Estate Planning The Importance of Having an Estate Plan Having an estate plan is one of the most important things you can do for your family. It's not just about planning for estate taxes; it's about developing a plan to take care of your loved ones in the event something happens to you. Some things you may want to consider include: Planning for incapacity - Using powers of attorney and long-term care insurance to make sure things are taken care of if you become ill or injured Avoiding probate - Helping your family avoid the delays and frustrations of probate and estate settlement Transferring wealth - Using wills, beneficiary designations, gifting and trusts to efficiently transfer wealth to loved ones Charitable giving - Developing gifting and trust strategies to benefit charities Estate taxes - Reducing the potential estate tax burden your family may face Trusts - Establishing one or more trusts to accomplish your goals Assemble Your Estate Planning Team Estate planning requires the assistance of your attorney and CPA. Your financial consultant can work with you and your tax and legal advisors to help gather the appropriate records that will help you and your team develop an estate plan and determine which estate planning strategies are best for your specific situation. In addition, because your circumstances change throughout your life, it's important to revisit your estate plan regularly. That way you can keep it up-to-date and make sure that your family's needs will continue to be met. Note: A.G. Edwards does not provide legal, accounting or tax-preparation advice. You should consult your tax and legal advisors for your specific situation. Including Incapacity in Your Estate Plan Who Will Take Care of Things If You Can't? When you're developing your estate plan, it's important to think about what needs to happen if you become ill or injured. Who will take care of your finances? Who will make decisions about your health care? How will you pay for care on a long-term basis? Some common tools used to help meet those particular needs include: Living will Health care power of attorney Durable power of attorney Revocable living trust Long-term care insurance Living Will* A living will is a document that communicates your intentions regarding the use of life-sustaining measures in the event of terminal illness. It expresses what you want to happen but does not give anyone the authority to speak for you. Health Care Power of Attorney* A health care power of attorney, also called a durable power of attorney for health care, is a document that lets you appoint someone to make medical decisions for you if you are unconscious, mentally incompetent or otherwise unable to make your own health care decisions. Many states also let you include directives on withholding or providing lifesustaining care in your health care power of attorney. Durable Power of Attorney* A durable power of attorney is a document that lets you legally name another person to act on your behalf. Some examples of responsibilities performed by your "agent" or "attorney-in-fact" include: Handling banking and investment transactions Entering safety deposit boxes Settling insurance claims and handling matters related to government benefits Buying, managing or selling personal property or real estate Filing tax returns Revocable Living Trust When you establish a revocable living trust, you can appoint a successor trustee to manage trust property in the event that you become ill or injured and unable to continue managing the property yourself. This may help avoid the need for a probate court guardianship.
Long-Term Care Insurance Unfortunately, Medicare and most health insurances do not cover the costs of long-term care, whether you receive it at home or in a long-term care facility. That means if you become ill or injured and need long-term care, you and your spouse will most likely bear those costs. Long-term care insurance can help you pay those expenses. Ask your financial consultant for more information. Avoiding Probate With Your Estate Plan Help Your Heirs Avoid the Probate Process When it comes to developing your estate plan, it's important to find ways to make the distribution of your estate easier on your heirs. And in many states, you may be able to simplify the process by taking steps to avoid probate court. Unfortunately, just having a will does not accomplish that goal. What is probate? Your probate estate Tools to help you avoid probate What Is Probate? 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 probate court oversees payment of liabilities and the distribution of assets after your death. Generally, your estate's executor will need to employ an attorney. Probate proceedings vary from state to state. Though some states have simplified the process, probate can remain time-consuming, costly and public. Your Probate Estate Legal title usually determines whether an asset is part of your probate estate. For example, your probate estate includes non-trust assets held: In single name As tenants in common As community property Your attorney can help you identify which of your assets are required to go through the probate process. Tools to Help You Avoid Probate You have several estate planning strategies that can help your beneficiaries avoid probate court. The ones discussed below are not suitable for everyone. You should contact your qualified tax and legal advisors for helping in determining which strategy is best for your specific situation. Ownership/titling. As stated above, assets held in single name, as tenants in common or as community property are required to go through probate. Assets held in "joint tenants with rights of survivorship" let you share an undivided interest in property during your lifetime. At the death of one owner, the property avoids probate by automatically transferring to the surviving owner(s). However, titling your assets this way does have limitations as an estate planning tool. You should discuss the advantages and disadvantages of titling your assets as "joint tenants with rights of survivorship" with your tax and legal advisors. Beneficiary designations. Assets with beneficiary designations, such as annuities, life insurance, IRAs and retirement plans, generally avoid the probate process when they pass to your heirs. Keep in mind, beneficiary designations take precedence over any other instructions you provide in a will or trust. Revocable living trusts. Trusts are often used to solve problems that other forms of ownership cannot. While there are many types of trusts that can help you meet different estate planning goals, the revocable living trust is one that is commonly used as a way to avoid the probate process. A revocable living trust lets you maintain full control of trust assets while you're alive and competent. At your death or incapacity, your designated successor trustee steps in to manage or distribute your assets as you direct in your trust document.
Learn more about using trusts in your estate plan. Transfer on death account. Transfer on death accounts can provide your heirs a simple, convenient and inexpensive way to avoid the costs and delays of probate while letting you maintain sole ownership of your assets during your life. The transfer on death account has limitations as an estate planning tool, so you and your tax and legal advisors should carefully evaluate the pros and cons of this strategy. Ask your financial consultant for more information about transfer on death accounts. Wealth Transfer: Wills, Trusts & Gifting Wealth Transfer Is a Major Goal of Estate Planning You have a variety of estate planning and wealth transfer tools that can help you distribute your assets to your family and other beneficiaries. The wealth transfer tools discussed below may also help you meet other estate planning goals, such as avoiding probate and reducing estate taxes: Wills Beneficiary designations Gifting Trusts Learn how your financial consultant can help you plan your wealth transfer strategy. Wills: Distributing Assets to Beneficiaries Wills are simply plans for distributing assets to family members and other beneficiaries. If you die without a will, your state law will determine how your assets are distributed. While wills do not help avoid probate (in fact, to be effective, your will must be filed in probate court), they're still an important part of estate planning. You can work with your attorney to create (and revise) your will to meet your goals, including naming the executor of your will and, if you have children, designating a guardian for them. Beneficiary Designations Annuities, life insurance, IRAs and retirement plans are just some of the assets that let you designate beneficiaries as part of the paperwork process. When you designate a beneficiary, the assets are automatically distributed to that beneficiary upon your death, which means they generally avoid the probate process. Note: Beneficiary designations take precedence over any other instructions you provide in a will or trust. Keep that in mind when you're developing your estate plan. Gifting to Individuals & Trusts In its simplest form, gifting presents an opportunity to transfer assets to children or other beneficiaries during your lifetime and reduce your taxable estate. Sophisticated gifting techniques can also help you: Provide income for yourself or your heirs Avoid capital gains tax on your appreciated assets Leverage your annual exclusion gifts Pay for a child's education Annual gifting. You may gift up to $12,000 per person per year tax free ($24,000 per recipient for married couples who combine gifts). This amount is called the annual exclusion. Any gift over that amount may be subject to gift taxes. Medical and education expenses. If you pay someone's medical or education expenses directly to the provider, the gift is not included in your annual exclusion amount. For example, if you pay $25,000 for your grandchild's tuition in 2006, you can still gift up to $12,000 tax free to him or her this year ($24,000 for a combined gift from you and your spouse). Gifting to 529 college savings plans. If you're helping your child or grandchild save for college using a 529 college savings plan, you can gift up to the annual exclusion per year tax free or you can make up to five years' worth of annual exclusion gifts ($60,000 per single donor; $120,000 per couple) in one year to benefit any one person. Note: If you contribute the maximum amount using the five-year acceleration rule, you will not be able to make other annual exclusion gifts to that beneficiary for five years. And if you die within five years of the date of your gift, a portion of the original gift will be included in your estate tax calculation (any growth will not be included).
Trusts: Transfer Wealth, Avoid Probate & Reduce Estate Taxes While many types of trusts can help you accomplish your estate planning goals, below are two common types of trusts that are designed to help you transfer your wealth efficiently while avoiding probate and reducing estate taxes: Life insurance trusts. An irrevocable life insurance trust lets you keep the death benefit of your life insurance policy outside of your estate (and out of probate), which means your life insurance proceeds will not increase your estate tax liability. In fact, you can design your life insurance trust so that it will be applied toward your estate tax liability, leaving more of your actual wealth for your heirs. Revocable living trusts. Although revocable living trusts are still part of your taxable estate, they do help you efficiently transfer wealth to your heirs and help them avoid the probate process. Learn more about using trusts in your estate planning strategy. Charitable Giving Charitable Giving & Estate Tax Reduction Whether your goal is to provide for philanthropic organizations, reduce estate taxes or both, you have a variety of charitable giving strategies to choose from. Your tax advisor can provide more information about these and other charitable giving strategies and can help you determine which methods are most appropriate for your situation. Gifting cash, tangible assets and investments Gifting IRAs, retirement plan accounts and annuities Designating a charity as a life insurance beneficiary Establishing a charitable trust Learn how your financial consultant can help with your estate plan's charitable giving strategy. Gifting Cash, Tangible Assets & Investments Your estate can take an estate tax deduction for gifts made to charitable organizations upon your death. That includes gifts of cash, personal property, real estate and specific investments. There is no dollar amount or percentage limitation on the amount of such a deduction, provided it does not exceed the value of your gross estate. Gifting IRAs, Retirement Plan Accounts & Annuities Naming a charity as beneficiary of tax-deferred assets upon your death can help you avoid both income and estate taxes on the gifted amount. If you're considering making charitable gifts at death, you can increase your overall tax benefit (and reduce the cost to your heirs) by naming a charity in your beneficiary designation. Designating a Charity as a Life Insurance Beneficiary Another way you can make a charitable contribution is by naming a charity as beneficiary of a life insurance policy. This results in a charitable gift at your death. However, you would not qualify for an income tax deduction during your lifetime. You can also transfer ownership of an existing policy to a charity. Generally, your deduction will be the lesser of premiums paid or the value of the policy as determined under IRS rules. Your tax advisor can help you determine how you should structure this type of gift. Establishing a Charitable Trust A charitable trust can help you solve various estate and income tax planning problems while providing for the charity or charities of your choice. Two common types of charitable trusts are: Charitable remainder trust. A charitable remainder trust can be structured to pay a lifetime income to you and distribute any remaining principal to a charity at your death. By gifting to a charitable remainder trust, you can benefit from a current charitable income tax deduction and, if you gift appreciated securities, you can avoid capital gains tax on those securities. Charitable lead trust. A charitable lead trust pays an income to charity for a set term (this could be either a fixed number of years or your lifetime). Upon termination, any remaining principal is distributed to your heirs. Charitable trusts can be structured in different ways. Your qualified tax and legal advisors can help you determine which charitable trust is best-suited for your estate planning strategy. Estate Taxes & Your Estate Plan Confused About Estate Taxes?
Despite the Economic Growth and Tax Relief Reconciliation Act of 2001, estate taxes could still have an impact on your estate and beneficiaries. Learn more about: Estate tax legislation (Is your estate at risk?) Your taxable estate Strategies to help reduce estate taxes How your financial consultant can help with your estate plan Estate Tax Legislation: Is Your Estate at Risk? The 2001 tax legislation has caused many people to disregard the threat of estate taxes. As it stands now, the applicable exclusion (the amount that's not subject to estate taxes) is scheduled for one additional increase before 2010, when the estate tax will be repealed for one year only. However, unless Congress takes action, even higher estate taxes will be back in 2011. Maximum Estate Tax Rates & Exemption Amounts (The Economic Growth & Tax Relief Reconciliation Act of 2001) Year Exclusion Amount Tax Rate 2006 $2 million 46% 2007-2008 $2 million 45% 2009 $3.5 million 45% 2010 Not applicable Not applicable 2011 $1 million 55% Even with the current tax law's increase in the applicable exclusion amount, you still need to determine whether you will have a taxable estate in the future. That's why you should regularly review your estate plan and make adjustments to reflect changes in the tax laws and shifts in your circumstances. Your Taxable Estate Generally, assets you own or control are part of your taxable estate. That includes: IRAs and retirement plans Life insurance Annuities Other assets that have a beneficiary designation (including transfer on death accounts) Assets held in a revocable trust Assets held as joint tenants with the right of survivorship Be sure to include each of these when calculating your estate. Use our estate tax calculator to see an estimate of your estate's tax liability. Strategies to Help Reduce Estate Taxes If you're concerned about estate taxes, you can use a variety of strategies to help reduce your estate's tax bill, including: Credit shelter trust planning Annual gifting Life insurance Irrevocable life insurance trust Credit shelter trust planning. A credit shelter trust enables married couples to use each spouse's applicable exclusion ($2 million in 2006) to protect $4 million from estate taxes. When one spouse dies, a credit shelter trust can be created from his or her estate. The surviving spouse can then receive income from the trust and may have access to the principal. When the surviving spouse dies, the assets in the credit shelter trust are distributed to heirs as directed in the trust document. Because he or she would have limited control over the distribution of the trust assets, those assets would not be considered part of his or her taxable estate. Annual gifting. A simple way to reduce estate taxes is through annual gifting. By gifting up to the $12,000 annual exclusion amount to individuals, you can remove those assets from your taxable estate. Learn more about gifting.
Life insurance. Even though life insurance proceeds are income-tax-free for your beneficiaries, if you own the policy, the death benefit will still be part of your taxable estate. However, if your children (or other beneficiaries) own the policy, the proceeds are free from federal estate and income taxes. That means if you make gifts to your children (or other beneficiaries) to acquire the insurance, the proceeds from the policy are not part of your taxable estate. Learn more about life insurance. Irrevocable life insurance trust. Another way to make sure your life insurance proceeds are not part of your taxable estate is to establish an irrevocable trust to own the policy and make gifts to the trust to fund the policy. When you die, the life insurance proceeds are paid into the trust and distributed according to your directions. Those proceeds are not included in your taxable estate and are available for distribution to your family or can be used to pay estate taxes. Learn more about using trusts as part of your estate plan. Trusts & Your Estate Plan Using Trusts to Meet Your Estate Planning Goals Trusts can be an important tool in meeting the goals of your estate plan. But knowing the types of trusts that can help you meet your estate planning goals can be difficult. You should work closely with your attorney and tax advisor to determine which trusts are right for your situation. Types of Trusts Below are a few of the common types of trusts that are used in estate plans. The chart below offers a quick, high-level comparison of how these trusts can help you meet your estate planning goals. Charitable trusts. Charitable trusts can help you create a current income stream for yourself, your heirs or a charity as well as help you transfer your wealth to either your heirs or a charity when you die. In addition, transferring your assets to a charitable trust removes them from both your probate estate and your taxable estate. Charitable lead trust - Current income from the trust is distributed to the charity, usually for a fixed number of years. At that time, your heirs receive the remainder of the trust's assets. Charitable remainder trust - You or your beneficiaries receive current income from the trust. At your death (or the end of the trust's term), the charity receives the remainder of the assets held within the trust. Credit shelter trusts. A credit shelter trust enables married couples to use each spouse's applicable exclusion ($2 million in 2006) to protect $4 million from estate taxes. When one spouse dies, a credit shelter trust can be created from his or her estate. The surviving spouse can receive income from the trust and may have access to the principal. When the surviving spouse dies, the assets in the credit shelter trust are distributed to heirs as directed in the trust document. Because he or she would have limited control over the distribution of the trust assets, those assets would not be considered part of his or her taxable estate. Irrevocable life insurance trusts. With an irrevocable life insurance trust, the trust is the owner of the insurance policy, which keeps the proceeds out of your taxable estate. In addition, establishing a gifting program to cover the insurance premiums also helps reduce your taxable estate. When you die, the trust's assets (the insurance proceeds) are distributed to your beneficiaries income-tax-free. Revocable living trust. A revocable living trust can be altered at any point during your life. You can change beneficiaries or discontinue the trust at your discretion. However, because you still maintain control of the assets within the trust, it remains part of your taxable estate. Irrevocable living trust. An irrevocable living trust is one that cannot be altered once you've established it. In some cases, assets in an irrevocable trust can be removed from your taxable estate. For that to happen, you generally cannot have rights to get the money back or control the trust. Transfers to an irrevocable living trust are usually made by gift. To avoid gift tax, the transfers must be carefully planned to either use annual exclusion gifts or your lifetime gift tax applicable exclusion. How These Trusts Help You Meet Your Estate Planning Goals Assets Avoid Transfer Wealth to Charitable Giving Reduce Estate
Probate Beneficiaries Taxes Charitable remainder trust X X X Charitable lead trust X X X X Credit shelter trust X X X Revocable living trust X X Irrevocable living trust X X X Irrevocable life insurance trust X X X