What is it and why do we do it?
You spend your entire life creating wealth.
The more wealth you create the more unhappy the people you leave behind
will be without the proper estate planning. Estate planning allows you
to decide while you are alive how your assets will be distributed. It
also allows you to protect your heirs from unanticipated devastating expenses
ranging from debts to taxes to administrative fees. Court and probate
records show 75% of all estates do not have the necessary cash to pay
for these expenses. Heirs are forced to quickly liquidate assets such
as homes and businesses to pay these expenses, often at a fraction of
their real value. If people didn't care about taking care of loved ones
after they're gone, no one would bother completing an estate plan.
Our discussion will explore:
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Wills
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Executors
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Probate
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Estate Taxes
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Trusts
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Life Insurance
The material presented on our web site may contain concepts that have
legal, accounting and tax implications. It is not intended to provide
legal, accounting or tax advice, you may wish to consult a competent attorney,
tax advisor, or accountant.
Wills
Everyone who is concerned how their assets
will be divided should at the very least have a current and valid will.
The will should:
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Provide a description of your assets.
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Provide for the distribution of your assets to your heirs.
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Name an executor.
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Name a guardian for your children.
Wills are simple to create. Though you
should always have it done by a qualified attorney, many courts have accepted
simple handwritten wills drawn up without any legal counsel. Some states
even accept oral wills.
Wills may be simple, but after death, they
become a public document once they are entered into court. They instruct
the court of your wishes. A will can be contested and it is up to the
court to decide validity. Legal counsel may help you avoid many of the
pitfalls associated with wills, especially in the area of contestability.
After death, wills must be brought before
the courts. This process is called probate. This process could take from
9 months to 2 years or longer, and could cost 2% and sometimes up to 5%
of the entire estate.
If the value of an individual's assets
are high enough to be subject to estate taxes, wills do not help with
estate taxes.
Executor
In most instances, when a person dies
owning property of any real value, it is necessary to appoint someone
to administer the estate. That someone could be an individual close to
the deceased, a bank or trust. That individual who acts for, or "stands
in the shoes of," the deceased is called the personal representative.
If the personal representative is named in a will and the will is accepted
as valid that person is known as the executor.
To carry out the administration of the
estate, the executor is responsible for:
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Contacting the funeral director, cemetery and clergy to make burial
and funeral arrangements.
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Notifying relatives, friends, employer, post office, insurance agents,
civic organizations, veteran organizations, newspapers, attorney and
accountant.
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Collecting all documents and important information related to the
deceased:
1.
Will |
7.
Insurance Policies |
13.
Veteran Discharge Papers |
2.
Death Certificate |
9.
Bank Accounts |
14.
Disability Claims |
3.
Birth Certificate |
9.
Deeds |
15.
Unpaid Bills |
4.
Marriage Certificate |
10.
Leases |
16.
Property Tax Bills |
5.
Socical Security Number |
11.
Car Titles |
17.
Credit Card Information |
6.
Citizenship Papers |
12.
Income Tax Returns |
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Depending on the value and complexities of the estate, hire lawyers,
accountants, appraisers and if there is a business involved the necessary
people to keep it going.
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Filing the necessary tax returns and paying the appropriate estate,
federal and state income taxes and paying all debts and expenses.
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Distribute assets in accordance with the will.
Probate
Probate is a legal process where your executor
goes before a court and:
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Identifies the property in the estate.
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Has the assets appraised.
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Pays all debts and taxes.
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Proves the will is valid.
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Distributes the assets according to the will
The pitfalls of probate:
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Time consuming. It could get bogged down in the busy courts and take
a year or two, while your heirs wait.
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Costly. If the estate consist of non-cash assets such as real property,
art, coins, or long term bonds they will need to be sold to pay for
probate costs. That involves appraisal fees, additional delays and
selling property you intended for your heirs. Plus, often that property
is sold below market value.
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Multiple probate. If property is in more than one state, each state
requires separate probate proceedings.
Can probate be avoided?
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Probate is not necessary if all of a person's assets will pass automatically
under joint ownership.
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Probate may not be necessary if the only asset is life insurance
payable to a beneficiary.
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Probate is not necessary for assets that have a beneficiary designation
such as IRA's, and employee benefits such as pension plans or profit
sharing plans.
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Assets placed in a trust usually do not have to be probated because
the assets are payable to named beneficiaries.
Estate Taxes
The federal estate tax, initially adopted
by Congress in 1916, is tax on the right to transfer property at death.
The Tax Reform Act of 1976 revised the federal estate tax to be a tax
based on the value of all property and rights to property possessed by
a decedent at his death or transferred by him by gift during his lifetime.
Exclusions:
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Unlimited Martial Deduction: Property transferred at death from one
spouse to another is excluded from estate taxes.
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Annual Exclusion: An individual can gift any number of other individuals
$11,000 each year without incurring a transfer tax.
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Unified (Lifetime) Credit: Each person is allowed lifetime credit.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA
2001), signed into law by President Bush on June 7, 2001, repeals
the estate tax for one year. Under the new law, the federal estate
tax continues, but with increasing unified credits and decreasing
top estate tax rates, until 2010 when it is repealed only for one
year. Without future Congessional action, the 2001 federal estate
tax rules will be reinstated in 2011, but with a $1 million exemption
equivalent.
Year of Transfer |
Exemption
Equivalent |
Top Estate Tax Rate |
2002 |
$1,000,000 |
50% |
2003 |
$1,000,000 |
49% |
2004 |
$1,500,000 |
48% |
2005 |
$1,500,000 |
47% |
2006 |
$2,000,000 |
46% |
2007 |
$2,000,000 |
45% |
2008 |
$2,000,000 |
45% |
2009 |
$3,500,000 |
45% |
2010 |
Repealed |
Repealed |
2011 |
$1,000,000 |
55% |
Estate Tax Table |
|
|
Taxable Estate 2002 |
Tax (assumes max. credit) |
Marginal Tax Rate |
$1,000,000 |
$0 plus |
18% over $1,000,000 |
$1,010,000 |
$1,800 plus |
20% over $1,010,000 |
$1,020,000 |
$3,800 plus |
22% over $1,020,000 |
$1,040,000 |
$8,200 plus |
24% over $1,040,000 |
$1,060,000 |
$13,000 plus |
26% over $1,060,000 |
$1,080,000 |
$18,200 plus |
28% over $1,080,000 |
$1,100,000 |
$23,800 plus |
30% over $1,100,000 |
$1,150,000 |
$38,800 plus |
32% over $1,150,000 |
$1,250,000 |
$70,800 plus |
34% over $1,250,000 |
$1,500,000 |
$155,800 plus |
37% over $1,500,000 |
$1,750,000 |
$248,300 plus |
39% over $1,750,000 |
$2,000,000 |
$345,800 plus |
41% over $2,000,000 |
$2,250,000 |
$448,300 plus |
43% over $2,250,000 |
$2,500,000 |
$555,800 plus |
45% over $2,500,000 |
$3,000,000 |
$780,800 plus |
49% over $3,000,000 |
$3,500,000 |
$1,025,800 plus |
50% over $3,500,000 |
Trusts
A trust is the holding of property and
the equitable management of that property by one person (a trustee) for
another person (a beneficiary). The person who transfers property into
a trust is called a grantor. A Living Trust is called a Living Trust simply
because it is created while you are alive. In most Living Trusts the grantors
(Husband and Wife) are also the trustees.
Almost anything can be placed in a trust:
bank accounts, stocks, bonds, real estate, personal property, and life
insurance. Once the trust is established, assets can be placed into the
trust by simply changing the name or title of the asset. If constructed
properly the grantor can still maintain full control of the assets.
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Living Trusts avoid probate. Because a trust is recognized as a separate
legal entity, distributions are made by a Trustee to named beneficiaries
without any court involvement.
-
Keeps the details of the estate private.
-
Gives the grantors (Husband and Wife) full control of their assets
while they are alive and competent.
-
Allows assets to be distributed quickly upon death.
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A Living Trust arranges for a successor trustee to manage the assets
should the Grantor trustee become incapacitated.
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A Living Trust is difficult to contest.
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A Living Trust with "A-B Provisions" effectively doubles
the standard estate tax deduction for married couples.
Life Insurance
Life Insurance can provide much needed
cash to pay for fees and taxes and also allow for an easier distribution
of all assets.
Life insurance proceeds at death add to
the value of the estate and therefore are subject to estate taxes. This
can be avoided by having someone other than the insured own the insurance
policy. This can be accomplished in two ways:
1. The children of the insured can own the policy.
2. An irrevocable life insurance trust can be created and funded
by life insurance. The trust is irrevocable because the insured
(Grantor) cannot have any rights or powers over the trust and no
incidence of ownership over the life insurance policy.
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