Estate Planning Basics
An Overview of the Estate Planning Process
PLC.1991 (11.09)
A word about this presentation.
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This presentation contains statements regarding the tax treatment of certain
financial assets and transactions. These statements represent only our current
understanding of the law in general and are not to be relied upon by Purchasers.
Income, estate, gift, and generation skipping tax rules are subject to change at any
time. Neither Protective Life nor its representatives offer legal or tax advice.
Purchasers should consult with their legal or tax adviser regarding their individual
situations before making any tax-related decisions.
•
Following the workshop, sales representatives will be on site to discuss specific
products and services you might consider in planning for your future.
•
Variable products are issued by Protective Life Insurance Company (PLICO), and
securities are offered by Investment Distributors, Inc. (IDI). Both PLICO and IDI
are located at 2801 Highway 280 South, Birmingham, AL 35223 (Attn: LAD 3-1)
and are subsidiaries of Protective Life Corporation. Protective Life Corporation is
a separate company and is not responsible for the financial condition or contractual
obligations of PLICO or IDI.
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Estate Tax Uncertainties
There are four areas of uncertainty about Federal estate
taxes:
• Currently (2010) the Federal Estate Tax is zero
• In 2011, the Federal Estate Tax will return with $1 million
exemption amount and top tax rates approaching 55% (and 60% for
very large estates)
• Congress might consider new tax laws that will change the
exemption amount, the tax rates, and other features of the estate tax
law
• We don’t know if or when Congress will act
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
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any tax-related decisions.
What Is an Estate Plan?
•
An estate plan is a map
•
This map reflects the way you want
your personal and financial affairs
to be handled in case of incapacity
or death
4
The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Who Needs an Estate Plan?
Chances are, you do:
Especially needed if:
•
Not just for the wealthy
•
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Your spouse isn’t comfortable
with financial matters
Without an estate plan, you
can’t control what happens
to your property if you die
or become incapacitated
•
You have minor children
•
Your net worth exceeds federal
estate tax exemption
($1 million after 2010*)
•
You own property in
more than one state
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Financial privacy is a concern
•
You own a business
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An estate plan makes your
wishes clear, and helps
avoid family disputes
•
Proper estate planning
can preserve assets and
provide for loved ones
*Based on current law. The $1 million figure may change if
Congress passes new tax legislation during 2010 or later.
5
The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Basic Estate Planning Concepts
Health
Care
Property
Management
Estate
Planning
Planning for
Incapacity
Tax Basics
Life Insurance
Trusts
Wills and
Probate
Lifetime
Gifting
Planning for
Death
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Planning for Incapacity
•
Incapacity is an important consideration in
estate planning
•
Without a plan for possible incapacity, a
court would have to appoint a guardian
•
Lack of planning increases the burden on a
guardian
•
A guardian’s decisions might not be what
the incapacitated person would want
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Planning for Incapacity – Health-Care Directives*
Living Will
Durable Power of
Attorney for Health Care
(Health-Care Proxy)
Do Not Resuscitate
(DNR) Order
Puts your
instructions
in writing
Lets you designate
an agent to make
decisions on your
behalf
Directs that
resuscitative
measures be
withheld or
withdrawn
*Health-care directive requirements vary by state.
The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
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Planning for Incapacity – Property Management Tools
Joint Ownership
Durable Power of
Attorney (DPOA)
Living Trust
Joint owner has
the same access
to property as
you do
Lets you designate
an agent to make
decisions on your
behalf
Lets a successor
trustee take over
management of
trust property
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
What Happens If You Die Without an Estate Plan?
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Some property passes automatically
to a joint owner or to a designated
beneficiary (e.g., IRAs, retirement
plans, life insurance, trusts)
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All other property generally passes
according to state intestacy laws
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
What Happens If You Die Without an Estate Plan – Intestacy
•
•
A typical intestate distribution
pattern looks like this:
Intestacy laws vary
from state to state
Husband / Father
Typical pattern of distribution
divides property between
surviving spouse and children
•
Your actual wishes are irrelevant
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Many potential problems
½
Wife
¼
¼
Child
Child
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Wills & Probate
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•
•
•
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A will is the cornerstone
of an estate plan
Directs how your property
will be distributed
Names executor and guardian
for minor children
Can accomplish other
estate planning goals
(e.g., help reduce taxes)
Written, signed by you,
and witnessed
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Wills & Probate – The Probate Process
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Most wills must be probated
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Will is filed with probate court
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Executor collects assets, pays
debts, files tax returns, and
distributes property to heirs
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Typically, process lasts several
months to a year
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Wills & Probate – Pros & Cons
Pros
Cons
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Time and costs are
typically modest
•
Can be time consuming
for complex estates
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Court supervision
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Title transfer delays
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Offers some possible protection
against creditors
•
Fees
•
Ancillary probate
•
Public record
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Wills & Probate – Avoiding Probate
•
Own property jointly with
rights of survivorship
•
Complete beneficiary designation
forms for property such as IRAs,
retirement plans, and life insurance
•
Use trusts
•
Make lifetime gifts
Can you avoid probate?
Yes, an estate plan can be designed to
control which assets pass through probate,
or to avoid probate altogether.
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Tax Basics
Transfer taxes include:
•
Federal gift tax - lifetime gifts
•
Federal estate tax - property
transferred at death
•
Federal generation-skipping
transfer taxes (GSTT) - transfers
to individuals more than one
generation below you
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Tax Basics – Federal Gift Tax
The donor files the return and
pays the gift tax.
•
Gift tax applies to lifetime transfers
•
Certain gifts are excluded $13,000 annual gift tax exclusion
in 2010*
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$1 million dollar gift tax exemption
in 2010*
Lifetime Transfer
You
(Donor)
Person
Receiving
Gift (Donee)
Gift tax may apply
*The National Underwriter Company, “Tax Facts 2010”
17
The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Tax Basics – Federal Estate Tax
The executor files the return and
pays the estate tax.
•
Estate tax applies to
transfers made at death
•
Property transferred to a spouse
or to a charity is generally not
subject to tax (fully deductible)
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$1 million estate tax
exemption*
Transfer at Death
Your Estate
Beneficiary
Estate tax may apply
*Based on current law for persons dying in 2011,
unless changed by new rules enacted by Congress
during 2010.
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Tax Basics – Federal GSTT
Transfer During Life
or at Death
You / Your Estate
•
•
The generation - skipping transfer
tax (GSTT) may apply to transfers
made to someone more than one
generation below you
$1 million GSTT exemption*
Child
(Donee / Beneficiary)
Grandchild
(Skip Donee / Beneficiary)
GSTT may apply
*The exemption amount for generation-skipping transfer tax purposes is equivalent to the estate tax exemption amount,
i.e., if we return to a $1 million estate tax exemption amount, that same amount will be used for purposes of the
generation-skipping transfer tax exemption.
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Tax Basics – Changing Landscape
Tax Rates
Estate Tax and GSTT repealed
60%
50%
40%
30%
20%
10%
0%
2004
2005
2006
Highest Gift Tax Rate
2007
2008
Highest Estate Tax Rate
2009
2010
Highest GSTT Rate
2011
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Tax Basics – Changing Landscape
Estate Tax and GSTT repealed
Exemption Amounts
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
2005
2006
Gift Tax Exemption
2007
2008
Estate Tax Exemption
2009
2010
GSTT Exemption
2011
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Lifetime Gifting
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Lets you see the recipient
enjoying your gift
•
Lets you help reduce transfer taxes
by taking advantage of the
$13,000* annual gift tax exclusion
and other tax deductions
•
Removes future appreciation of
property from your taxable estate
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But, no “step-up” in basis –
your basis in the property
carries over instead
*The National Underwriter Company, “Tax Facts 2010”
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Lifetime Gifting – Transfers Excluded from Gift Tax
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If you’re contributing to a Section 529
plan, you can give $65,000
($130,000 with spouse) gift tax free
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No gift tax on amounts paid directly
to a school for an individual’s tuition
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No gift tax on amounts paid directly
to a medical care provider for an
individual’s medical care
You can give $13,000* each year
to as many individuals as you
want federal gift tax free
($26,000* if you and your spouse
make the gift together)
*The National Underwriter Company, “Tax Facts 2010”
23
The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Trusts
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Versatile estate planning tool
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Can protect against incapacity,
avoid probate, helps reduce taxes
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Allows professional
management of assets
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Provide safeguards for minor
children, elderly parents,
other beneficiaries
•
Certain trusts can help protect
assets from future creditors
•
Control over property
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Trusts – What Is a Trust?
Grantor
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Legal entity that holds property
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Parties to a trust: grantor,
trustee, beneficiary
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Living trusts vs. testamentary trusts
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Revocable trusts vs. irrevocable trusts
Trust
Agreement
Trust Property
Trustee
Manages trust property according
to trust agreement
Beneficiaries
Have rights to trust property
under terms of trust agreement
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Trusts – Marital and Bypass Trusts
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Used by married couples
•
Bypass trust receives maximum
amount that can pass free of estate
tax under exemption – no estate tax
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Marital trust receives balance
of estate – no estate tax
(marital deduction)
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Surviving spouse receives income
during life, principal passes to
beneficiaries at death – estate tax
imposed on remaining marital trust
assets only, but may be offset by
surviving spouse’s exemption
First Spouse
to Die
Trust A
Marital Trust
(Balance of
Estate)
Trust B
Bypass Trust
(Exemption
Amount)
Surviving Spouse
Receives income from trusts
Beneficiaries (Children)
Receive principal upon death
of surviving spouse
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Life Insurance
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Can provide instant estate
•
Can provide needed estate liquidity
•
Life insurance proceeds are
included in your estate for federal
estate tax purposes unless your
estate plan addresses this issue
•
Key issue is ownership of policy
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Life Insurance – Irrevocable Life Insurance Trust (ILIT)
During Your Life
Insured
Irrevocable Trust
1. You (the insured)
create an irrevocable
trust and name a
trustee and
beneficiaries
3. You make regular
cash gifts to trust
2. Trustee purchases life
insurance policy on
your life – policy
owned by trust
5. Trustee uses cash
gifts to pay premiums
Insurance
Company
Beneficiaries
4. Beneficiaries
technically can
withdraw cash gifts
during limited
window of time
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Life Insurance – Irrevocable Life Insurance Trust (ILIT)
At Death
Insurance
Company
Irrevocable Trust
1. ILIT receives proceeds
of life insurance policy
2. Proceeds not subject
to estate tax
Beneficiaries
4. Beneficiaries receive
full proceeds, free
of estate tax
3. Proceeds distributed
according to terms of trust
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.
Conclusion
1. Have you implemented a plan for incapacity (health and
property)?
2. Do you have a valid will?
3. Is estate tax a planning concern for you?
4. Does your overall estate plan reflect your current wishes and
circumstances?
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The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal
or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making
any tax-related decisions.