1. Estate Planning Parman R. Green University of Missouri Extension
Ag Business Mgmt. Specialist
July 2006
Estate planning is important because while not everyone has a taxable estate – everyone has an estate! Estate planning is the means for providing directives for the supervision and distribution of your property after your death.
The State of Missouri provides a default estate plan for its residents – it provides distribution by “relationship” formula, no preferences, and the estate must be probated.
We are in a period of great uncertain relative to whether estate tax will be repealed or reformed. The certainty is uncertainty – estate tax laws will change, we just don’t know how or when!
The overwhelming majority of people are not liable for any estate tax. Further, the vast majority of the few people that would be liable for estate tax can avoid any estate tax with a small to moderate amount of planning.
So why is estate planning such an important component of life planning? Its because most of their estate goals and objectives can only be assured with planning during their life!
However, given the certainty of change – it is imperative we design estate plans with flexibility and cost efficiency! Again stress that estate planning is critically important whether estate tax is repealed or not. So where do we begin? Answer: Their Goals and Objectives!

2. Program Goals Identify & Prioritize EP Goals & Objectives
Identify Tools & Provisions for Meeting Goals
Compile a Balance Sheet
Complete an SOS
“Special Organized Stuff” … for Heirs
Estimate Your Potential Estate Tax and Settlement Costs
Use a flip chart or chalk board to list any special goals identified by the participants.
Stress it is critical we coordinate our estate planning objectives and strategies with those of our income tax management, retirement planning, and business planning objectives and strategies.

3. Estate Planning Goals and Objectives
Income & Security for Life
Treat Heirs Equitably
Provide for Special Needs
Minimize Taxes & Settlement Costs
Transfer of Family Business
Meet Requirement for “Special” Provisions
Special Bequests
Deal with Living Will, Durable Power of Attorney, and Long-term Care Issues
Regardless of the estate size, the first step is to identify the individual’s and/or couple’s goals and objectives.
It is important to not only identify these for the couple – but for each spouse. For example, the goals and objectives may be different if the wife survives the husband and vice versa.
To facilitate communication and insure clarity for the estate planning team – the goals and objective need to be written.
This listing is not all inclusive!
The identified goals and objectives must be prioritized – if all of the objectives can not be met – which ones are to be satisfied first.

4. Federal Estate and Gift Exclusion Amounts
Year
Maximum
Rate
Estate
Exclusion
Gift
2003
49%
$1.0 million
2004
48%
$1.5 million
2005
47%
2006
46%
$2.0 million
2007
45%
2008
2009
$3.5 million
2010
35% gifts
Repealed
2011
55% + 5%
Stress that under current law - federal estate tax is repealed for one year (2010) and that gift tax is not repealed.
Also that we have now entered a period of time where the exclusion amounts for taxable gifts and estates are different.
The federal estate maximum rate (not all rate brackets) decrease 1% per year through 2006 – then is maintained at 45%.
If the estate tax repeal is made permanent – taxable gifts will continue to have an exclusion of $1 million and a maximum rate of 35%.

5. ESTATE & GIFT TAX UNIFIED RATE SCHEDULE
(selected brackets)
500,000 to 750, , % > ,000
750,000 to 1,000, , % > 750,000
1,000,000 to 1,250, , % > 1,000,000
1,250,000 to 1,500, , % > 1,250,000
1,500,000 to 2,000, , % > 1,500,000
2,000, , % > 2,000,000
In 2007 we will have a federal estate flat tax rate of 45%.
If you have a taxable estate greater than the $2 million exclusion – the marginal estate tax rate will be 45% regardless of its size.

6. Tools & Provisions Life Insurance Wills Marital Deduction
Trusts
Annuities
Medicare, Medicaid, Long-term Care Ins.
Living Wills
Durable Power Attorney
Marital Deduction
Annual Gift Exclusion
Gift Splitting
Ed. & Medical Gifts
Charitable Gifts
Title Ownership
Non-probate Transfers
Generation Skipping
Business Organization
Special Use Valuation
14 yr. Tax Installment
These are some of the important and most common estate planning tools and provisions.
Each of these tools and provisions have pros and cons.
The task of estate planning is to utilize the most appropriate tools and provisions to accomplish identified goals and objectives.

7. Tools & Provisions Marital Deduction Annual Gift Exclusion
Gift Splitting
Educational & Medical Gifts
Charitable Gifts
Marital Deduction – provides for the tax-free unlimited transfer of property between spouses.
Annual Gift Exclusion - $12,000 per donee per year and must be gifts of a present interest. Transferring property while retaining the right to income and use for the remainder of your life would be an example of gifting a future interest.
Gift Splitting – allows spouses to share in the gifting of property, regardless of which spouse has title to the property.
Educational & Medical Gifts – No dollar or relationship limit, but must be paid to the institution or provider.
Charitable Transfers – many people want to financially recognize a charity via their estate. Charitable transfers are subtracted from the gross estate in calculating the taxable estate.
If you desire to make a charity bequest – work with your estate planning team as there are good tax savings to be had by structuring the bequest in specific ways.

8. BEQUEST vs GIFT
160 A. purchased 1950 in for $16,000. Current FMV is $320, Bequest Gift
Decedent’s (donor’s) basis , ,000
Heir’s (donee’s) basis , ,000
Built-in taxable gain ,000
While gifting can be one of the best estate planning tools in the estate planning tool kit – this example illustrates the point that the donee steps into the shoes of the donor relative to tax basis and the reason why considerable thought should be given before gifting substantially appreciated assets.

9. Tools & Provisions Title Ownership Non-probate Transfers
Sole Ownership
Tenants in Common
Joint Tenancy (JTWROS)
Non-probate Transfers
Title Ownership – the key to determining if property is included in your estate. Is particularly important to understand the differences between the types of title for co-owned property.
Tenants-in-Common, undivided interest and no survivorship provision.
Joint Tenancy with Right of Survivorship (JTWRS) – undivided interest and surviving joint tenants inherit. Sometimes called a poor-man’s will.
Tenancy by Entirety – (restricted to husband and wife) undivided interest and surviving joint tenant (spouse) inherits.
Note – JTWRS and Tenancy by Entirety prevents the transfer via a will or a trust – it passes by title to the surviving owners.
Non-probate Transfers – Very popular method of titling property – provides a lot of flexibility at a very affordable price. Provides the owner the ability to change beneficiary any time during life and avoids probate.

10. Avoiding Probate Joint Tenancy & Tenancy by the Entirety
Non-probate Transfers
Pay on Death (POD) [ex: checking accounts, CDs]
Transfer on Death (TOD) [ex: stocks, bonds, vehicles]
Beneficiary Deed [example: real estate]
Revocable Trust
While very few decedents will have any federal estate tax liability – all decedents have potentially probatable estates.
The items in this slide identify the typical tools available to avoiding probate.

11. Tools & Provisions Generation Skipping Business Organization
Children for life, grandchildren with remainder interest
Business Organization
Sole proprietorship
Partnership
Limited Liability Company
Corporation “C” or “S”
Generation Skipping – strategy for shielding assets from estate tax on every-other generation. Typical arrangement is for grandparents to leave asset in a life estate for the children with the grandchildren receiving the entire property rights following the death of their parents.
Business Organization – creating an operational business entity can increase funds available for the retiring generation and facilitate the timely transfer of ownership and control of operational assets to the younger generation.

12. Tools & Provisions Special Use Valuation 14 yr. Tax Installment
Net Cash Rent Capitalization at 6.02%
Maximum Reduction for 2006 is $900,000
14 yr. Tax Installment
No principal payments first 4 years
Interest at 2%
Special Use Valuation – is a provision that allows qualifying estate to value real estate at its agricultural value rather than its fair market value. This is a particularly valuable tool for land located near developmental and recreational sites. However, it can usual be utilized to reduce the value of an estate regardless of where the land is located. The cash rental per acre is reduced by property tax and this net is divided by an annual interest rate factor published for each farm credit services district. For 2006, special use valuation can be utilized to reduce an estate up to $900,000.
14 Yr. Tax Installment – is a provision that allows qualifying estate to pay estate tax over a 14 year period. No principal is paid during the first 4 years and the tax is then paid in equal principal payments over the last ten years. The interest rate is very favorable, currently 2% compounded daily.

13. Tools & Provisions Life Insurance Wills Trusts Annuities
Life Insurance – If the decedent maintains the incidents of ownership – the value of the policy is included in the estate. Life insurance is an often overlooked asset that could put the value of an estate over the exclusion amount. Incidents of ownership includes: the right to cancel, borrow, or change beneficiaries.
Wills – provides for distribution of property - will not avoid probate. Must be 18 years old, will must be signed and witnessed by 2 people.
Trusts – come in all “shapes and sizes” and can be customized to really focus on fulfilling your goals and objectives.
inter vivous or testamentary
revocable or irrevocable
Revocable living trusts are the most popular trust
Advantages are the ability to accomplish everything you can accomplish with a will and avoid probate. Naming successor trustees is another big plus.
Disadvantage is the extra expense drafting the trust and need to title (transfer) assets into the trust.
Annuities – instrument for establishing a flow of payments over a “time certain”, life, or joint lives. Extremely useful in the right place at the right time – difficulty can be discovering the right place and right time --- otherwise can be a disaster. Lacks flexibility!

14. Life Insurance Incidents of Ownership right to:
Change beneficiaries
Borrow against policy
Cancel the policy
Consider using an “Irrevocable Life Insurance Trust”
Placing the ownership of life insurance policies in irrevocable trusts is an excellent way of keeping the value of the insurance policies out of the gross estate.
If liquidity is a concern within the estate, the trustee could be encouraged to utilize life insurance proceeds to purchase assets from the estate and to distribute these assets in like manner as the life insurance proceeds would have been distributed.

15. Types of Trusts Living Trust (Revocable Trust) Testamentary Trust
Irrevocable Trust
Life Insurance Trust
Marital Deduction & Bypass Trusts
Qualified Terminal Interest Trust “QTIP”
Grantor Retained Annuity Trust
Qualified Personal Residence Trust
Charitable Remainder Trust
Charitable Lead Trust
…. many more!

16. Trust - Terms Annuity Trust Grantor Unitrust Trustee Beneficiary
Remainder
Lead
Grantor
Trustee
Beneficiary
Living
Testamentary
Revocable
Irrevocable

17. Priority of Estate Asset Transfer Methods
Right of Survivorship (title)
Trust
Non-probate Transfer
Will
Intestate
This slide points out the fact that all transfer methods are not created equal and if there is a conflict between the methods – this ranking identifies the order of priority for settling a conflict. For example: title will take president over a trust, a trust will take president over a TOD or POD, and a non-probate transfer will take president over a will!

18. Tools & Provisions Medicare, Medicaid, Long-term Care Insurance
Living Wills
Durable Power Attorney
Medicare. Medicaid, & LT Care Ins. – too many people fail to incorporate planning for their possible long-term care into their estate plan. This is particularly important for people desiring to provide for business succession.
Living Wills – a very important instrument is you have particular desires relative to certain medical treatments being withheld or withdrawn under certain circumstances.
Durable Power of Attorney – under a typical power of attorney your agent’s authority ceases to be operative upon you incapacity. Particularly with regard to health care issues you want the person you have granted power of attorney to be able to speak for you when you can’t – that is the function of a durable power of attorney. Durable powers of attorney can also be made conditional (springing) – that is they only become operative when you’ve been incapacitated. The possible disadvantage of springing durable powers of attorney is that the agent must prove that the “spring has been sprung” perhaps at a time when time is of the essence.

19. What’s Their Estate?
Jack and Jill are 67 years young and have 2 adult children and 6 grandchildren. They own as JTWROS 1,280 acres worth $3,000,000. Jack and Jill have $200,000 and $100,000 in IRAs, respectively. They have $150,000 in their checking account, held as JTWROS. Their farm machinery is valued at $350,000 and they have grain in storage worth $200,000. Jack owns a life insurance policy on his life and Jill is the named beneficiary – its face value is $500,000.
They owe the bank $100,000 on a land mortgage.
This is an exercise - have participants use the balance sheet to calculate the estate values for Jack and Jill.
What is the size of Jack’s estate?
What is the size of Jill’s estate?
What does this information tell you about their goals and objectives?
- nothing
- stress point that estate planning is more than the listing of assets and liabilities!

20. What’s Their Estate? Jack Jill Cash 75,000 75,000
Inventory , ,000
Machinery , ,000
Real Estate ,500, ,500,000
Retirement Accts , ,000
Life Insurance ,000
Assets 2,550, ,950,000
Short Term Liab
Long Term Liab , ,000
Liabilities , ,000
Net Estate ,500, ,900,000
How did participants list the values for the untitled farm business assets? Half and half or all to Jack?
Most attorneys I have consulted suggest this is a workable and justifiable allocation. However they stress the importance of the couple agreeing and documenting how they would prefer the untitled assets be handled.
An alternative division of assets is presented on the next slide.
If Jack dies in 2006 will he have a taxable estate? Stress the benefit of Jack transferring his life insurance to an irrevocable life insurance trust.

21. What’s Their Estate? Jack Jill Cash 75,000 75,000 Inventory 200,000 0
Machinery ,
Real Estate ,500, ,500,000
Retirement Accts , ,000
Life Insurance ,000
Assets 2,825, ,675,000
Short Term Liab
Long Term Liab , ,000
Liabilities , ,000
Net Estate ,775, ,625,000
Given the fact women have a longer life expectancy – if Jack dies before Jill – Jack’s estate will get a step-up in basis for all of the inventory and machinery.
This assumes Jack is still materially participating in the farm business. If not, his estate would not receive a step-up in basis for the inventory!

22. Strategies for Jack & Jill
Transfer life insurance to an irrevocable life insurance trust.
Income to wife for life –
remainder interest to children.
Why not transfer ownership to Jill?
Does Jack want Jill to own his policy if they divorce?
If Jill owns the policy and dies before Jack – the problem returns!

23. Strategies for Jack & Jill
Establish by-pass trusts so surviving spouse has right to income, but keeps those assets from being included in the survivors estate when they die.
Provides income and security for survivor.
Very effective tool for couples with children from more than one marriage. Means of ensuring their children ultimately receive their assets.

24. Strategies for Jack & Jill
Provide for continuation of business?
Provide for charitable bequests?
Provide for distribution of certain assets to certain heirs?
Provide for distribution in trust for the grandchildren?

25. Strategies for Jack & Jill
What happens to the farm business if Jack is in an accident and is in a prolonged comma? To compound the problem, what happens if Jill was killed in this accident – who will manage the financial affairs and make health care decisions for Jack?
In planning always consider “worst case scenarios”.
Plan for the worst – hope for the best!
However, the best in this case still ends with death!