Trusts and Other Planning Tools
Today, We Will Discuss: Estate planning fundamentals Wills and probate Taxes Trusts Life insurance Alternate decision makers How we can help
Preliminary Considerations Ask yourself: Do you have a plan to manage your assets in the event of incapacity or death? Who will handle your affairs? Are there special situations for you or your loved ones that need to be considered? Do you have the right advisors?
Who Needs an Estate Plan? Everyone! No estate is too small What makes up an estate? Everything you own less everything you owe! Financial assets Real estate Personal property
Reasons for an Estate Plan Satisfies three primary objectives: To achieve your goals for the disposition and management of assets transferred during and after your lifetime To provide for the management of your affairs in the event of incapacity To minimize taxes, expenses, and other costs associated with wealth transfer
Basic Planning Tools to Help Transfer Assets Wills Gifts Titling of property Beneficiary designation Trusts Life insurance Prenuptial and marital property agreements Divorce decrees
Wills Name an executor and guardian Spell out distribution of property who receives what and when Help avoid state involvement for intestacy proceedings but not probate Can be used in conjunction with other wealth transfer planning techniques
Executors and Administrators Executor and Administrator Duties: Deciding whether or not probate court proceedings are needed Administering who inherits what property Filing the will and all required legal papers in the local probate court, if required Finding the deceased s assets and managing them during the probate process Handling day-to-day details and notifying various companies and government agencies you deal with
Naming and Designating Beneficiaries Considerations: Too young or too old Trusts or charities Per capita or per stirpes Secondary beneficiaries For key financial assets such as: IRAs 401(k)s Pensions Life insurance
Tax Implications of Estate Planning Gift taxes Generation-skipping transfer taxes Federal estate taxes State taxes Descendent taxes on certain assets
Estate Taxes for 2016 Federal estate tax exemption limit for 2016: $5.45 million ($10.90 million for married couples), adjusted annually for inflation Maximum estate tax rate = 40% Unified exemption for federal estate, gift, and generation-skipping taxes = $5.45 million for 2016 Other (unchanged) strategies to be aware of: Unlimited marital deduction Charitable contributions
Federal Estate Taxes Federal Estate Tax* on $12 Million Estate Tax in $000s *After applicable exemption ($5.45 million in 2016). The value of the estate is in 2016 dollars. Assumes taxable portion of the estate is taxed at the highest marginal rate. The taxes and rates shown here apply to individuals. The unused portion of an individual s exclusion may be carried forward and used by his/her spouse s estate in most cases. This effectively makes the 2016 exemption $10.90 million for a married couple. The estimates here assume there was no carryover of a spousal exclusion.
Gift Taxes $14,000 annual gift limit (per person) Gift tax rates same as estate tax rates = 40% $5.45 million lifetime gift tax exemption for 2016, indexed for inflation Exceptions to rule
Generation-Skipping Transfer Tax Paid in addition to gift and other estate taxes Applies to property left to grandchildren or other persons more than one generation younger than you GST rate = Highest estate tax rate 40% Unified tax exemption: $5.45 million in 2016, adjusted annually for inflation
State Taxes Estate and Inheritance States that collect an estate tax and/or inheritance tax at the state level:* 1. Connecticut estate tax 11. Minnesota estate tax 2. Delaware estate tax 12. Nebraska inheritance tax 3. District of Columbia estate tax 13. New Jersey estate and inheritance tax 4. Hawaii estate tax 14. New York estate tax 5. Illinois estate tax 15. Oregon estate tax 6. Iowa inheritance tax 16. Pennsylvania inheritance tax 7. Kentucky inheritance tax 17. Rhode Island estate tax 8. Maine estate tax 18. Tennessee estate tax 9. Maryland estate and inheritance tax 19. Vermont estate tax 10. Massachusetts estate tax 20. Washington estate tax *The type of tax, tax rate, and amounts determined taxable vary widely from state to state. Check with the IRS, your state s department of revenue, and/or a tax professional for details. The information contained herein is not tax or legal advice and is not a substitute for tax or legal advice. Source: About Money, States With an Estate Tax or Inheritance Tax in 2015.
Taxes in Respect of Decedent IRAs and annuity payouts to heirs remain subject to income taxes Taxed at heirs ordinary rates Tax-efficient payout strategies can help minimize the tax bite
Trusts Some key uses of trusts include: Manage assets Protect assets Avoid probate Tax planning
Trust Categories Revocable trusts Can be changed Income and estate taxes paid by grantor (owner of estate) Irrevocable trusts Cannot be changed Income and estate taxes paid by trust
Living Trusts Grantor acts as own trustee you retain full control of trust assets Your assets move to heirs without going through probate Allows you to provide for management of your financial affairs in the event of incapacity Corporate trust/investment management firm often acts as full trustee or investment agent for trustee
Living Trusts How a Revocable Living Trust Works Trust Remainder Beneficiaries Income Beneficiary(ies) Income beneficiary(ies) typically the grantor and his/her spouse receives trust income during lifetime Spouse Child Other Remainder beneficiary(ies) are heirs to trust assets
How Portability Works: A Sample $8 Million Estate First spouse dies $8 million passes directly to spouse Estate tax exclusion passes to spouse No estate tax due to spousal exemption $0 federal estate tax Second spouse dies $8 million passes to heirs $10.90 million exclusion available $0 federal estate tax No estate tax, since estate is less than allowable exclusion
Credit Shelter Trust Due to recent tax law changes (i.e., Portability ) a Credit Shelter trust is no longer needed to pass unused portion of federal estate tax exclusion to a surviving spouse. Other potential uses of Credit Shelter trusts: Control how decedent s assets are handled after death. Provide additional tax benefits, such as reduced capital gains taxes. Reduce the size of surviving spouse s taxable estate when figuring state estate taxes.
Two-Trust Estate Plan $10 Million Estate No tax due to marital deduction* $5 Million to Spouse in Trust $5 Million to Beneficiaries Chosen by Spouse $5 Million to Credit Shelter Trust No tax on spouse s estate* No tax due to $5.45 million estate tax exemption* $5 Million to Beneficiaries Chosen by You *Assumes a federal estate tax exemption of $5.45 million in 2016. Amount will be adjusted annually to account for inflation.
QTIP Trust $10 Million Estate $5 Million to Spouse in QTIP Trust * Spouse is Income Beneficiary Remainder Beneficiaries Upon Death of Spouse Chosen by You *Assumes a federal estate tax exemption of $5.45 million in 2016. $5 Million to Credit Shelter Trust $5 Million to Beneficiaries Chosen by You
Life Insurance Trust Irrevocable Contributions are used to purchase life insurance policy on you Death benefit proceeds are not included in estate Proceeds can be used to meet estate tax obligations
Issues With Life Insurance Trusts Existing policies can be gifted Value must be determined Annual exclusion can be applied if present interest is given Transfer of existing policy triggers the three-year survival requirement This is avoided if the trustee takes out a new policy
Education Planning Considerations 529 College Savings Plans State-sponsored Tax-free distributions for qualified educational expenses High contribution limits Coverdell Education Savings Accounts Can contribute up to $2,000 per year per child Tax-free distributions for qualified educational expenses
Lifetime Gifting Family gifting Gift to Minors Trust Direct Payments to Medical/Educational Institutions 529 College Savings Plans/Coverdell IRAs Charitable gifting Split interests Gift Charitable Lead Trust Charitable Remainder Trust
Charitable Lead and Remainder Trusts Grantor Charitable Lead Trust Charitable Remainder Trust Charity Income during Noncharitable Beneficiary Remaining life of trust assets Noncharitable Beneficiary Charity
Charitable Gifts Why wait? Potential gift and estate tax savings Support the charities you believe in Enjoy the benefits of gifting while alive Current income tax deduction; tax deductions for cash contributions must be substantiated by a receipt or bank record
Living Arrangements What would happen if you couldn t handle your affairs? Who would act on your behalf to pay bills? Who would manage your investments? Who would deal with the paperwork that accompanies collecting insurance and other benefits? Who would make arrangements for your medical care and see that your wishes for treatment were carried out?
Alternate Decision Makers Durable powers of attorney Health care powers of attorney Living wills (directives to physicians) Organ donation Trustee powers and/or Conservatorships
Estate Planning With Your Financial Advisor Your Financial Advisor can help you: Clarify your specific estate planning goals. Assemble the right team of professionals. Determine appropriate wealth transfer strategies. Manage your assets to meet tax challenges.
How to Get Started Developing your wealth transfer and estate plan starts with a clear understanding of: What is important to you Your objectives What s currently working for you and what isn t Your financial situation
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