Five most important estate planning documents

Transcription

1 Five most important estate planning documents Understand the essentials before you plan This is just the beginning Once you have executed the appropriate documents for your planning needs, you should review them periodically to ensure they remain up-to-date given any significant changes (births, deaths, divorces, etc.) in your situation. While having these documents is important, there s more to the estate planning process. For example, you ll need to coordinate primary and contingent beneficiary designations on your IRA, employer-sponsored retirement plan [such as a 401(k) or 403(b) plan], annuity contracts and life insurance policies with your estate plan. And you may have estate-tax issues to deal with. It may be the subject matter death, incapacity and taxes that causes us to avoid estate planning. However, the fact is that, no matter what your age or how much wealth you ve accumulated, you need an estate plan to protect yourself, your loved ones and your assets both now while you re still active as well as after your death. Before visiting with your attorney, you need a basic understanding of the documents he or she may recommend for your plan. 1. Will A will simply provides instructions for distributing your assets to your family and other beneficiaries upon your death. Your attorney can customize its provisions to meet your needs. You appoint a personal representative (also known as an executor ) to distribute your assets. If you have minor children, you can designate a guardian for them. To be effective, a will must be filed in probate court. Probate is a judicial process for managing your assets if you become incapacitated and for transferring your assets in an orderly fashion when you die. The court oversees payment of liabilities and the distribution of assets. Generally, your personal representative will need to employ an attorney. Because a will does not take effect until you die, it cannot provide for management of your assets if you become incapacitated. Other estate planning documents, discussed below, become effective if you should become incapacitated. 2. Durable power of attorney A power of attorney is a legal document in which you name another person to act on your behalf. This person is called your agent or attorney-in-fact. You can give your appointed agent broad or limited management powers. You should choose this person carefully because he or she will generally be able to sell, invest and spend your assets. A traditional power of attorney terminates upon your disability or death. However, a durable power of attorney will continue during incapacity to provide a financialmanagement safety net. A durable power of attorney terminates upon your death. 1 of 2

2 You can count on us Having an effective estate plan is one of the most important things you can do for your family. To start the planning process, you should work with an experienced firm that will put your interests first a firm such as Wells Fargo Advisors. The first step in the planning process is to create a comprehensive Net Worth Statement showing all of your assets, including taxable accounts, tax-deferred accounts (IRAs, annuities, retirement plans) and life insurance investments. Our Financial Advisors can create a personal Net Worth Statement containing this important information. We can also help you complete our Your Financial Information organizer. By being organized and having your Net Worth Statement, you may make your meeting with an attorney more productive and expedite the planning process. 3. Health care power of attorney A durable power of attorney for health care authorizes someone to make medical decisions for you in the event you are unable to do so yourself. This document and a living will (see below) can be invaluable for avoiding family conflicts and possible court intervention if you should become unable to make your own health care decisions. 4. Living will A living will expresses your intentions regarding the use of life-sustaining measures in the event of a terminal illness. It expresses what you want but does not give anyone the authority to speak for you. 5. Revocable living trust. There are many different types of trusts with different purposes, each accomplishing a variety of goals. A revocable living trust is one type of trust often used in an estate plan. By transferring assets into a revocable trust, you can provide for continued management of your financial affairs during your lifetime (when you re incapacitated, for example), at your death and even for generations to come. Your revocable living trust lets trust assets avoid probate and reduces the chance that personal information will become part of public records. Every revocable trust has three important components. The grantor (or settlor) generally you creates the trust and transfers assets to it. The beneficiary(ies) often you and your family receive the income and/or principal according to your trust s terms. The third component, a trustee who could be you, a family member or a corporate trustee manages the trust assets. You can change a revocable trust s provisions at any time during your life. If you act as your own trustee, you continue to manage your investments and financial affairs. In this case, your account might be titled (Your Name), Trustee of the (Your Name) Revocable Living Trust Dated (Date). Because this legal entity exists beyond your death, property titled in the trust does not need to pass through probate. Trust services available through banking and trust affiliates in addition to nonaffiliated companies of Wells Fargo Advisors. Wells Fargo Advisors does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state. Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company Wells Fargo Advisors, LLC. All rights reserved (Rev 03, 1 ea) 2 of v7

3 Estate planning and the 2010 tax-relief legislation A two-year window of opportunity Estate provisions summary The estate tax applicable exclusion increases to $5 million. A flat rate of 35% applies to estates above $5 million. The estate and gift tax exemptions are re-unified at $5 million. The generation-skipping tax exemption increases to $5 million. These rules sunset at the end of In 2013, the estate tax would return to a $1 million exemption and a top rate of 55% unless Congress acts before the sunset takes effect. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 set a $5 million exclusion amount for the estate tax, gift tax and generation-skipping tax. (The exclusion means that estates below $5 million do not owe federal estate tax.) The act also reduced estate- and gift-tax rates to 35%. These rules remain in effect for 2011 and In 2013, the estate tax reverts to a $1 million exclusion and 55% top rate. What does this mean for your estate plan? The rules for estate planning are very favorable in 2011 and This two-year window should be a reason to take action now. Congress will need to revisit the estate tax in two years, and the desire to raise revenue may lead a future Congress to limit or take away some tax-saving strategies that are currently sanctioned. Here are some key points to keep in mind: For married couples with large estates, credit shelter planning is more valuable than ever. Credit shelter planning is designed to make sure that married couples take advantage of both of their respective estate tax exclusions. New rules make the exclusion portable between spouses. In other words, a deceased spouse can pass on his or her unused exclusion to the surviving spouse. This could benefit modest estates, and reduce tax costs for procrastinators and couples who fail to plan. However, it may not be wise to rely on the portability rules just yet, because they are scheduled to lapse after In order to get the benefit of portability, an estate tax return must be filed, even if the estate would not normally be subject to estate tax. In addition, portability has risks. After the exclusion is passed on to a survivor, it could still be lost due to remarriage, or changes to the survivor s estate plan. For larger estates, it still makes sense to proactively create a credit shelter trust at the first death. A credit shelter trust is more effective because it removes future asset growth from the survivor s taxable estate and assures that the exclusion will be used as intended. To make credit shelter planning work, you need more than a good document. It s critical to assure that asset ownership and beneficiary designations are in sync with the directions in your will or trust. 1 of 3

4 In 2011 and 2012, the lifetime gift exemption is increased to $5 million. For high-net-worth families, this opens up remarkable planning opportunities for business-succession and wealth-transfer planning. Attractive strategies to consider might include: Grantor retained annuity trusts (GRATs) Life insurance trusts funded with income-producing assets Valuation-discount planning Charitable lead trusts Sales to younger generations, including sales to grantor trusts Generation skipping planning could be smarter than ever. Generation skipping is not about skipping your kids it s about skipping a generation of tax. Children can still be the beneficiaries of a generation-skipping trust but have the opportunity to pass trust assets to future generations without estate tax. Life insurance can be used to supersize a multigenerational trust. Planning for state estate taxes is more important than ever. More than 20 states impose their own estate or inheritance tax. Some also have a gift tax. The threshold for states is often much lower than the federal threshold. States often begin imposing their own estate taxes at $675,000 or $1 million. For large estates, state taxes can add an additional 10% to 15% on top of any federal tax. When the state exclusion is lower than the federal exclusion, married couples face special planning challenges. Be sure to consult an experienced local attorney, because planning options and strategies can vary considerably from state to state. This is a good time to review existing life insurance policies. You should include both policies that are included in the taxable estate and those held outside the taxable estate (within an irrevocable life insurance trust). When reviewing life insurance needs, remember that the $5 million exclusion level is only effective through 2012; prospects for its extension are uncertain. It makes sense for families to give more attention to non-tax issues, including long-term trust planning and family wealth education. In your discussions with your Financial Advisor and your estate planning attorney, consider: Higher exemptions mean your children and grandchildren will receive more. How do you want this wealth to affect their lives? What would have a more positive impact on your family a lump sum inheritance or a lifetime of supplemental income? 2 of 3

5 Remember that trusts are not only for tax planning. Depending on your objectives, ongoing trusts can be used to guide investment management, set spending guidelines, provide some degree of asset protection, promote charitable goals and perpetuate your legacy and values. Flexibility for estates of those who died in 2010 The act provides some flexibility for the estates of individuals who died in Executors will be permitted to select either: The old 2010 rules, which repealed the estate tax for one year, but permitted only a limited step up in cost basis at death, or Retroactive application of the new rules, with a $5 million exclusion and an automatic basis adjustment for all assets Very large estates would most likely prefer the former; estates under the $5 million threshold might prefer the latter. For the estates of individuals who died during 2010, the due date for filing returns is extended until Sept 17, 2011 (nine months after the date of enactment). Review your strategies today These increased exemption levels for estate, gift and generation-skipping tax even temporarily represent a remarkable planning opportunity. It s important to take a step back and ask yourself what you and your family want your estate plan to accomplish. Under this new law, the opportunities for wealth transfer planning are greater than ever. Talking with your Financial Advisor and estate planning attorney can help you narrow or expand the possibilities and choose the kind of trusts and other wealth-transfer vehicles that best suit your goals. Wells Fargo Advisors designed this publication to provide accurate and authoritative information on the subject matter covered. Wells Fargo Advisors makes it available with the understanding that the firm does not render legal, accounting or tax preparation services. For tax or legal advice, seek the services of competent tax or legal professionals. Any estate plan should be prepared and reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your situation at the time your tax preparer submits your return. Wells Fargo Advisors believes investment decisions should be based on investment merit, not solely on tax considerations. However, the effects of taxes are critical in achieving a desired after-tax investment return. Wells Fargo Advisors has based the information provided on internal and external sources that the firm considers reliable; however, Wells Fargo Advisors does not guarantee the information s accuracy. Direct specific questions relating to your tax situation to your tax advisor. Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company Wells Fargo Advisors, LLC. All rights reserved. e of v1

6 Understanding beneficiary designations Ten things everyone should know Most of us think of our estate plan as our will or living trust. However, in many cases, those documents have no effect on some of your most important assets. Instead, your beneficiary designations control who will receive those assets. Always keep these important considerations in mind regarding your beneficary designations. 1. Don t forget to name beneficiaries. Assets that pass by beneficiary designation are not subject to probate. But if you fail to name a beneficiary, the asset(s) becomes part of your probate estate. This could delay distribution or lead to additional administrative costs. 2. Name both primary and contingent beneficiaries. It s important to name a back up beneficiary in case the primary beneficiary predeceases you. Again, this is important to avoid having a nonprobate asset ending up in probate. 3. Update for life events. Review your beneficiary designations regularly and update them as needed, based on a birth, death, marriage or divorce. Failure to update designations can result in a transfer of assets to unintended beneficiaries for example, an ex-spouse or heirs of a deceased beneficiary. 4. Coordinate with your will and trust. Whenever you change your will or trust, be sure to talk with your attorney about your beneficiary designations. Be certain that you understand how all the different parts of your estate plan work as a whole. 5. Understand potential consequences of naming individual beneficiaries for particular assets. Consider the example of someone who established three equal accounts and named a different child as beneficiary of each. Over the years, some accounts grew more than others, so some beneficiaries got more and others less which may not be what was originally intended. 6. Avoid naming your estate as beneficiary. This causes nonprobate assets to become subject to probate. And for IRAs and qualified retirement plans, there may be unfavorable income-tax consequences. The required minimum distribution (RMD) rules generally let an individual beneficiary stretch distributions over his or her life expectancy. An estate, however, has no life expectancy. And so, in most cases, taxable distributions must be made over a shorter time frame than would apply if an individual had been named as beneficiary. 7. Use caution when naming a trust as beneficiary. Consult your attorney or CPA before naming a trust as beneficiary for IRAs, qualified retirement plans or annuities. In many cases, the governing document (the plan document or annuity contract) or tax law (the RMD rules) may require accelerated taxable distributions when a trust is beneficiary. There are situations where it makes sense to name a trust for example, if your beneficiaries are minor children or if you want to control access to funds but be sure you understand the tax consequences in advance. 1 of 2

7 Beneficiary designation accounts Individual Retirement Accounts (IRAs) Retirement plans 401(k), 403(b) and 457 plans SEP and SIMPLE IRAs Pension plans Employee stock ownership plans (ESOPs) Life insurance Annuities Other employee benefit plans Group term life insurance Stock options Restricted stock Phantom stock or stock appreciation rights (SARs) Employee stock purchase plans (ESPPs) Nonqualified deferred compensation (NQDC) plans Transfer-on-death (TOD) accounts 8. Explore rollover alternatives when changing jobs. Nonspousal beneficiaries of qualified retirement plans, such as a 401(k) or profit-sharing plan, must be allowed to make a direct rollover into an inherited IRA for any amounts eligible to roll over. However, if he or she doesn t transfer the assets in a timely manner (by the end of the year following the year of death), his or her distribution options will be limited to those allowed in the qualified plan. As a result, the beneficiary may not be permitted to stretch out distributions over his or her life expectancy, which he or she may be able to do with an inherited IRA. If a beneficiary doesn t transfer the assets to an inherited IRA, he or she will need to keep in contact with your former employer and deal with the company s human resources department to manage the assets and arrange withdrawals. In many cases, rolling the assets into an IRA will simplify this process, broaden the range of potential investment choices and provide greater control than dealing with a former employer with whom the beneficiary is probably unfamiliar. 9. Consider naming a charitable organization as beneficiary. The beneficiary of an IRA, qualified retirement plan or deferred annuity will need to pay income taxes on all or part of the distributions from these accounts. But if a qualified charity is named as beneficiary, it can take distributions without any income tax. If your estate plan includes a bequest to charity, talk to your tax advisor about naming a charity as beneficiary of income-taxable assets. 10. Use disclaimers when necessary but be careful. Mistakes involving beneficiary designations are often not discovered until after an account owner s death. In some cases, it is possible to fix mistakes by using a disclaimer a legal document that lets the named beneficiary refuse the asset. When a beneficiary disclaims an asset, it passes to whomever is next in line. Disclaimers involve complex legal and tax issues and require careful consultation with your attorney and CPA. You can count on us Beneficiary designations can have a big effect on whether your estate plan works as intended. Your Financial Advisor can help you gather information about all of your beneficiary designations so you will be better prepared when you meet with your attorney and CPA to review your estate plan. Trust services available through banking and trust affiliates of Wells Fargo Advisors. Wells Fargo Advisors does not provide tax or legal advice. Please consult with your tax and/or legal advisor before taking any action that may have tax and/or legal consequences. Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company Wells Fargo Advisors, LLC. All rights reserved. E of v5

8 Why are Crummey letters required? To qualify for the gift-tax annual exclusion, tax law requires that beneficiaries have a present interest in a gift. That means they must have some real even if limited right to enjoy the gift today. The Crummey letter is evidence that the trustee has notified beneficiaries of their temporary withdrawal right. It provides proof that the gift qualifies for the annual exclusion. Do minor children have to receive a gift notice? Yes. The notice may be sent to a parent or legal guardian on their behalf. I m concerned that my children might exercise their withdrawal rights and take the money. Is there any way to prevent that? Beneficiaries often realize that it is in their long-term best interest to forgo their withdrawal rights. At the same time, be sure to talk to your attorney about trust provisions that can give you flexibility to deal with short-term problems. For example, a trust could give the donor the ability to designate which beneficiaries will and which will not have withdrawal rights in any particular year. (Keep in mind that if you don t provide a withdrawal right, your gift will not qualify for the annual exclusion, so you would need to file a gift tax return. In most cases, this simply means that you would use up part of your $5 million lifetime gift exclusion. If you have already used your entire lifetime gift exclusion, you would have to pay gift tax.) Do I really need a trust? Why not just let my children own the policy? You don t have to establish a trust. But consider: What would happen to the policy if a child gets divorced or has problems with creditors? How will children coordinate responsibility for paying premiums and managing the policy? Are you comfortable letting children do whatever they please with the death benefit? By having a trust own the policy, you can avoid many potential problems. The policy is insulated from possible financial problems that could affect the children; there is a centralized point for administration; and the trust document will ensure that the death benefit is used according to your directions. What is second to die life insurance and when is it used? Traditional life insurance provides protection on the life of a single insured individual. Second to die or survivorship insurance covers two lives in one policy with the proceeds payable at the second death. Traditional single-life insurance is commonly used to protect the financial security of a surviving spouse or minor children by providing capital to replace the income lost when a wage-earner dies. Second-to-die insurance, in comparison, is most commonly used as part of a plan to efficiently transfer wealth between generations. Because two lives are insured under one policy, premiums are typically lower than for single-life policies on either spouse. Can I transfer existing life insurance policies to an irrevocable trust to get them out of my taxable estate? Yes, you can transfer existing policies; however, if you die within three years of making the gift, the death benefits will still be included in your taxable estate. In most cases, the gift s value will be somewhat greater than the policy s cash value. Ask your tax advisor to help you determine the gift s value. 3 of 4

9 You can count on us Your Financial Advisor can work with you and your attorney to help determine whether a life insurance trust may be appropriate for your estate plan. Can an irrevocable life insurance trust hold assets in addition to a life insurance policy? Yes. Income from trust assets can be used to pay policy premiums. This can reduce or eliminate the need to make annual gifts to the trust. This type of trust is classified as a grantor trust. This means that the grantor (the trust s creator) is taxed on all of the trust s income (even though he or she does not receive that income). While at first that may seem undesirable, it is actually a smart planning strategy. By picking up the tax liability, you reduce your taxable estate without making an additional gift. And your wealth-transfer strategy is more effective because all of the trust income is available to fund premiums without being reduced by taxes. What if I change my mind or want to disinherit one of the beneficiaries? Can I change the trust? The trust is irrevocable, so you cannot change its terms. However, you could stop funding the trust. Any existing trust assets would still have to be used for beneficiaries according to the trust s terms. Can my spouse or I be the trustee? The trustee cannot be someone who is also a grantor of the trust. So, as a general rule, anyone who might provide funds to the trust should not be named as trustee. Your tax advisor can provide additional guidance. What are the advantages of using a corporate trustee? Being a trustee is not an honorary position; it requires real work. For individuals, the administrative and recordkeeping duties can be burdensome. A professional, independent trustee has the staff and systems in place to handle these duties efficiently. You certainly can choose a family member or another trusted individual. However, many people like the convenience of having a corporate trustee send annual gift notices, maintain records and review the insurance policy on a regular basis. This information is provided for informational purpose only. The solutions discussed may not be suitable for your personal situation, even if it is similar to the example presented. Wells Fargo Advisors does not provide legal or tax advice. Trust services available through banking and trust affiliates in addition to nonaffiliated companies of Wells Fargo Advisors. Be sure to consult your tax and legal advisors before taking any action that could have tax consequences. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state. Insurance products are offered through non-bank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies. Wells Fargo Advisors, LLC is a separate non-bank affiliate of Wells Fargo & Company. Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company Wells Fargo Advisors, LLC. All rights reserved. E of v3

10 Your financial information A checklist that can be used for planning or emergencies Prepared/Updated Personal profile Name Social Security number Birth date Location of birth certificate Husband Wife Children Other beneficiaries Financial Advisor Attorney Phone Phone Accountant Insurance Agent Phone Phone

11 Do you have: Current and dated Location Will / / Durable power of attorney / / Health care directive / / Living will / / Revocable living trust / / Personal representative/executor Location of tax returns Location of safe deposit box (Institution) Names of those authorized to open safe deposit box Location of keys Contents (stock certificates, EE bonds, bearer bonds, etc.) Location of appraisal and inventory of personal property (including collectibles) List Photos Video Funeral and burial arrangements Incapacity/Disability Name of guardian/trustee in the event of your incapacity What disability policies do you own? What long-term care policies do you own? Investment/Bank accounts Bank/Institution How account is titled Bank/Institution How account is titled 2

12 Trust accounts Institution Type of trust Current trustee Tax ID number Successor trustee Beneficiaries Institution Type of trust Current trustee Tax ID number Successor trustee Beneficiaries Have you reviewed your trust(s) recently? Yes No Gift information Are you a custodian of uniform gift/transfer to a minor s accounts? Yes No (If so, and you are the donor, these may be included in your estate for tax purposes.) Have you filed any gift tax returns? Year Gift amount $ Are you taking full advantage of annual exclusion gifts? Yes No Securities Brokerage firm How account is titled Brokerage firm How account is titled 3

13 IRAs/Retirement plans Type: Traditional IRA Roth IRA Qualified plan 403(b) Participant Name of company (i.e., brokerage firm, bank, mutual fund) Approximate value $ Date Primary beneficiaries Contingent beneficiaries Type: Traditional IRA Roth IRA Qualified plan 403(b) Participant Name of company (i.e., brokerage firm, bank, mutual fund) Approximate value $ Date Primary beneficiaries Contingent beneficiaries Life insurance policies Owned by Type of policy* Issuer Insured Beneficiary Death benefit Premium Cash value Loans $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ *Wl = Whole life; g = Group term; ul = Universal life; spwl = Single-premium whole life; t = Term; sl = Survivorship life The owner is assumed to be the insured unless you note otherwise. Have these policies been reviewed recently? Yes No Do these policies meet your current needs? Yes No 4

14 Annuities Owned by Type of contact* Issuer Beneficiary Death benefit Cash value $ $ $ $ $ $ $ $ $ *F = Fixed rate; V = Variable rate Real estate/personal residence/business assets/other (collectibles, jewelry, etc.) Real estate/real-estate interests owned Location of property Lender Lender s address Loan amount $ Payment amount $ Date due Interest rate % Maturity Real estate/real-estate interests owned Location of property Lender Lender s address Loan amount $ Payment amount $ Date due Interest rate % Maturity Estate tax What is your estimated estate tax liability? $ Have you planned for it? Yes No Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company Wells Fargo Advisors, LLC. All rights reserved. 5

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