Presentation on theme: "A Sensible Approach to Planning Your Estate"— Presentation transcript:
1 A Sensible Approach to Planning Your Estate Hello, my name is _________ and I am ____________ with __________. Today I’d like to talk about wealth transfer.According to a 2010 recent study from the Center for Retirement Research at Boston College for the MetLife Mature Market Institute, it is estimated that between $8.4 and $11.6 trillion dollars will transfer to loved ones, charities and the government during the 55 year period from 1998 through What are your plans for your portion of these funds? Who do you want to receive your assets, and on what terms, when you are gone?Let’s get started.A Sensible Approach to Planning Your Estate
2 What is Estate Planning? Goals include, but are not limited to:Accumulating or creating your legacyPlanning for the orderly distribution of your assetsPassing your assets intact by incorporating the necessary liquidityEstate planning means different things to different people. One aspect of estate planning is the creation of your estate. This involves the accumulation of assets over your lifetime.Another aspect of estate planning is deciding who should inherit your assets and how they should inherit them at your death. This aspect of estate planning involves personal choices and legal documents such as wills and trusts.A third, and very important aspect of estate planning, focuses on minimizing and paying the costs associated with dying.For very affluent individuals, a significant cost could be the federal estate tax, which is essentially a “transfer” tax. It is a tax upon your right to transfer property at your death. Generally, the estate tax is due and payable in cash within nine months of your death.Whether or not a particular estate will be subject to this transfer tax depends upon several things: the estate tax law in effect at the time of death, the size of the estate and to whom the estate is transferred.You may have heard that the federal estate tax exclusions have been raised to essentially eliminate the majority of Americans from this tax. While this is true, we will discuss throughout the presentation that federal estate taxes are not the only taxes to be concerned about with regard to your legacy. There are other taxes which may apply to significantly smaller estates as well as charges, expenses and fees you can prepare for in advance to minimize the effect they have on your wishes for the distribution of your assets after you are gone.Please note: This document is designed to provide introductory information on the subject matter. MetLife does not provide tax and legal advice. Clients should consult their attorney and/or tax advisor before making financial investment or planning decisions.
3 Five Questions to Consider What do you want to accomplish?What are the basics?What are the challenges?What strategies are available?What can you do to ensure your goals are achieved?These are the five questions you should consider in the estate planning process.Let’s start with number 1 - What do you really want to accomplish with your estate plan?
4 1. What Do You Want to Accomplish? Estate Planning GoalsOrganize your personal affairsProvide for a surviving spouse and/or dependentsLeave assets to your beneficiariesReduce estate costs and taxesProtect your assets from unintended recipientsWhen planning an estate, most people want to (READ SLIDE).The most critical step in the process is to think carefully about what you want to accomplish. Your goals are personal and specific to you.Take a few moments to write down what you want to have happen. Once you have your wishes in writing, you can pursue these goals. With proper planning, your distribution wishes will be honored, reducing delays and family friction.Remember that a plan that is just in your head and not implemented, will have none of the desired results.
5 2. What Are the Basics? What’s Included in Your Estate? Property in your nameYour interest in joint propertyLife insurance you own in your nameIRAs and retirement plansAfter clarifying your goals, the next step is to assess your current situation and how those assets are going to work towards realizing your vision.Let’s start by discussing what is included in your estate.Everything you own by yourself or with others, or retain certain interests in, is included in your estate. That means all of your worldwide property. It’s the house, car, money, jewelry, golf clubs, clothing, tea pot collection — everything. If you own a business with partners or a vacation home with siblings, your portion of that value would also be included.The death benefits paid by any life insurance policies you own are included, as are IRAs and retirement plans in your estate.You should work with your advisors to create an estimate of the value of everything because this total number is your gross estate. This number will have an impact on how you plan.
6 2. What Are the Basics? How Property Passes at Death You Operation There are three ways that property can pass at your death:Will- Property that you own in your own name does not automatically “know where to go” when you die. A properly executed will controls how and to whom this property passes at your death. If you do not have a will, the intestacy laws of each state dictate how this type of property passes at your death. Your interest in property that you own with someone as a “tenants in common” also passes under your will.Contract- This type of property involves some sort of contract where you have named a beneficiary, such as a life insurance policy, an annuity or a retirement plan. Provided you have properly named a beneficiary, your will has no control over the distribution of this type of property.Operation of Law- means that the piece of property will automatically be distributed to a survivor, such as a house owned “jointly with rights of survivorship” between spouses. Keep in mind that some laws vary by state.It’s important to not only know what you have, but to also know how you own it so that you can understand how it will pass at your death. Periodically review any ownership or beneficiary documents for your assets because it is very easy to forget to make these updates when you decide to make a change. Remember that how you own it can play an important factor in who gets it.At this point, if you’ve made the appropriate arrangements, your wishes regarding who will inherit the asset will be carried out.WillOperationof LawContractOperationof Law
7 2. What Are the Basics? Work with a Team Financial professional AccountantEstate planning attorneyGenerally, planning your estate is not a do-it-yourself project. Take advantage of the experts.When preparing your legacy, it is important to have a qualified and experienced team working to achieve your goals. This should include your financial professional, an estate planning attorney and an accountant. In addition, you will probably want to include your spouse, partner, children or other beneficiaries who play a critical or ongoing role in your plans, especially if the plan is for them to act as executor or trustee at a future date.The financial professional works in unison with both the accountant and the estate planning attorney to offer appropriate strategies. The accountant is a professional whose business is to be on top of the tax laws. He or she can also help you to calculate the value of your estate. The estate planning attorney can help you implement certain estate planning tools, such as a will or a trust.
8 2. What Are the Basics? Documents to Create with Your Attorney Will Power of Attorney (Health)Durable Power of Attorney (Financial)Living WillDocuments related to small business ownershipTrustsDocuments to create with your attorneyAn attorney is generally required to create the following types of documents.A will should clearly spell out what you want to have happen to your assets and possessions at your death. Without a will, the state may decide who will inherit your assets. The state may also determine guardianship of minor children if not specified in a valid will.A durable health power of attorney or proxy assigns the person that you want to make health decisions for you if you are unable.A durable financial power of attorney assigns the person who will make financial decisions if you are unable.A living will provides clear instructions as to what treatment you do and do not want if you are unable to speak for yourself.Please consider having these documents created if you do not already have them. They can provide you with assurance that your plans will be carried out and provide your loved ones a clear understanding of your wishes. Once you create these documents, make sure that you revisit them at least annually to ensure that they are up-to-date and that they reflect your current wishes.It is important that a family member or a trusted advisor know where these documents are kept.
9 3. What Are the Basics? Trusts Grantor - Sets it up A useful estate planning basic is a trust.The reason to set up a trust is to give you additional control over how and when your beneficiaries receive your assets.There are three players:The person who sets it up is called the grantor. The people whom the trust is designed to benefit are the beneficiaries. That’s whoever you want to get the money. The person who executes the instructions contained in the trust document is the trustee. The trustee can be anyone you choose or it could be a bank or other financial institution. It is someone you feel you can trust to take care of the trust. In certain situations, however, it may not be advisable for the trustee to be yourself or your spouse.Some people think of a trust as a document, but I would like you to think of it as a container designed to hold money and other assets for your beneficiaries. You decide what you are going to put into the trust, you decide who gets what is in the trust and you decide how it is distributed.A properly structured trust can help ensure that your plan is executed exactly the way you intend it to be. A trust should be drafted by an attorney with experience dealing with estate planning and trusts.There can be gift and estate tax consequences to the various types of trusts used in estate planning. I’ll talk more about how you can use trusts later on in this program.Beneficiary – Receives the benefitsTrustee - Executes the instructions
10 4. What Could Present Challenges? Final ExpensesDebtsLong term careFuneral billsMedical billsProbate expensesTaxes (federal and/or state)The fourth question is to identify what might get in the way of planning your estate.Final expenses can reduce the size of your estate before assets pass to your beneficiaries.These can include:Debts and mortgagesFuneral bills (The average cost of a funeral, including cemetery plot and headstone, can typically be $10,000 or more—making final arrangements for a deceased relative one of the biggest expenses families face. (The High Cost of Saying Goodbye, CNNMoney, November 9, 2012.)Medical billsProbate expensesYour beneficiaries stand in line behind all of the above to receive their share. They get what is left. Without proper planning, they may get a lot less than you think.However, with planning these costs can be anticipated, managed and potentially reduced. If your estate is subject to federal estate taxes, it’s important to know that, generally, federal estate taxes are due within nine months after death, in cash.The IRS doesn’t want a house or car — they require cash.Let me tell you about Georgia. When her father passed away, Georgia was in charge of wrapping up his estate. Working with an estate planning attorney and an accountant, it was determined that her father’s estate owed $200,000 in federal estate taxes.The estate had $100,000 in cash, but where would the other $100,000 come from? Georgia was forced to sell her father’s home which she had wanted to keep in the family. To add insult to injury, because the estate had only nine months to pay, Georgia was forced to sell the home below market value.If you think your estate may be subject to state or federal estate taxes, you may want to make sure your estate has the cash needed to pay any associated taxes.
11 4. What Could Present Challenges? ProbatePublic can access documentsProcess can be slow and costlyOne of the most significant costs associated with dying can be probate costs. This is the legal process of verifying your will through the courts. Probate can be slow and costly. Probate is not private. Anyone who wants to know can find out who is getting what.If you didn’t want Cousin Mimi to know that Cousin Smitty was getting your ceramic cow collection, you may be out of luck.There are actions one can take to ensure that at least some of your assets are passed to your beneficiaries outside of probate.A revocable living trust is a type of dispositive vehicle that can help you avoid probate delays and expenses. For the trust to reduce probate expenses, you must re-title your assets into the name of the trust before you die. Since the trust is revocable, re-titling does not result in a completed gift—you can call the assets back into your own name at any time.A revocable trust DOES NOT reduce estate taxes. It is not designed, nor intended to do so.You still need a “pour over” will when you use a revocable trust for assets which were not titled in the name of the trust upon your death.
12 *IRD tax deduction may be available. 4. What Could Present Challenges?Income in Respect of a Decedent (IRD)If you didn’t pay tax on accrued income, your beneficiaries will have to.Estate taxes are not the only tax that you need to be aware of. A little-known tax applies to people who inherit certain types of money and is referred to in the tax code as Income in Respect of a Decedent, or IRD. This is jargon that I can put into plain English for you.If you die and you have income that would have been subject to income tax had you lived, your estate or your beneficiaries are going to have to pay income taxes on that money.As little-known as this tax is, it is likely that some of the most valuable assets within your estate may be subject to it. Examples of assets subject to this tax include savings bond income, retirement account payouts(IRAs, 401(k)s, 403(b)s) and sales commissions. Basically, any income you would have received and been taxed on had you lived.It’s important to understand how IRD can affect your plans. Let me give you an example:Virginia passed away with an estate valued at $300,000, with $200,000 of that in her 401(k). Let’s assume Virginia passed away in 2013 and that she never paid income tax on any of the money in the 401(k). Her beneficiaries will be taxed on the full $200,000 as ordinary income.Even though Virginia’s estate was valued under $1,000,000 in 2013 (which is well below the amount which would be subject to estate taxes) her beneficiaries will still need to pay tax on the $200,000 in the 401(k). If the IRD assets are also subject to federal estate taxes, then there exists an income tax deduction the beneficiaries may claim to account for the estate tax attributable to the same IRD asset.Understanding how these taxes work enables you to better prepare for them and potentially reduce their impact on the vision you have for your legacy.Not only can you not “take it all with you,” but IRD may also prevent your beneficiaries from “taking it all with them” too.**IRD tax deduction may be available.
13 Potential Transfer Tax Exposure 4. What Could Present Challenges?Potential Transfer Tax ExposureFederal estate/gift tax on estates over $5M per person (indexed for inflation after 2011)Residents of certain states with inheritance taxes or states which have decoupledOwners of highly appreciating assetsIndividuals expecting additional inheritances (resulting in a total estate over the basic exclusion amount)Under the American Taxpayer Relief Act of 2012, estate tax rates have been made permanent for the first time in more than a decade. As a result, many feel that estate and transfer taxes have become a “non-issue” for the vast majority of Americans. Let’s take a moment to review the exclusion amounts and common situations which should be examined more closely.Under current law, each U.S. citizen has a lifetime applicable exclusion amount of $5 million as of Indexed for inflation after 2011, the 2013 applicable exclusion amount is $5,250,000. (With the proper election, a spouse’s unused exemption is portable to the surviving spouse.) Above this exclusion the maximum federal estate and gift tax rate is 35%.However, approximately 40% of states have either imposed state-level inheritance taxes or “decoupled” and are no longer following the federal exclusion levels for the purpose of calculating their own state estate taxes. These states typically have exemptions significantly lower than the federal basic exclusion amount. While they also typically have lower estate tax rates, they can still be significant with most in the 10-20% range.While the current law does allow for the federal applicable exclusion amount to be indexed as often as annually for inflation, the adjustments in the first few years have hovered near 2% annually. If your portfolio consists of highly appreciating assets such as a closely held business, real estate or investments; you should be aware of the potential for the growth of these assets to outpace the federal basic exclusion amount, thereby creating a future estate tax potential which may not exist today.(For example, a 55 yr old couple with $5 M in assets appreciating at 7% annually could grow to $40 M before reaching their joint life expectancy of 85.)Finally, consider the value of any future inheritances you may be anticipating and how any lump sums could potentially increase your estate to the point of becoming taxable.
14 5. What Strategies are Available? Unlimited Marital Deduction and Spousal PortabilityMarried couples have several advantages available to them.The first is called the unlimited marital deduction. Anything and everything that you give while alive or leave at death to your spouse is gift and estate tax free. There is no dollar limit to this benefit. As long as your spouse is a U.S. Citizen, if you leave everything to your spouse then you would be left with a taxable estate of zero. It is important to note that this is a federal benefit and as such, is based upon the federal definition of marriage which currently excludes same-sex and common law couples.While this may sound terrific, you should keep in mind that this may be just a “deferral” technique, not a tax elimination technique. This is because when your spouse dies, he or she may have an even larger estate, which may in turn create an even larger estate tax liability. Prior to 2012, this could create a real problem in that the estate tax exclusion for the first spouse to die could not be carried over to the second spouse.The American Taxpayer Relief Act of 2012 made permanent the ability of the surviving spouse to also use any remaining basic exclusion amount of the deceased. This portability, combined with the much higher exclusion amounts enables couples to leave the full estate to the survivor and still exclude $10.5 M in 2013.Be aware that for those of you living in states with their own state or inheritance taxes, portability may not apply on the state level. You may still need to plan your exclusions carefully with qualified professionals to ensure they are used to best achieve your wishes.Finally, you should also keep in mind that not every “marriage” qualifies for this unlimited deduction. Your marriage must be recognized by the federal government. “Non-traditional” relationships such as state sanctioned same sex marriages or common law marriages do not qualify. If you are in this situation, there may be special preparations required to protect your loved ones and your assets. This is another area where different rules and definitions may apply at the state level.No estate taxes due on assets passing from one U.S. citizen spouse to another
15 5. What Strategies are Available? Lifetime GiftingGifting allows you to reduce the amount of money in your estate, which can potentially lower federal and/or state estate taxes. Future income and appreciation attributable to gifted assets may be removed through lifetime giving, further reducing the potential of having a taxable estate. Perhaps more importantly, you will have the opportunity to witness the impact and enjoyment the gift gives the recipient — which is something you can’t do after you are gone.For example- if you gift $5,000 worth of stock to your child. That stock is removed from your estate. Any future dividends would be issued and taxed to your child; and if your child sells the stock in 10 yrs for $10,000 the capital gains would be your child’s responsibility.While large gifts are subject to the same lifetime exclusion amounts as the federal estate tax exclusion, there are a few exceptions to that rule.First are annual exclusion gifts. Currently under this exclusion, a U.S. citizen may give up to $14,000 per year to as many people as he or she chooses. If married, that individual may double that amount to $28,000 as long as their spouse consents to the gifts. This amount is adjusted periodically for inflation. (These are permanent gifts which cannot be subject to limitations or revoked.)Second is that you may make payments directly to the provider of certain medical or educational expenses on behalf of another individual. When properly made, these payments are not subject to estate, gift or Generation Skipping Transfer Tax (GSTT), and do not count against the annual gift tax exclusion.Third is that any gifts or bequests at death that you make to a qualified charity are fully deductible for gift and estate tax purposes.Consult with your advisors about the appropriateness of a lifetime giving program, which assets you might consider gifting and the various rules surrounding lifetime gifts which may apply to your specific situation.Annual gifting of up to $14,000*Unlimited payments directly to institutions providing certain education or medical expenses on behalf of another individualUnlimited gifts to charitable organizations*$28,000 if spouses split the gift.
16 Applicable Exclusion Amount 5. What Strategies are Available?Applicable Exclusion AmountAmount exempt from estate, gift and GST tax by the applicable creditAnother benefit available to all taxpayers is the Applicable Exclusion Amount. This is the amount that can be transferred exempt from estate, gift and GST tax.On January 2, 2013, The American Taxpayer Relief Act was signed into law. Among other provisions, the Act continues the Applicable Exclusion Amount of $5 million for federal estate tax purposes in 2011, indexed for inflation thereafter. Individuals must still evaluate with their tax, legal and financial professionals the potential impact of state death taxes on their estate. Individuals should also consult with their professionals regarding steps that can be taken now to reduce estate tax exposure or prepare for the future liquidity needed for expenses, fees and taxes. Keep in mind that should this legislation be changed in the future, the legislation in effect at the time of death will be what applies to an individual’s estate.If your estate is currently above these limits, or if you believe it may be by the time you die, you may choose to use this exclusion at any point during your lifetime. Doing so may effectively reduce your estate by removing any future appreciation or income from the estate, but amounts gifted using the lifetime exclusion amount are usually added back into the estate for determining the estate tax calculation. No gift tax is imposed for lifetime gifts up to the current applicable exclusion.Year2013Estate/Gift/GST$5.25m
17 5. What Strategies are Available? Irrevocable Life Insurance TrustAs we have discussed, gifting programs are very common strategies to reduce the size of your estate and also witness the recipient’s enjoyment of the gift during your lifetime. This can be accomplished by making gifts outright or using a trust, but for the gifted assets to be removed from your estate, the gift must be irrevocable. In other words, once given, it cannot be reclaimed or changed.Irrevocable trusts are documents which have long been used to reduce or manage exposure to taxes, but these trusts also provide the ability to dictate terms upon which your beneficiaries are eligible to receive the assets within. For this reason, many people establish trusts to formalize their wealth transfer plans even if they may not believe their estate will have any estate tax liability. For example, your attorney may be able to help you insert provisions to: prevent beneficiaries from having unlimited access to funds, protect assets from potential judgments against beneficiaries by ex-spouses or other creditors; or even promote certain interests you value, such as education, career development or philanthropy.While other types of financial products may be used within this type of trust, life insurance is often chosen because it features: 1) an income tax free death benefit, 2) the possibility to leverage a limited number of premium payments into a sizeable death benefit, 3) a wide variety of product options to help meet preferences for premium design, coverage durations and risk tolerance and 4) guaranteed death benefits on certain products — subject to the claims paying ability and financial strength of the issuing insurance company.Irrevocable trusts can come in many variations to meet almost any need. Your attorney can help you craft the irrevocable trust with the provisions most important to your goals.Trust is owner and beneficiary of a life insurance policyDonor dies, trust lends money to, or purchases assets from, the estateCash used to pay estate taxes
18 5. What Strategies are Available? Life insuranceIncome tax deferred growth potentialIncome tax free death benefitCreates liquidity to pay taxes or divide illiquid assets more equitablyIf large charitable gifts are planned, may replace value of those gifts for heirsPossibility to leverage a limited number of premiums into sizeable death benefitPotential for guaranteed death benefits*Within an irrevocable trustGifts to irrevocable trust reduce size of taxable estateEstate tax free death benefitLife insurance is a popular product for wealth transfer because it has several distinct advantages. Life insurance gives you the possibility to create a substantial death benefit in exchange for a limited number of premium payments. It also provides the potential to accumulate assets on a tax deferred basis and an income tax free death benefit which can be very useful for your legacy. The death benefit can create liquidity to pay taxes; or help create a more fair distribution of your legacy if your estate contains one or more large, illiquid assets. Many individuals planning a significant bequest to charity often also use the policy’s death benefit to replace the value of the charitable donation for personal beneficiaries.Life insurance policies may also have death benefit guarantees, as part of the product or by adding an optional rider to the policy. Just remember, that all product guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company.Having a life insurance policy owned by an irrevocable trust removes it from your taxable estate. By gifting the dollars to the trust which will be used to purchase the insurance, your taxable estate is reduced by the amount of those gifts, which can reduce the amount your estate may ultimately owe. Perhaps more importantly, because you relinquished all rights to the trust assets, including the policy within, the policy’s death benefit will also be estate tax free.These financial benefits of having an irrevocable trust own the policy as well as the ability to define the terms of your legacy for the trust beneficiaries are why many successful families choose life insurance within an irrevocable trust as a cornerstone of their estate plan.*Guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company.
19 5. What Strategies are Available? Review your wills and trustsDo they reflect your current wishes?Are all of your assets addressed?Do they reflect your current beneficiaries?Is there adequate liquidity to accomplish your goals?Are they flexible to accommodate future changes?It is important to review your plan periodically to ensure it still meets your needs.Make the time to speak with your legal, tax and financial professionals to review your goals, family situation, personal assets and existing documents. Several important things to review are shown on this slide.Do your documents reflect your current wishes? Have your goals changed in regard to transferring your wealth?Are all of your assets addressed, inventoried and accurately valued? Have there been any inheritances from other relatives? Did you start a business? Have you bought or sold assets within your portfolio?Do your documents reflect the accurate beneficiaries? Have grandchildren or great-grandchildren been born? Have there been divorces or deaths in the family? Are your charitable beneficiaries accurately identified?Does your estate contain adequate liquidity to accomplish your goals? Would you potentially have to sell assets to pay estate or inheritance taxes? Do you have one or two large assets such as a business or vacation home that would be difficult to divide fairly among your children?Is your plan and its supporting documents flexible enough to withstand family changes or legislative changes? Can it adjust to a changing tax environment or adapt to meet the needs of your beneficiaries as they evolve over time?These situations and any others specific to your personal situation should be considered and evaluated with your team of professionals at least every few years to make sure the legacy you leave is as close as possible to the legacy you envision.