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Iowa Inheritance Tax
• Eliminated in 1996 for children, grandchildren,
parents and grandparents
• Starts at $0 per recipients for non-lineal
decedents with a range from 5% to 10% above
$150,000 of taxable income
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Administration (Iowa)
• Executor/trix may receive $220 plus 2% of the
value of the estate over $5,000.
• Attorney is the same, but often money can be
saved by hiring the attorney by the hour.
• Bonding may be required.
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Liquidity
•
•
•
•
a).
b).
c).
d).
Cash
Life Insurance
15 year installment payments if qualified
Borrowing
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Unified Credit
• The estate tax due on $3,500,000 in 2009 was
$1,455,800
• However, no tax is due if you still have your
unified credit
• The excess is taxed at 45%
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Federal Estate Tax Credit
• Ramp-up in the applicable exclusion
–
–
–
–
–
–
$675,000 in 2001
$1,000,000 in 2002-2003
$1,500,000 in 2004-2005
$2,000,000 in 2006-2008
$3,500,000 in 2009
Estate tax repealed in 2010
• No basis step-up (with exceptions)
– $1,000,000 in 2011 and thereafter
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2010 Rules
• No tax, but no step up in basis?
• Can “adopt” the 2011 rules and get “step up
in basis” so would be useful for $5/$10 million
dollar estates.
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New rules
Husband and wives can share the $10 million
(Portability) or
have $5 million of “generation skipping” each
(Reunification) or
have $5 million of “gifting” each
In 2013 it is scheduled to go back to the old $1
million rules with 41% to 60% rates on excess
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ESTATE SETTLEMENT
Without a life estate / trust
Husband's death Wife's death
Gross Estate
$3,580,000
$3,590,000
Inheritance
$3,500,000
Life Insurance benefits no ownership $ 100,000
Total gross estate
$3,580,000
$7,190,000
Deductions
Debts
Admin.(estimated)
Funeral Expenses
Charitable deducts.
$0
$70,000
$ 7,000
$ 3,000
Total Expenses
$80,000
$0
$140,000
$ 7,000
$ 3,000
$150,000
To Spouse
To
Children (b.t.)
Adjust. Gross Estate
Marital Deduction
Taxable Estate - Fed.
Gross Federal Tax
Unified Tax Credit
State Tax Credit
Net Federal Tax
State Death Tax
Total Costs
Combined
$3,500,000
$3,500,000
$0
$0
$1,455,800
$0
$ 7,040,000
$0
$7,040,000
$3,048,800
$ 1,455,800
$0
$0
$80,000
$ 0
$ 1,593,000
$ ???
$1,743,000
$1,823,000
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ESTATE SETTLEMENT
With a life estate / trust
Husband's death
$3,580,000
Gross Estate
Inheritance
Life Insurance benefits
no ownership
Total gross estate $3,580,000
Deductions
Debts
$0
Admin.(estimated) $10,000
Funeral Expenses $7,000
Charitable deducts. $63,000
Total Expenses
$80,000
Wife's death
$3,580,000
$0
$ 0 paid to trust
$3,580,000
$0
$10,000
$ 7,000
$63,000
$80,000
To Trust (children)
To Children
Adjust. Gross Estate
$3,500,000 – spouse income $3,500,000
Marital Deduction $ 0
$0
Taxable Estate - Fed.
$3,500,000
$3,500,000
Gross Federal Tax $1,455,800
$1,455,800
Unified Tax Credit $ 1,455,800
$ 1,455,800
State Tax Credit
$0
$0
Net Federal Tax
$0
$0
State Death Tax
$0
$ ????
Total Costs
$10,000
$10,000
Combined
$20,000
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ESTATE SETTLEMENT
With a life estate / trust
under 2010 rules
Husband's death
$3,580,000
Gross Estate
Inheritance
Life Insurance benefits
no ownership
Total gross estate $3,580,000
Deductions
Debts
$0
Admin.(estimated) $10,000
Funeral Expenses $7,000
Charitable deducts. $63,000
Total Expenses
$80,000
Adjust. Gross Estate
Marital Deduction $ 0
Taxable Estate - Fed.
Gross Federal Tax $ 0
Unified Tax Credit $ 0
State Tax Credit
$0
Net Federal Tax
$0
State Death Tax
$0
Total Costs
Combined
Wife's death
$3,580,000
$0
$ 0 paid to trust
$3,580,000
$0
$10,000
$ 7,000
$63,000
$80,000
To Trust (children)
To Children
$3,500,000 – spouse income $3,500,000
$0
$0
$0
$0
$0
$0
$0
$ ????
$10,000
$10,000
$20,000
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Business, Succession, Retirement and Estate Planning for Farm and Ranch Women
ESTATE SETTLEMENT
With a life estate / trust
under 2011 rules
Husband's death
$3,580,000
Gross Estate
Inheritance
Life Insurance benefits
no ownership
Total gross estate $3,580,000
Deductions
Debts
$0
Admin.(estimated) $10,000
Funeral Expenses $7,000
Charitable deducts. $63,000
Total Expenses
$80,000
Adjust. Gross Estate
Marital Deduction $ 0
Taxable Estate - Fed.
Gross Federal Tax $ 0
Unified Tax Credit $ 0
State Tax Credit
$0
Net Federal Tax
$0
State Death Tax
$0
Total Costs
Combined
Wife's death
$3,580,000
$0
$ 0 paid to trust
$3,580,000
$0
$10,000
$ 7,000
$63,000
$80,000
To Trust (children)
To Children
$3,500,000 – spouse income $3,500,000
$0
$0
$0
$0
$0
$0
$0
$ ????
$10,000
$10,000
$20,000
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ESTATE SETTLEMENT
With a life estate / trust Under 2013 rules ????????
Husband's death
$3,580,000
Gross Estate
Inheritance
Life Insurance benefits
no ownership
Total gross estate $3,580,000
Deductions
Debts
$0
Admin.(estimated) $10,000
Funeral Expenses $7,000
Charitable deducts. $63,000
Total Expenses
$80,000
Wife's death
$ 3,580,000
$ 2,500,000
$ 0 paid to trust
$6,080,000
$0
$10,000
$ 7,000
$63,000
$80,000
To Trust ($1 mil. children, $2.5 mil wife)
To Children
Adjust. Gross Estate
$3,500,000
$6,000,000
Marital Deduction $ 2,500,000
$0
Taxable Estate - Fed.
$1,000,000
$6,000,000
Gross Federal Tax $ 345,800
$ 2,700,800
Unified Tax Credit $ 345,800
$ 345,800
State Tax Credit
$0
$0
Net Federal Tax
$0
$ 2,355,000 ???
State Death Tax
Total Costs
Combined
$0
$10,000
$ ????
$ 2,355,800 ???
$2,365,800
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Property
Trusts
Corpus - The assets that are held in trust (also called trust res, trust assets,
principal, or trust estate)
Trustee
Holds title to trust property; manages the trust property
Beneficiary
Person or institution for whose benefit trustee owns and manages the
trust property
Document also called Trust instrument
Document that embodies the terms of the trust
Donor Settlor/Grantor
person who funds the trust
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Advantages of Trusts
• Can separate assets from beneficiaries; i.e. separate
management from benefits
• Utilize professional manage of investments
• Avoid probate or minimize probate costs
• Provide for guardianship requirements of transfers to
minors or incapacitated persons
• Increase privacy in property transfers
• Guard against will contests
• Save estate tax, in certain cases
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Basic Trusts
• Trust may be
– Intervivos (Living trust) – established during life
• Revocable - can be changed
• Irrevocable – cannot be changed
– Testamentary – established at time of death, pourover trusts are established by a will
• Trust may be joint (one trust for both spouses) or
separate
• All trusts become irrevocable upon the death of
the settlor
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Types of Trusts
Living Trusts
Irrevocable Living Trusts
Revocable Living Trusts
Testamentary Trusts
Charitable Remainder Trusts
Life Insurance Trusts
Generation Skipping Trust
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Inter Vivos Revocable Trust
“Living Trusts”
• Avoids probate of trust assets
– Assets not required to go through probate process so transfer may be quicker
after death
– Generally costs more to create than a will, but avoids probate costs
– Commonly used to avoid probate in another state where property is held
• Property remains part of taxable estate for calculation federal estate tax
– Does not reduce the value of estate for estate tax planning
– Heirs do receive step-up in basis because of retained control
– Spouses can use their own individual unified credit
• Can be fully funded at creation, at a set later date or subject to pour-over
provisions of will
• Can be used to transfer management of assets – can involve successor
trustees to mange assets before death
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Inter Vivos Irrevocable Trust
• Can reduce value of taxable estate – common tool for very high
value estates
• If grantor/settlor does not retain interest in income or
corpus of trust
• Trust must benefit others – Ex. personal charitable foundation
• No retention of life estate in income
• Enjoyment by beneficiaries cannot be contingent on death of settlor –
must be present interest (some room to plan for minors)
• Irrivocable transfer of property
• Transfers subject to Gift Tax: over $13,000 (2012) per
person reduces unified credit but appreciation occurs
outside of estate
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Long term care insurance
• Your odds are 33% that you will spend more than 3
months in a nursing home (according to the insurance
industry)
• The very wealthy and very poor probably don’t need LTC
insurance
• AARP suggests those with assets of more than $75,000
but less than $1 million may want to consider LTC in the
Midwest
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Providing for Long-Term Care
• Adequate cash flow
– Significant earnings
– Sell asset
• Long-Term Care Insurance
• Medicaid
– Restrictions on resources
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Charitable Remainder Uni-Trust CRUT
• Transfer property into trust irrevocably
• Trust pays settlor income for life or term of years
– May provide for successive income beneficiaries
• Remainder of trust goes to charities after death of
settlor/successor beneficiary or after term of years
• May transfer appreciated property into CRT without
capital gain recognition
– CRT may sell appreciated property without recognizing
capital gain
• May receive charitable deduction
• Payments may go to “Crummey Trust” to buy life
insurance
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Charitable Remainder Annuity Trust
CRAT
• Transfer property into trust irrevocably
• Trust pays settlor income for life or term of years
– Relatively high rates of return on the full amount – no
recognition of capital gains
• Remainder of trust goes to charities after death of
settlor/successor beneficiary or after term of years
• May receive charitable deduction
• Payments may go to “Crummey Trust” to buy life
insurance
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Documents
Up to date estate plan
– Will
– DPA
Property titled correctly
– TOD/POD
Plans for non-titled property
Beneficiaries current – people tend to name and
forget
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Questions
• Who do you want to get into your safety
deposit box? Is their name on card?
• Does your will/trust provide for designating
personal items? Grandma’s Yellow Pie Plate
• Where is your most recent will located?
• Who needs to know your plan? Why?
• Have you compiled all critical information in
one place? Who knows where?
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Premiums
$$$$
Universal Life Insurance
or
Interest
Accumulation
(Investments)
Variable Life
Mortality
Adm. Costs
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Advance Directives
• Durable power of attorney
A grant of authority to make financial decisions
and conduct business on your behalf if you
become incapacitated
• Durable power of attorney for health care
A grant of authority to make health care decisions
on your behalf if you are unable to make such
decisions.
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Durable Power of Attorney
• Grant of power to another to look after assets and manage
affairs
• Anticipates possibility of incompetence; avoids need for
incompetency hearing or approval of guardian
• Statute defines powers (plenary – complete, unqualified)
– Should also include express powers for tax returns, life insurance
matters, making gifts, transferring property into trust, accessing safe
deposit box, dealing with retirement plans and Social Security
• May be contingent or present
– Contingent – effective only upon incompetence
– Present – effective when executed and continues in spite of
incompetence
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Durable power of attorney for health care
Allows you to:
Choose a person (agent) to make health care decisions for you if
you cannot speak for yourself
Communicate instructions about your health care
Your responsibilities
Think about your values and wishes
Choose someone you trust
Choose an alternate agent
Talk to family members and the agent concerning your wishes
Complete, sign and make copies for the agent and family
members
Agent responsibilities
Understand your wishes
Evaluate choices about your heath care
Make decisions in accordance with your wishes
Keep the original document
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Living will
becomes effective when death is the alternative to
treatment and you are unable to make that decision
Allows you to:
Direct physician to withhold or withdraw treatment
that could prolong the dying process
Your responsibilities
Clarify wishes with your family and with your physician
Complete the proper forms
Make copies for your family and physician
Doctor’s responsibility
Follow your wishes
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Overview
Crucial estate planning steps
– Examination of how property is owned or held
– Review of family insurance program
– Advisability of lifetime gifting
– Alternatives for disposing during life or after death
– Transferring the family business
– Get started
– Get it written
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YearPlanning Estate
Taxand
Exemption
Top Estate Tax Rate
Business, Succession, Retirement and Estate
for Farm
Ranch Women
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
*2010
2011
2012
2013
$600,000
$625,000
$650,000
$675,000
$675,000
$1,000,000
$1,000,000
$1,500,000
$1,500,000
$2,000,000
$2,000,000
$2,000,000
$3,500,000
$5,000,000 or $0
$5,000,000
$5,000,000
$1,000,000
55%
55%
55%
55%
55%
50%
49%
48%
47%
46%
45%
45%
45%
35% or 0%
35%
35%
55%