Wills, Powers of Attorney, Death & Taxes

Wills, Powers of Attorney, Death & Taxes • By: • Bernard F. Duhon • Attorney at Law BERNARD F. DUHON, LTD. A Professional Law Corporation 111 Concorde St. Suite B Abbeville, La 70511-1169 bernard@bernardduhon.com Telephone 337-893-5066 Fax 337-893-0030

ESTATE PLANNING BASICS Prepared by: Joe M. Hawbaker, Hawbaker Law Office Omaha, Nebraska mjbaker@radiks.net and Dave Goeller, University of Nebraska dgoeller@unl.edu

Need For Personal Legal Advice The information in this presentation and accompanying material is provided for educational purposes only. It is not a substitute for individual legal consultation.

Estate Planning • What is your estate? • Who will receive your estate? • How will your estate be transferred?

Preliminary Concepts • Property & Titling • Basis and Basis Adjustment • Maintain Flexibility

Property • Real Property • Land, and what is built on it - fixtures • Buildings, etc. • Personal Property • Tangible – stuff, cars, boats, etc. • Intangible – accounts, stocks, insurance • Subject to • Eminent domain • Taxing power • Zoning regulation

Titling • Sole ownership • Co-ownership

Basis & Capital Gains • “Basis” means “cost” • What you paid for it • What it was valued at when you inherited it • The basis of the giver if you received it as a lifetime gift • + the cost of all undepreciated improvements • If asset sold, capital gains tax is paid on difference between the sale price and the basis, with some adjustments • Current maximum federal rate is 15%

Capital Gains Tax • Purchased $150,000 • Improvements + $ 30,000 • Depreciation - $ 20,000 • Income tax basis $160,000 • Selling Price $480,000 • Capital Gain $320,000 @ 15% • Tax Due $ 48,000

Stepped Up Basis • A time-of-death transfer wipes out locked-in capital gain tax liability • Heir receives the asset with a basis equal to FMV at time of death • Only occurs in time of death transfers • No restrictions on step-up in basis for 2012

WHAT • What do you own? • What is it worth? • How much is the debt?

“WHAT” Come First Because of Taxes Federal transfer taxes • Estate Tax – 35% (2012) • Paid on time-of-death transfers • Gift Tax – 35% (2012) • Paid on lifetime transfers

Federal Transfer Taxes • Policy – at each generational level impose a federal transfer tax on assets • Estate tax occurs on time-of-death transfers • Gift tax on transfers made during life

Critical Concept The Unified Credit • A “credit” that exempts transfers of assets from federal transfer taxes • “Unified” because it is a single credit against both gift and estate taxes • Each person has one unified credit • 2012 $5 million • Uncertain after December 31, 2012?

Critical Concept Marital Deduction • No estate or gift tax imposed on transfers between spouses

NEW RULE 2011-2012 PORTABILITY OF UNIFIED CREDIT • Unused exclusion amount of spouse dying after 12/31/2010 may be used by surviving spouse • Only available if election made on timely filed estate tax return of predeceased spouse – whether estate tax return is otherwise required

Planning Zones • Estate ≤ Single Exclusion Amount • Estate ≤ Twice Exclusion Amount • Estate ≥ Twice Exclusion Amount

Tools to Reduce Estate • Use of annual gift tax exclusion • Discounting value for lack of liquidity or control • Use of special valuation procedures • Insurance owned by someone else (three year look-back) • Irrevocable trusts • Installment sales • Charitable Remainder Trusts

Gift Tax: Annual Exclusion • Annual exclusion amount = $13,000 • Does not reduce Unified Credit • No need to file gift tax return • Additional unlimited exclusion for education gifts and medical

Charitable Trusts • Charitable Remainder Trust (CRT): income paid to settlor/heirs, remainder goes to charity • Charitable Lead trust (CLT): income paid to charity, remainder to heirs • Complicated rules, numerous variations • Favorable tax treatment – possible to avoid capital gains tax and transfer tax

WHO • Who are your heirs? • What will each heir receive? • Will your estate carry on as a business? • Who will be in charge? • Who will need income? • Will estate be divided? Physically divided or divided by interests? • Will you make charitable gifts?

WHO • This is not a legal question • It is a determination of your own wishes and judgments

WHO: Often the Hardest Issue • Parents tend to start with idea that fair means equal • Not always possible to be equal • Equal is not always fair • Should estate be sold, cut up or kept together

Estate Plan • Concepts • Fair vs Equal • Contribution = Compensation

Contribution = Compensation? • 1990 Networth = $90,000/3 kids = $30,000 • 2012 Networth= $390,000/3kids=$130,000 • Contribution/Compensation • 50%/50% Partner and Founder • $300,000 Partner & Founder $150,000 ea • Partner’s share • $ 30,000 from 1990 • $150,000 from growth and appreciation • $ 50,000 from Founder growth and appreciation • $230,000 total for Partner $80,000 each for siblings

WHO: The Business Heir • Business Heir and The Other Kids • Business is sufficient for one or two families but what about the other kids? • Cash flow v. fair market value • Will business continue as a viable family operation?

WHO: The Business Heir • Life insurance • If affordable, life insurance is purchased for non-business heirs • Business heir purchases life insurance on parents’ lives for buying out siblings interests • Partnership, LLC, Corporation • Business heir controls/manages operation • All siblings share in ownership • Operating entity owned by business heir and land entity owned by all heirs

HOW • Time of death transfers (Step up in Basis) • Give it away at death (e.g. will, intestacy, revocable trusts) • Lifetime transfers • Give it away now (e.g. gift, irrevocable trust) • Gifts of future interests • Give it away now with strings attached (e.g. life estate deed) • Sale • Sell it all at once or over time (e.g. outright or installment sale)

TOOLS • Titling • Wills • Lifetime Gifts • Trusts • Business Entities • Sales

Should You Have A Will? • Without a will the laws of Louisiana determine who gets your property as follows:

If No Children If no children - spouse gets all the community property, your nearest blood relatives get your separate property. If no spouse or children - parents and siblings share. If none of the above - grandparents or descendants share. If none of the above - nearest relative inherits. If no relatives - The State of Louisiana inherits.

If there are Children • Your spouse gets one-half of community property and the use of the other half until remarriage. Children share in the remaining one-half of the community and receive our separate property. • No Spouse • Children Share

Forced Inheritance • Unless your children are disabled and under twenty-four (24) years old you may leave them nothing. To disinherit a child you must have a will.

AvoidingProbate • The only way to avoid successions is to have no land and your assets are less than $50,000.00. • Living Trusts can be a means to avoid succession. All property is placed in a trust and upon death the property passes to all beneficiaries of the trust. Be careful! If property is not put in the trust, it will need to go through a succession. A Will may be needed to put all remaining property into the trust. If it is a revocable trust, you keep control over the property but don’t escape estate taxes. This means most of the problems associated with “Probate” must be dealt with.

TRUSTS • In Irrevocable trusts you have no control over the property but there may be less or no estate tax. • Trusts are not for everyone. You should carefully consult with your family lawyer before you make any decisions.

Will Formalities • You can write your own Will but there are technicalities that must be followed due to changing laws. • It is best to consult your attorney and review your will ever few years.

LIVING WILLSPOWERS OF ATTORNEY

Living Wills • The purpose of a Living Will is to allow you the right to make “end of life” decisions relating to your medical care.

Powers of Attorney A Durable Health Care Power of Attorney is used to control all aspects of their personal care and medical treatment, including the right to decline medical treatment or to direct that it be stopped. This type of Power Of Attorney provides for the donation of organs, refusal of autopsy, disposition of remains (i.e., cremation, burial), appointment of an agent to make decisions for all medical treatment, continuing or terminating food and water, and naming a person to be a guardian if one becomes necessary.

Powers of Attorney • If you do not have a power of attorney or living will, Louisiana establishes a procedure for making decisions to end life-sustaining treatment once you are terminally ill and have lost the ability to make decisions. • You can combine a health care and general power of attorney to allow your representative to take care of their assets and person. • The truth is an agent is often necessary toward the end of life to manage an elderly person’s affairs. It is better for you in advance to determine who that person is.

Basic Trusts • Trust may be • Intervivos – established during life • Revocable - can be changed • Irrevocable – cannot be changed • testamentary – established at time of death, often by Will • Trust may be joint (one trust for both spouses) or separate

TRUSTS My brother’s lunch My younger brother and I are going to the carnival and our mom gives me $10. She says: $5 is for you and with the other $5 make sure your brother eats lunch. The first $5 is mine; the second $5 I hold as trustee. I possess the second $5 and I have the right to spend it, but only as I have been told. My brother is the beneficiary, he does not possess the money but has the right to have it spent on his lunch. In legal terms, I have legal ownership and my brother has equitable or beneficial ownership. If I were to spend part of that $5 on myself, I would have violated my fiduciary duties to my brother. My brother would then complain to my mother and seek enforcement of the trust from my parents.

Elements of a Trust • Settlor/Grantor • person who creates the trust; funds the trust • Trustee • Holds title to trust property; manages and deals with trust property • Fiduciary • Position of trust and confidence; the relationship between trustee and beneficiaries (like guardian/ward, principal/agent, director/shareholder) • Beneficiary • Person for whose benefit trustee owns and manages the trust property • Corpus • The property that is held in trust (also called trust res, trust assets, principal, or trust estate) • Trust instrument • Document that embodies the terms of the trust

USING A LIMITED LIABIILTY COMPANY (L.L.C.) TO TRANSFER BUSINESS

ADVANTAGES OF AN LLC • Shelters the owners from liability for business or property accidents; • A member’s creditor cannot place a lien on the property; • A member’s creditor would have difficulty inserting themselves in the LLC; • Provides a method to keep ownership in the family; • Provides for effective property management; • Prevents forced sale of the property, • Can be used as a method to gradually transfer ownership of property or business to partners or family members, and • Most importantly, you can write the rules for dealing with each other and the property.

OPERATING AGREEMENT • How long the LLC would last will and the method for termination • The authority of the operating committee (representing each of the current branches of the family) • The authority of the general manager (s) to run the LLC; • What the items requiring vote of the membership • Restrictions sale of the membership in the LLC to current members • Transfers on death to children & spouses, and • Grants the rights of member to buy membership if another member decides to sell

Successions • Succession takes property out of a deceased person’s name and puts the property in their heirs’ name.

Items Needed • Death Certificate; • Expenses of deceased’s last illness; • Funeral expenses; • Copy of the will, and original’s location; • Number and location of a Safety deposit box; • Copy of the pink slips or the titles to cars; • Copies of the Deeds or location of all property; • Copies of bank statements for the month of death; • Copy of stock broker statements, annuities or similar investments; • Copies of all stocks and bonds certificates; • A list of all debts owed at the time of death; • The full name, address and social security number of the surviving spouse and children; • The full name, address and social security number of individuals named in the will; • Copies of life insurance policies where the estate is named the beneficiary, or if no beneficiary is named; • Copies of all property tax notices, and • You should prepare a complete list of all assets with the value for each item.

After the information is collected and given to an attorney, he prepares a detailed list of all the assets and debts with values. The list is signed by the heirs. A Louisiana and a federal estate tax return must be filed. Once state inheritance taxes are paid and there are no problems a petition is presented to the judge asking that the property and assets be taken out of the deceased’s name and placed into the heirs’ name. • This is usually uncontested. The attorney’s work can sometimes be done within a few weeks of receiving all the necessary documents from the family.

Administration • If there are debts absent heirs, dispute among the heirs or business to conduct, then the succession needs to be administered. This takes a longer period of time and costs increase proportionately. I avoid administering successions for my clients unless there is a special need.

Wills, Powers of Attorney, Death & Taxes