What is Estate Planning?

What is Estate Planning? Estate planning is the process of planning the accumulation, conservation, and distribution of an estate, in the manner that most effectively and efficiently accomplishes an individual’s personal tax and non-tax objectives.

“Controlled Estate Planning” A systematic process for uncovering problems and providing solutions in clients’ L.I.V.E.S.

L.I.V.E.S.-Seven Major Areas of Estate Planning • Lack of liquidity • Improper disposition of assets • Inflation-proof and diversify portfolio • Inadequate income or capital at retirement, death or disability • Value stabilization and maximization • Excessive transfer costs • Special problems

Who Needs Estate Planning? • Individuals with estate in excess of the unified credit exemption equivalent ($3.5 million in 2009; $5 million in 2010, 2011, and 2012, subject to potential for unlimited exemption for decedents dying in 2010 at election of executor) • Individuals in combined state and federal income tax bracket in excess of 15% • Nonresident aliens, resident aliens, aliens about to move to the U.S., individuals considering expatriation, and U.S. citizens with property interests in foreign countries

Who Needs Estate Planning? (cont’d) People with: • Minor children • Children, spouses or other dependents who are exceptionally artistic or intellectually gifted, and are expected to have their own wealth • Children, spouses or other dependents who are emotionally or mentally challenged, emotionally disturbed, or physically handicapped • Children, spouses or other dependents who can’t or don’t want to handle money, securities, or a business

Who Needs Estate Planning? (cont’d) People with: • Closely-held business interest • Property in more than one state, or persons who move from state to state • Charitable objectives • Special property such as a fine art, coin, gun or stamp collection • Pets that are particularly important to them • Asset protection concerns of heirs

The 10 Most Common Estate Planning Mistakes • Improper use of jointly-held property • Improperly arranged life insurance • Lack of liquidity • Choice of the wrong executor • Will errors • Leaving everything to your spouse • Improper disposition of assets • Failure to stabilize and maximize value • Lack of adequate records • Lack of a “Master Strategy” game plan

Mistake 1: Improper Use of Jointly-Held Property • Potential for both federal and state gift tax • Possibility of double taxation • For non-spouse tenants the entire joint asset is taxed in the first-to-die tenant’s estate, unless contribution can be proved • Then the asset is taxed in the surviving tenant’s estate to the extent the surviving tenant did not consume or give away the asset • Once property has passed to the survivor, provisions of the decedent’s will are ineffective

Mistake 1: Improper Use of Jointly-Held Property (cont’d) • Surviving tenant during life or at death can give property to whomever the survivor desires • Joint property passes outside of the probate estate potentially leaving the decedent’s executor with a lack of adequate cash to pay estate taxes and other settlement expenses

Avoiding Double Taxation • Do not use JTWROS titling • Include a credit equivalent bypass trust (CEBT) provision in will or trust document • The provision allows the decedent to shelter an amount equal to the unified credit equivalent (up to $3.5 million in 2009, $5 million in 2010, 2011, and 2012) from federal estate tax, and • Avoids taxation of this amount in the surviving spouse’s estate

Credit Equivalent Bypass Trust Decedent’s Estate2006 $4 million Marital “A” Trust $2 million Spouse’s Estate Tax Paid $0 Tax Paid (if any) Income for life Bypass “B” Trust $2 million Heirs Heirs

Mistake 2: Improperly Arranged Life Insurance • Proceeds payable to beneficiary at wrong time or in wrong manner • Inadequate insurance on key person • Family  Breadwinner • Corporation  Rainmaker • No contingent beneficiary named

Mistake 2: Improperly Arranged Life Insurance (cont’d) • Policy proceeds included in decedent’s estate • Decedent owner and insured • Decedent retained an interest in the policy • Decedent transferred policy or policy interest within three years of death • Triangulation • Example: Wife-owner, Husband-insured, Child-beneficiary • When husband dies, the policy proceeds will constitute an unintended gift from the wife to the child

Mistake 2: Improperly Arranged Life Insurance (cont’d) • Corporation: • Names someone other than itself as the beneficiary of insurance on the life of a key employee • IRS will claim proceeds are not income tax free and should be treated as: • Dividends if paid to or on behalf of a shareholder • Compensation if paid to an employee who is not a shareholder • Dividends for income tax purposes and also taxed as part of gross estate if insured owned more than 50% of the corporate stock

Mistake 2: Improperly Arranged Life Insurance (cont’d) • Proceeds paid to insured’s estate • Subject to claims of insured’s creditors • Increased probate costs • Transfer-for-value rule: • When a life insurance policy is transferred for any kind of valuable consideration in money or money’s worth • Proceeds may lose their income tax free status

Mistake 2: Improperly Arranged Life Insurance (cont’d) • Divorce: • No income tax deduction for premium payments made by one spouse when the ex-spouse is named the irrevocable beneficiary of the policy under a divorce decree • No alimony deductions are allowed for cash values in a life policy transferred to an ex-spouse under a divorce decree • Remind recently divorced clients to review all life, health, and disability insurance coverage and beneficiary designations

Mistake 2: Improperly Arranged Life Insurance (cont’d) • Update beneficiary designation to reflect changes to estate planning documents • if estate is beneficiary, manner in which money disbursed automatically updated as will changed • If have revocable living trust, beneficiary designation may need updating if document is changed

Mistake 3: Lack of Liquidity Key Questions: • How do you know if your executor will have enough cash to pay taxes, expenses, and other settlement costs? • Will your executor be forced to have a “fire sale” of your family business, income producing property, or most precious assets to cover these expenses within the time they are due?

Mistake 3: Lack of Liquidity (cont’d) Cash Demands on the Executor of the Estate: • Federal Estate Taxes(due nine months from the date of death) • State Death Taxes • Federal Income Taxes(including taxes on pension distributions known as IRD - income in respect of a decedent) • State Income Taxes (including taxes on pension distributions) • Probate and Administrative Costs

Mistake 3: Lack of Liquidity (cont’d) Cash Demands on the Executor of the Estate (cont’d): • Payment of Maturing Debts • Maintenance and Welfare of Family • Payment of Specific Cash Bequests • Funds to Continue Operation of Family Business • Generation-Skipping Transfer Tax

Mistake 4: Choice of Wrong Executor Key Questions: • Does the executor have the time to administer the estate? • Does the executor live in the state? • Does the executor have a conflict of interest with the beneficiaries of the estate? • Is the named executor capable of: • Collecting all the decedent’s assets • Paying all obligations • Distributing the remaining assets to beneficiaries

Mistake 4: Choice of Wrong Executor (cont’d) • Is the executor willing to assume the liability and personal financial risk of administering the estate? • Who is likely to have a conflict of interest? • Beneficiary also acting as executor • Business associate acting as executor

Mistake 4: Choice of Wrong Executor (cont’d) • How can the conflict of interest problem be solved? • Name an independent third party as sole executor or co-executor • A disinterested individual (Problematic if don’t know or don’t get along with the family) • Corporate fiduciary (Trust Company or Bank)

Mistake 5: Will Errors Common Errors: • Dying without a valid will  Intestacy • Not updating the will

Mistake 5: Will Errors (cont’d) A Will Should Be Reviewed At Least: • At the birth, adoption, or death of a child • Upon the marriage, divorce, or separation of anyone named in the will • Upon every major tax law change • Upon a move of the testator to a new state • On a significant change in income or wealth of either the testator or beneficiary • On any major change in the needs, circumstances, or objectives of the testator or beneficiaries

Mistake 6: Leaving Everything to Your Spouse Considerations: • Everything passes to U.S. citizen spouse estate tax free utilizing the unlimited marital deduction • Use of the decedent’s unified credit equivalent ($3.5 million in 2009, $5 million in 2010, 2011, and 2012) is lost • Surviving spouse may not be capable of managing large stock portfolios, real estate holdings, or a family business • Lose opportunity to skip generations and potentially save future generations significant taxes

Mistake 7: Improper Disposition of Assets Common Problems: • The wrong asset goes to the wrong person in the wrong manner at the wrong time • Equal but inequitable distributions • Secondary beneficiary who should not receive the asset in the same manner as the primary beneficiary

Mistake 7: Improper Disposition of Assets (cont’d) Possible Solutions: • “Sprinkle” provision in a trust empowers the trustee with flexibility to provide extra income or principal to a child that requires more in a given year • Trust or custodial arrangements for minors and those who are incompetent • “Simultaneous death” or “common disaster” provision in will or trust avoids needless second probates and additional inheritance taxes

Mistake 8: Failure to Stabilize and Maximize Value Key Questions for Business Owners: • What economic “shock absorbers” have been put in place to cushion the blow caused by a key employee’s death or disability? • What if the key employee is lured away by competition at the wrong time?

Mistake 8: Failure to Stabilize and Maximize Value (cont’d) Possible Solutions for Business Owners: • Key employee life and disability insurance coupled with good business overhead coverage

Mistake 8: Failure to Stabilize and Maximize Value (cont’d) Buy-Sell Agreement Problems: • Business may not have an agreement • Agreement may not be in writing • Price or price-setting mechanism doesn’t reflect current value of business • Agreement is not properly funded • No guarantee heirs will receive price they are entitled to • No assurance surviving owners will have cash needed to buy out decedent’s heirs

Mistake 8: Failure to Stabilize and Maximize Value (cont’d) Problems with Beneficiary Designations: • Not naming a contingent or back-up beneficiary in a will, trust, life insurance contract, qualified retirement plan, IRA, or annuity • Unnecessarily subjects assets to risks and costs of probate when they could have passed outside the probate estate by naming a secondary beneficiary

Mistake 9: Lack of Adequate Records Lifetime Steps to Help the Executor Save Time & Money: • Acquire a safe deposit box • Put all of your important documents in the box • Annually, put an updated list with names and phone numbers of your family advisors 4. Tell your executor where your safe deposit box is and ensure the executor has access to it Note: Some states freeze safe deposit boxes at death until a tax examiner can inventory the contents. Check with your attorney on your state’s rules.

Mistake 9: Lack of Adequate Records (cont’d) Lifetime Steps to Help the Executor Save Time & Money (cont’d): • Keep tax returns and records at least six years • Continue to keep records regarding your basis 7. Have a family meeting to discuss goals, managing resources, and what assets are available for income and capital needs

Mistake 10: Lack of a “Master Strategy” Game Plan Do it yourself estate and financial planning is the closest thing to do it yourself brain surgery! Few people can do it successfully.

Mistake 10: Lack of a “Master Strategy” Game Plan (cont’d) Use The Following Steps As A Guide: • Annually quantify in dollar terms financial needs and objectives, as well as current financial status • Here’s what we must have • Here’s what we would like to have • Here’s where we are • Establish a game plan for getting to the goal in the most efficient and effective way

Mistake 10: Lack of a “Master Strategy” Game Plan (cont’d) Use The Following Steps As A Guide (cont’d): • Use a team including a CPA, attorney, life insurance agent, trust officer, and other financial services professionals to: • Conduct an annual “financial fire drill” • Formulate the plan • Execute the plan

The Bottom Line An individual can’t eliminate the big mistakes in their estate plan until they have identified them! Every family, every year, should stage a “financial fire drill”.

“Financial Fire Drill” With the assistance of competent financial services professionals, annually: • Measure needs • Establish an order of priorities • Develop and put into effect a plan to meet financial security needs • Use a checklist to facilitate the review (optional)

What is Estate Planning?