Estate And Legacy Planning An Overview of the Estate Planning Process MVMA LUNCH 'N LEARN PROGRAMS November 10, 2015 By: Samuel S. Stalsberg Sjoberg & Tebelius, P.A Woodlane Drive, Suite 101 Woodbury, Minnesota Phone:

What Is an Estate Plan?  An estate plan is a map  The map reflects the way you want your personal and financial affairs to be handled in case of incapacity or death

Who Needs an Estate Plan? Chances are, you do  Not just for the wealthy  Without an estate plan, you can’t control what happens to your property if you die or become incapacitated  An estate plan makes your wishes clear and helps avoid family disputes  Proper estate planning can preserve assets and provide for loved ones  Protects beneficiaries from others and themselves Especially needed if:  Your spouse isn’t comfortable with financial matters  You have minor or disabled beneficiaries  Your net worth exceeds the federal transfer tax exemption amount ($5,430,000 in 2015) or, if less, your MN exemption amount ($1,400,000 in 2015)  You own property in more than one state  Financial privacy is a concern  You own a business  Second marriages

Basic Estate Planning Concepts Planning for Incapacity Planning for Death Property Management HealthCareHealthCare QuestionsQuestions Wills and Probate Tax Basics GiftingGifting TrustsTrusts

 Failing to plan means a court would have to appoint a guardian  Lack of planning increases the burden on your guardian  Your guardian’s decisions might not be what you would want  Attorney's fees, court costs and delays Planning for Incapacity Health Care

Disposition of Remains, Funeral Services, Organ Donation Lets you designate an agent to make decisions on your behalf Puts your instructions in writing Puts your instructions in writing Planning for Incapacity Health-Care Directives Miscellaneous Directions Durable Power of Attorney for Health Care Living Will

Planning for Incapacity Financial Management Without appropriate planning for management of your assets during incapacity, a court supervised conservatorship is probably necessary. Time Consuming Expensive Public Record

Lets you designate an agent to make decisions on your behalf Lets a successor trustee take over management of trust property Planning for Incapacity Property Management Tools Living Trust Durable Power of Attorney (DPOA) Joint Ownership Joint owner has the same access to property as you do

What Happens If You Die Without an Estate Plan?  Some property passes automatically to a joint owner or to a designated beneficiary (e.g., IRAs, retirement plans, life insurance, trusts)  All other property generally passes according to state intestacy laws

What Happens If You Die Without an Estate Plan? -- Intestacy  Intestacy laws vary from state to state  Pattern of distribution in Minnesota depends on marital status, and if all children are also children of the surviving spouse.  Your actual wishes are irrelevant, you are stuck with how the legislature assumes you want your property divided.  Many potential problems

Wills & Probate  A will is the cornerstone of an estate plan  Directs how your property will be distributed upon your death  Names personal representative and guardian for minor children  Can accomplish other estate planning goals (e.g., estate tax planning, trusts for children)  Written, signed by you, and witnessed

Wills & Probate -- The Probate Process  Most wills must be probated  Will is filed with probate court  Personal Representative collects assets, pays debts, files tax returns, and distributes property to beneficiaries  Typically, process lasts several months to a year

Wills & Probate -- Probate Pros & Cons ProsCons  Costs are typically modest  Court supervision  Protection against creditors  Can be time consuming for complex estates  Title transfer delays  Fees  Ancillary probate  Public record

Wills & Probate -- Avoiding Probate Can you avoid probate? Yes, an estate plan can be designed to control which assets pass through probate, or to avoid probate. Can you avoid probate? Yes, an estate plan can be designed to control which assets pass through probate, or to avoid probate.  Own property jointly with rights of survivorship  Complete beneficiary designation forms for property such as IRAs, retirement plans, and life insurance  Transfer on death deeds  Make lifetime gifts  Use trusts

Revocable Trusts  Versatile estate planning tool  Can protect against incapacity  Avoid probate  Allow professional management of assets  Control over property  Can revoke or amend  Private

Trusts -- What Is a Trust?  Legal entity that holds property  Parties to a trust: grantor, trustee, beneficiary  Living trusts vs. testamentary trusts  Revocable trusts vs. irrevocable trusts Grantor Trust Agreement Beneficiaries Have rights to trust property under terms of trust agreement Trust Property Trustee Manages trust property according to trust agreement

Revocable Trusts Pros 1. Avoid Probate 2. Incapacity Planning and Asset Management 3. Protects Privacy 4. Reduces Administrative Burden on Loved Ones Cons 1. More Complex 2. More Work Upfront (funding the trust) 3. Higher Initial Cost

Tax Basics Transfer taxes include:  Federal gift tax - imposed on transfers you make during your life  Federal estate tax - imposed on transfers made upon your death  Minnesota estate tax - - imposed on transfers made upon your death  Federal generation-skipping transfer (GST) tax - imposed on transfers to individuals who are more than one generation below you (e.g., grandchildren) both during your life and upon your death

Transfer Tax Basics Federal Top rate40% Gift and estate tax exemption equivalent amount $5,340,000$5,430,000$5,450,000 GST tax exemption $5,340,000$5,430,000$5,450,000

Tax Basics -- Gift Tax  Federal Gift tax applies to transfers made during your life  Certain gifts are excluded  $14,000 annual exclusion  Gifts for Education  Gifts for Medical Expenses  $5,430,000 exempt from all transfers (gifts and estates) combined in 2015  Minnesota Gift Tax [Repealed] You (Donor) Person Receiving Gift (Donee) Lifetime Transfer Gift tax may apply

Tax Basics -- Federal Estate Tax  Estate tax applies to transfers made at death  Generally does not apply to transfers made to spouse or charity  $5,430,000 exempt from all transfers (gifts and estates) combined in 2015  Any portion of exemption used for gifts will be unavailable to the estate Your Estate Beneficiary Transfer at Death Estate tax may apply

Tax Basics -- Federal Estate Tax  New feature important for married couples.  Exemption is “portable” - unused portion left by deceased spouse can be transferred to surviving spouse.  $10,860,000 can be left to beneficiaries tax free (in 2015).  Note: Portable feature does not apply to MN state estate tax

Tax Basics -- Federal Estate Tax Explanation of “Portability” Feature 1.Assume Husband owns $7M in assets and Wife owns $3M. Wife dies first. 2.Wife’s $3M estate passes to Husband. 3.Husband now owns $10M of assets. Husband can utilize the portable unused $5.43M from Wife and use his own $5.43 M exemption on top. 4. Result: No federal estate tax on $10.86M. NOTE: Minnesota estate tax is still applicable.

Tax Basics – Minnesota Estate Tax Review of Minnesota Estate Tax  Estate Tax Exemption through 12/31/13 - $1M  Decedents Dying in $1.2M (9%-16%)*  Decedents Dying in $1.4M (10%-16%)*  Decedents Dying in $1.6M (10%-16%)*  Decedents Dying in $1.8M (10%-16%)*  Decedents Dying in $2.0M  Over $2M but less than $2.6M – 10% of excess over $2M  Over $2.6 but less than $7.1 - $60,000 plus 13% of excess over $2.6M  *Tax on amounts exceeding the exemption.

Tax Basics – Tax Planning (Minnesota) A.An estate plan leaving everything outright to a spouse may not be appropriate for a couple with total assets in excess of the Minnesota applicable exclusion amount. B.Example: Husband and Wife each have assets of $2,000,000 and Husband dies in 2015 leaving his entire $2,000,000 estate to his wife outright.  No Minnesota or Federal estate taxes are due thanks to the unlimited marital deduction. Wife now owns $4,000,000 worth of assets. Wife dies later that same year.  No federal estate tax will be due at her subsequent death because her assets are under the federal exclusion amount.  Minnesota estate tax will be due, however, because her assets exceed the Minnesota exclusion amount.

Tax Basics – Tax Planning (Minnesota) H'S ESTATE $2,000,000 TO SPOUSE NO TAX Husband dies first in 2015

Tax Basics – Tax Planning (Minnesota) W'S ESTATE $4,000,000 TAXABLE Federal Taxes = $0 Minnesota Taxes = $268,000 BYPASS $0 Wife dies second, also in 2015

Tax Basics – Tax Planning (Minnesota)  To reduce MN estate tax, include tax planning in your estate plan  Bypass Trust (aka Credit Shelter Trust, Family Trust, “B” Trust)  Formula v. Disclaimer  Purpose  To use credit to pay tax at death of first-to-die  To use a trust to pass property values equal in amount to the exemption equivalent  To provide surviving spouse with use of property  To avoid tax on property at surviving spouse’s death

Tax Basics – Tax Planning (Minnesota) Example Revisited: Husband and Wife each have assets of $2,000,000. Husband dies in 2015, leaving $1,400,000 to a trust for the benefit of wife and children (Bypass Trust) and the remaining $400,000 passes outright to wife. Taxes at Husband’s Death: Federal Estate Tax due = $0 Minnesota Estate Tax due - $0 HUSBAND’S ESTATE $2,000,000 $1,400,000 BYPASS TRUST NO TAX $600,000 MARITAL DEDUCTION

Tax Basics – Tax Planning (Minnesota) Example Revisited: Wife dies later that same year. WIFE’S ESTATE $ 2,600,000* $2,600,000 TAXABLE $1,400,000 NON- TAXABLE No Federal Estate Tax Minnesota Estate Tax = $120,000 * Bypass Trust not included in Wife’s estate. BYPASS TRUST $1,400,000

Tax Basics – Tax Planning (Minnesota) Total Minnesota Estate Tax Savings $268,000 - $120,000 = $148,000

Lifetime Gifting  Lets you see the recipient enjoying your gift  Lets you minimize transfer taxes by taking advantage of the $14,000 annual gift tax exclusion and other tax deductions  Removes future appreciation of property from your taxable estate  No “step-up” in basis -- your basis in the property carries over instead

Lifetime Gifting -- Transfers Excluded from Gift Tax  You can give $14,000 to as many individuals as you want federal gift tax free ($28,000 if you and your spouse make the gift together)  If you’re contributing to a Section 529 plan, you can give $70,000 ($140,000 with spouse) gift tax free  No gift tax on amounts paid directly to a school for an individual’s tuition  No gift tax on amounts paid directly to a medical care provider for an individual’s medical care  Unlimited exemption for gifts to qualified charities

Legacy Planning  Gifts to Charity During Lifetime  Example: Outright Gift of $25,000 Mutual Fund to the MVMF  Supports wonderful causes of MVMF  No capital gains tax  100% income tax deductible  Lifetime Planned Gifts to Charity  Gift Annuities  Charitable Remainder/Lead Trusts

Legacy Planning  Gifts In Estate Plan  Use retirement plan beneficiary [most tax efficient]  Flat dollar amount by bequest  Tithing percentage by bequest  Family Foundation Planning with a Donor Advised Fund

MVMF Legacy Society  MVMF Board Appointed Planned Giving Task Force last fall Dr. Olson, Dr. McMenomy, and Dr. Greiner  Established the MVMF Legacy Society Includes anyone who has included MVMF in their will or estate plan  Detailed Information sent to MVMA this month  Website: mvmfcares.org/You-Can-Help  Questions: Contact Inez Bergquist at MVMF

MFMF Legacy Society  Detailed information mailed to members this month.  Website mvmfcares.org/youcanhelp  Questions? 

Conclusion I would welcome the opportunity to meet individually with each of you to address any specific concerns or questions that you may have: Samuel S. Stalsberg Sjoberg & Tebelius, P.A Woodlane Dr, Ste 101 Woodbury, MN Phone:  Have you implemented a plan for incapacity (health and property)?  Do you have a valid will?  Are transfer taxes a planning concern for you?  Does your overall estate plan reflect your current wishes and circumstances?