax. The first $2.25 million of a taxable estate is exempt from the federal estate tax

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Gift Tax

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-An individual can give $14,000 ($28,000 per couple) per year tax-free to an unlimited number of people. -The $14,000 amount will be indexed to inflation, but only in $1,000 increments. -Gifts in excess of the limit are nontax-exempt.

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Unlimited Marital Deduction

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-There is no limit on the value of an estate that can be passed tax-free to a spouse who is a U.S. citizen. -Unlimited marital deduction does not apply to non-U.S. citizen spouses. -Tax-free gift per year to non-citizen spouses is $143,000, beyond the tax-free transfer threshold.

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The Generation-Skipping Tax

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Flat 40% tax, in addition to the regular estate tax, imposed on any wealth or property transfers to a person 2 or more generations younger than the donor (i.e. grandchildren). --More than 37.5 years younger than donor if unrelated. --Direct transfers and transfers to trust.

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The Generation-Skipping Tax Exemptionss

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-$14,000 gift tax exclusion as well as education and medical expense gift tax exclusions apply -Exemption of $5.25 million per individual ($10.5 million per couple) may be passed on to grandchildren. -Use dynasty trust. In some states (such as LA), this may not be an option as trust laws do not allow trusts into perpetuity.

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Calculating Your Estate Taxes

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Step 1: Calculate the value of the gross estate Step 2: Calculate your taxable estate Step 3: Calculate your gift-adjusted taxable estate Step 4: Calculate your estate taxes

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The Top 3 Financial Missteps In Estate Planning

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People slip up in investing in estate planning when they do the following: 1. Not having a will. 2. Not having signed advance directive documents. 3. Forgetting to update forms you have signed that contractually award assets, like life insurance and retirement and checking accounts, to ex-spouses, parents, siblings and others because those instructions override your will.

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Good Money Habits in Estate Planning

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-Every three years or whenever you family situation changes, review the beneficiary and ownership designations in your life on insurance policies, retirement plans, bank accounts, and other assets to make certain they will transfer the property according to your wishes. -Always have both an up-to-date will and a letter of last instructions, and revise them as major life events occur.

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Good Money Habits in Estate Planning

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Prepare and regularly update advance directive documents so others can make the right decisions for you if you become incapacitated. Once a year, discuss with your spouse or significant other your family's financial and estate plans. Be positive that certain family members or friends know where you keep financial records, advance directives, your will, and an estate planning checklist.

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