Managing for Today and Tomorrow

1. Managing for Today and Tomorrow Estate Planning Part Two Methods of Asset Transfer

2. Homework Review • Did you find your will? Date on it? • Did you find terms not on the Vocabulary Exercise • Did you find anything surprising when looking at the titles on property? • Questions about the Estate Planning Questionnaire?

3. Methods of Asset Transfer“Four” Methods 1. Buy 2. Gift 3. Inherit from Estate (after death) 4. Steal it! Combination of two or three There are differences in tax implications

4. Property Transfer Taxes • SALE • Federal Income Tax (potentially at capital gains rate) • State Income Tax(potentially at capital gains rate) • GIFT • Federal Gift Tax • ESTATE • State Estate Tax • Federal Estate Tax • STATE INHERITANCE • Varies by state • Also State “Transfer Taxes” on Real Estate

5. Basis & Capital Gains • “Basis” means “cost” = “what you paid for it” + “cost of improvements” – “income tax depreciation” -or- “what it was worth when you inherited it” • If asset sold, capital gains tax is paid on difference between the sale price and the basis, with some adjustments • Current maximum rate is 20% ( for those in the 39.6% income bracket) Federal plus State C.G. Tax (no 15.3% Social Security tax)

6. Income Tax Basis Example40 Acre parcel of Land • Paid $500 per Acre or $20,000 in 1974 • Tax Value Today = 2x S.E.V. = $140,000 • Land’s been selling for $4,000 per Acre • Widowed Mother Gives land to Daughter and Daughter Sells. Taxes? • Daughter Inherits land after Death of Mother and then Sells. Taxes?

7. Basis Example Current Land Value $4,500 / acre Purchase Price $1,000 $4,500 $6,000 Die $4,500 $4,500 $4,500 Gift $1,000 $4,500 $4,500* Sell $1,000$4,500 $6,000* * gifting or selling to family, 2 year rule

8. 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

9. Unified Credit - Gift Tax • How much can each person transfer during life without incurring a gift tax? • $5.25 million per person for 2013 • Credits used for gift tax reduces amount available to use against estate tax

10. Unified Credit - Estate Tax • How much can each person transfer at time of death without incurring estate tax liability? • If have not used any during lifetime: • $5.25 million per person for 2013 • Adjusted for inflation in the future

11. Gift Tax Effective ExemptionGifts are during your Lifetime Increases over years 1997 and before = $600,000 1998 = $625,000 1999 = $650,000 2000 and 2001 = $675,000 2002 - 2010 = $1.0 million 2011 and 2012 = $5.0 & 5.12 million 2013 = $5.25 million

12. Gift Tax Filing Requirements • IRS Form 709A or 709 - Gift Tax Return • 709A =<$28,000 • Gifts of more than $14,000 (2013) per donee in any year • Return due April 15 following the year of the gift • Filing starts “statue of limitations”

13. Gifts • Elements of a gift. • Must have a donor. • Must have a donee (recipient) of the gift. • Must have actual or constructive receipt of the gift. • Gifts must be given free of any restrictions. • Gifts in any amount are not income to the recipient. • Gifts in excess of $14,000 (2013) per year to any one recipient will affect the gift tax credit.

14. Federal Gift Tax • Annual exclusion • Marital deduction • Charitable deduction • Unified credit • Example of other types of gifts: • Below market interest rate loans • Below market rents • Gifts to minors – Uniform Transfers to Minors Act or trusts

15. Gifts: Planning Pointers • $14,000 per person per year • Spouse can use spouses annual exemption so $28,000 per year • Two married people can give two other married people 56,000 per year before starting to use Unified Credit • Children, grandchildren and spouses $56,000 each set

16. Federal Estate Tax • Your taxable estate is your gross estate less allowable deductions: a). Debts b). Attorney fees c). Executor fees d). Court costs e). Burial expenses f). Marital deductions g). Charitable deductions h). Inheritance tax i). Part of Federal tax paid in previous 10 years

17. Valuing Property • Appraised at fair market value at date of death or six months later • Exceptions include: • “Special Use Valuation” based on a capitalization rate, often reduces value at least 25 percent. Capped at a limit of $1,040,000 reduction for 2012. Pre/post death test. • Discounts for “minority shareholders” • “Qualifying Conservation Easements” - 40%

18. Type of Ownership Value in Estate

19. Examples of Economic Interest in Property • Retained rights to income • The right to change who inherits • The right to change the future use • The right to change enjoyment

20. Joint Tenancy with Rights of Survivorship Question: If you add your daughter’s name to the title of a $100,000 piece of your real estate, how much reduction in the size of your estate?

21. Joint Tenancy with Rights of Survivorship Final Answer: • Depends, but probably none. • Who contributed to buying it? • Was there a gift to reduce the estate? • Does she bear the burdens and benefits of ownership? • Rent income, pay taxes etc. • Is there debt against it? Who is making payments? • Who will own it when you die?

22. Gross Estate • 3 year look back rule: • Life estate. • Transfer was to occur at death. • Revocable transfer. • Transfer of life insurance. • Includes: • Retirement benefits • Taxable gifts after 1976

23. Adjusted Gross EstateExample: • Gross Estate $1,600,000 • Funeral - 8,000 • Administration - 15,000 • Losses (casualty, theft) - 5,000 • Debt claims against estate - 12,000 • State Estate Taxes if any - 0 • Mortgages and Liens - 125,000 • Adjusted Gross Estate $ 1,435,000

24. Estate Tax Filing Requirements Estate Tax Return must be filed when gross value exceeds the exemption equivalent File within 9 months after death. Tax is DUE! May qualify for installment payments Federal Estate Tax Return 706

25. 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

26. Unified Credit - Portability • Spouse 1 dies in 2011 transferring $3 million in assets (spouse 1 had to own this amount) • Election is made by Spouse 1 estate tax return to allow Spouse 2 to use unused exclusion amount • Spouse 2 exclusion amount becomes $7 million (years ‘11 and ’12)

27. Unified Credit - Portability • Still a good idea to include disclaimer trust in estate plan • Portability is a significant change in the law • Will require careful review of regulations and forms once promulgated by IRS

28. Probate Procedures and Wills • A legal process (court proceeding) • Accomplishes transfer of property • Settles decedent’s debts • Pays taxes • Testate – having died with a valid will • Intestate – dying without a valid will

29. WILL • Will is revocable – can be changed • Revocable is to be preferred: circumstances and wishes change • A Will typically requires probate

30. What is Probate? • Probate is the legal process of administering the estate of a deceased person by resolving all claims and distributing the deceased person's property under the valid will. • Someone has to start the process, not automatic • Petition court to probate will • Notice of hearing • “Contesting the Will” would commence here

31. Testate (With a Will) a). Sound mind, of age, not coerced. b). Disinherit a spouse? c). Ante nuptial. d). Children. e). Pets. f). The will names the executor/trix and nominates the guardians… g). Special bequests list attached.

32. Distribution by Will – refer to state law • Competency required to make a will: • Know the nature and extent of your estate. • Be able to formulate a plan of distribution. • Know the natural objects of your bounty. • Understand the relationship of the above. • Must be witnessed by two witnesses in the presence of the testator and each other. • Must be revoked with the same formality with which they are made. • Amendments must be made with the same formality as a will. • Handwritten modifications to a will are of no effect.

33. Probate (Cont.) • PR - Personal Representative • Collects and preserves property of estate • Pays debts, expenses and taxes • If any property left, PR distributes property as directed in Will or, if no Will, then by rules of intestacy • Probate can take time; ties up distributions; • Costs money (Not court fees - its time and legal services) – maybe more than other alternatives

34. Probate (Cont.) • Personal Representative (PR) • Prepares inventory • Obtains appraisal, if necessary • Gives notice to creditors to file claims • PR may reject claim, lawsuit on claim may result • If claims not filed, forever barred

35. Avoiding Probate • How to accomplish & still control: • Joint tenancies - Do you really still have control? • Naming beneficiaries for retirement accounts • Register stock, bonds, brokerage accounts in “transfer on death” & “payable on death” forms • Life estate deed • Living trust • Insurance • Gifting (you lose control with this option)

36. Avoiding Probate • Avoiding probate may be oversold idea • Probate procedures have been streamlined • Probate settles the estate, clears title, resolves debt

37. Probate Estate vs. Taxable Estate • Assets may be part of one estate and not the other • Anything a person has an interest in at the time of death goes into the taxable estate to the extent of that interest: this includes more than probate property, such as • Property transferred with strings attached • Value of an annuity • Joint tenancy property • Life insurance proceeds • Interests retained from previous “inter vivos” transfers (between lives)

38. Simplified Probate • States may have special rules for probate in certain situations • Informal • Formal • Supervised • Small Estates • (dollar amount varies by state)

39. Intestate Succession • Distribution of Property at Death: • The law of the decedent’s domicile (permanent residence) at death governs the succession of personal property (movables) • The law of the situs (location) of property governs succession of real estate (immovables.)

40. Intestate Property Distribution Varies by State Law – an example: • Married with full blood children • Spouse - $150,000 + 1/2 balance; Children - 1/2 balance • Married with ½ blood children (not of spouse) • Spouse - $100,000 + ½ balance; Children ½ balance • Married with parents, no children • Spouse - $150,000 + 3/4 balance; Parents - 1/4 balance • Married without parents or children • Spouse - all property • Single with children • Children - all property • Single without children • Parents - all property or brothers & sisters or next-of-kin

41. Probate Administration Fees vary by State; generally cost very little • Filing Fee $100, Small Estate $25 • Inventory Fee • $1 Million Estate = $1,175 • $2 Million Estate = $1,488 • $5 Million Estate = $2,425 • Certificate Letters of Authority • $11 Each (Stocks) • Petitions to the Court $15 (Supervised)

42. Small Pie Potential Tax Savings • If the “pie” is small (less than$5.25 million in 2013) look at impact of inflation and legal costs. • Don’t worry about Federal Estate Tax, focus on income tax issues, possible inheritance tax, asset protection.

43. Medium Pie Potential Tax Savings • If total “pie” is medium (husband and wife together is between $5.250,000 and $10,500,000)… Consider dividing equally and using a life estate or trust.

44. Big Pie Potential Tax Savings • If you have a big “pie” you need to seek specialized help. • Look at special tools to reduce valuation, consider a gifting program, charitable donations, Special Use Valuation, minority discounts and other tools estate planners would suggest.

45. Homework Assignment • Complete your net worth statement if not already done • Look at ratios and values • Look at the trend in net worth over several years? • Look at how your assets balanced out between farm and non-farm assets? • What are sources of retirement cash flow?