Essentials of
Estate Planning:
What You Need to Know
Presented by:
Joseph D. Serrano
• Estate planning is a process.
• After having been created, your
plan should be monitored, reevaluated, and updated
regularly.
• You are the one in control of the
entire process.
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INITIAL QUESTIONS
• Do you care who receives your assets when you die?
• Do you want someone to handle your children's assets if
you die while they are still minors?
• Do you care who will raise your children in the event of
your death?
• Do you wish to minimize the taxes
owed on your estate, as well as the
burden upon your heirs as to paying
them?
• Do you care about who will manage
your assets if you become disabled?
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Who will help me put together my
estate plan?
• Your Estate Planning Team,
which consists of:
– Your Family
– Your Accountant
– Your Financial Planner
– Your Estate Planning Attorney
– Your Religious Advisor
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What is my “estate”?
• Your estate is simply everything you own.
• It includes:
– your home
– other real estate
– frequent flyer miles
– bank accounts
– investments
– retirement benefits from your employer
– IRAs
– insurance policies
– collectibles
– personal belongings (such as jewelry)
– business interests
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Last Will and Testament
I, D. LAYED TOOLONG, of Jackson County, MO, having failed to write a Will expressing my
wishes, am stuck with this as my Last Will and Testament as prescribed by Missouri law.
1. If my spouse is alive after I die:
a. If one or more of my children are then alive, I bequeath $20,000 to my spouse. If my assets
are worth more than that, I bequeath one-half of the balance to my spouse and the other half to
my children.
b.
If none of my children survive me, I bequeath everything to my spouse.
2. If my spouse does not survive me, I bequeath my entire estate to my children who survive
me, or, if none, to my parents if they survive me, or, if not, to my brothers and sisters who survive
me.
3. If my children are minors, their portions of my estate will be managed by their Courtappointed Conservator, who may (but need not) be my spouse. Typically, the funds for my
children will be kept in accounts at banks selected by the Court, and any funds expended for the
care and education of my minor children will have to be approved, often in advance, by the Court.
If my spouse and the Court disagree as to expenditures, the Court's decision prevails.
4. The portion of my estate that I am leaving to my minor children will be given to them when
they turn 18, whether or not my spouse is then living. My children may then spend those funds as
they see fit.
5.
If my spouse does not survive me, my parents and my spouse's parents can fight over who
gets to raise my minor children. The Court will then decide with whom my children will live until
they become adults.
6.
Since I have no Will stating whom I want to administer my estate, the Court will select
someone to do so, who may (but need not) be my spouse. That person, even if it is my spouse,
will have to use funds from my estate to pay an insurance company for a bond to insure that my
estate is administered properly. That person will also be entitled to a fee for administering my
estate, and that fee will be paid from my estate.
7.
Estate taxes will be paid upon my death as provided by Federal and Missouri law, probably
sooner than need be, and at the highest applicable rates.
In Witness Whereof, not having cared enough to properly execute a document setting forth my
desires, I wind up with this as my Will.
/signed/ D. Layed Toolong
Who are the key persons in your Will?
• Family, friends and, if appropriate, charitable
organizations
• Guardians
• Executors
• Trustees
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Lifetime Documents
• Powers of Attorney:
– Durable Powers of Attorney
– Springing Powers of Attorney
• Health Care Proxies/Living Wills
• HIPAA Releases
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Death and Taxes
• For transfers at death: Federal exemption is
presently $2,000,000 (scheduled to increase to
$3,500,000 by 2009)
• For lifetime gifts: Federal gift exemption is frozen at
$1,000,000
• State estate, inheritance and gift tax laws vary and
have to be taken into account separately
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Federal Estate Tax Exemption & Rates
Year
Exemption
Rate
2008
$2.0 million
46%
2009
$3.5 million
45%
2010
Repealed
N/A
2011
$1.0 million
55%
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Tax Free Transfers
• Annual exclusion from gift tax: $12,000 per person,
per year (adjusted for inflation)
• College savings accounts are taxed favorably, but
gifts made to such accounts count against annual
exclusion from gift tax
• Gifts made to insurance trusts also count against
annual exclusion from gift tax
• Direct payments for tuition and
medical care are gift-tax-free
• Unlimited marital deduction to
Citizen spouses
• Unlimited charitable deduction
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State Estate and Inheritance Taxes
• Before 2001, state death taxes were relatively
uniform, and (usually) were fully credited against the
federal estate tax.
• The federal credit for state death taxes has been
phased out and replaced by a deduction.
• Overall, death taxes in many states appear to be
higher than they were before. They vary with the
residence of the decedent and the situs of the
assets.
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The Federal Estate Tax for Couples
With Assets of $4,000,000 or Less
(Death in 2008)
Example 1
Spouse A has assets of $4,000,000; Spouse B has assets of $0.
Spouse A dies first with a Will leaving everything to Spouse B
(or everything is held in joint names):
A.
When Spouse A dies:
Spouse A’s assets
Less federal estate tax
Amount passing to Spouse B
Spouse B’s assets
Assets supporting Spouse B
B.
$4,000,000
0
$4,000,000
0
$4,000,000
When Spouse B dies:
Spouse B’s assets
Less federal estate tax
Amount passing to children
$4,000,000
920,000
$3,080,000
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Example 2
Same assets divided the same way. Spouse A again dies first, but with a Will or
Living Trust incorporating estate tax planning designed to minimize the federal
estate tax:
A.
When Spouse A dies:
Spouse A’s assets
Less federal estate tax
Amount for Spouse B
Spouse B’s assets
Assets supporting Spouse B
$4,000,000
0
$4,000,000
0
$4,000,000
Division of above amount:
Property received by Spouse B from
Spouse A
Trust for Spouse B
Amount supporting Spouse B
$2,000,000
2,000,000
$4,000,000
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…and
B.
When Spouse B dies:
Spouse B’s own assets
$
0
Received from Spouse A
2,000,000
Spouse B’s total assets
$2,000,000
Less federal estate tax
Amount remaining
Plus trust for Spouse B
Amount passing to children
0
$2,000,000
2,000,000
$4,000,000
This is $920,000 more than in Example 1
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Example 3
Spouse A and Spouse B each have assets of $2,000,000 in separate names.
Spouse A dies first with a Will leaving everything to Spouse B:
A.
When Spouse A dies:
Spouse A’s assets
Less federal estate tax
Amount passing to Spouse B
Spouse B’s assets
Assets supporting Spouse B
B.
$2,000,000
0
$2,000,000
2,000,000
$4,000,000
When Spouse B dies:
Spouse B’s own assets
$2,000,000
Received from Spouse A
2,000,000
Spouse B’s total assets
$4,000,000
Less federal estate tax
Amount passing to children
920,000
$3,080,000
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Example 4
Same assets divided the same way. Spouse A again dies first, but with a Will or
Living Trust incorporating estate tax planning designed to minimize the federal
estate tax:
A.
When Spouse A dies:
Spouse A’s assets
Less federal estate tax
Amount for Spouse B
Spouse B’s own assets
Assets supporting Spouse B
$2,000,000
0
$2,000,000
2,000,000
$4,000,000
Division of above amount:
Spouse B’s own assets
Trust for Spouse B
Amount supporting Spouse B
$2,000,000
2,000,000
$4,000,000
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…and
B.
When Spouse B dies:
Spouse B’s own assets
Received from Spouse A
Spouse B’s total assets
Less federal estate tax
Amount remaining
Plus trust for Spouse B
Amount passing to children
$2,000,000
0
$2,000,000
0
$2,000,000
2,000,000
$4,000,000
Again, the children get $920,000 more
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Summary
Total federal estate tax paid:
Example 1 or 3
$ 920,000
Example 2 or 4
0
Federal estate tax saved
by estate tax planning
$ 920,000
Amount passing to children:
Example 2 or 4
$4,000,000
Example 1 or 3
3,080,000
Amount gained by children due to estate tax
planning
Note:
$ 920,000
Funeral and estate administration expenses and state death taxes, which
may be substantial, as well as any federal deduction for them are ignored
in the above examples. The above examples also assume that there were
no prior taxable gifts. All amounts are approximate.
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Would you rather leave
$920,000
to your children
or to your
“Uncle Sam”
?
Most Common Types of Trusts
• Revocable Trust/Living Trust
• Exemption Trust/Bypass Trust/Credit Shelter
Trust
• Marital Deduction Trust/QTIP Trust/Qualified
Domestic Trust (“QDOT”)
• Discretionary Trust/Sprinkle Trust/Spray Trust
• Insurance Trust/Second-to-Die Trust
• Dynasty Trust/Generation-Skipping Trust
• Supplemental Needs Trust
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Transfers by Resident Aliens
• With two very important exceptions, a resident who is
not a U.S. citizen (known as a “Resident Alien”) is
entitled to the same estate and gift tax credits as U.S.
Citizens
• The two very important exceptions:
– Gifts to a resident alien spouse are limited to
$120,000 per year (i.e. An Italian resident of the U.S.
makes a $320,000 gift to his Italian wife - $120,000 is
excluded. He must pay gift tax on the remaining
$200,000)
– Amounts payable at death to a resident alien spouse
are not entitled to the unlimited marital deduction
unless paid to a Qualified Domestic Trust (“QDOT”)
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Qualified Domestic Trusts
(“QDOT”)
• Qualifies for the marital deduction
• At least one Trustee must be a U.S. bank or U.S.
resident individual
• Must contain specific provisions insuring that the fund
will always be in reach of the IRS
• Income is paid to the surviving resident alien spouse
• Principal distributions may only be made for very
specific purposes, otherwise, tax is immediately due at
time of distribution
• At death of surviving resident alien spouse, trust is
taxed as if added to the original decedent’s estate
• Surviving resident alien may create QDOT so that
property will qualify for the marital deduction
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Retirement Plan Death Benefits
• Retirement plan benefits payable on your death will
be paid to the beneficiary you have named, if he/she
survives you
• Federal law requires that at least 50% of the death
benefits under qualified retirement plans be paid to
your spouse, unless your spouse has consented to a
different designation
(This rule does not apply to IRAs)
• To the extent that your spouse is not a
required beneficiary, and no beneficiary
has been named, the terms of the
retirement plan govern
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Three Primary Goals
of Retirement Planning
• Identify funds needed and available for retirement
income
• Evaluate savings and investment strategies needed
to meet retirement income objectives
• Integrate retirement plans into income and estate tax
planning
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Tax Planning at Retirement
• Defer income taxes for as long as possible
• Maintain as much flexibility as possible with
respect to investments and distributions
• Minimum distribution rules
during life
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Tax Planning at First Death
• Qualify benefits for Federal estate tax marital
deduction
• Consider how to take advantage of the
exemption
if retirement plans constitute a majority of
estate assets
• Continue income tax deferral and flexibility
– Spousal IRA rollover
– Long term post death payout
• Minimum distribution rules at death
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