Definition of Estate Planning

1. Definition of Estate Planning “Estate planning is a goal-oriented activity that uses tax minimization tools and techniques to provide the greatest possible financial security for an individual and his beneficiaries.” – Tools & Techniques of Financial Planning Estate planning is also used so that an individual can control where his or her assets go after he or she dies, and sometimes even to control the behavior of heirs, regardless of whether or not it maximizes financial security or minimizes taxes.

2. Control • If a person does not plan the disposition of his or her estate, the state will do it for him. • State intestacy laws are not designed to preserve the estate by reducing taxation, so much of what the person has built up in a lifetime goes where the state wants it to go. • Almost every estate can benefit from professional attention.

3. People Planning • Estate planning should give people peace of mind. • People want to know that their loved ones will be taken care of. • It isn’t just about money, it is a hope for being remembered and for making a difference in the lives of their heirs.

4. Estate Planning is Not Just for the Rich • Mistakes in estate planning for a middle class client represent a bigger percentage of the estate than they do in large estates. • Although the techniques for maximizing the estate for the family may not be as fancy, they can make a greater difference in the lives of the heirs.

5. Six Major Estate Planning Problems • Lack of Liquidity • Improper distribution of assets • Inadequate income or capital • Asset values destabilized and not maximized • Excessive taxes and transfer costs • Special needs

6. The Estate Planning Process Note that the process is analogous to the financial planning process. • Gather data on assets, liabilities, goals and desires. • Categorize the data into general categories. • Estimate estate transfer costs and liquidity needs. • Set priorities and prepare solutions for each problem. • Formulate the plan. • Test and implement the plan. • Review the plan as needed.

7. Estate Planning Legal Documents • Documents should be prepared by an attorney who has expertise in estate planning in that jurisdiction. • Just as do-it-yourself financial planning is beyond the ability of most people, mail-order estate planning kits rarely result in the most effective estate disposition.

8. Legal documents that may be needed include: • An asset and personal records inventory. • A letter briefing the executors. • A will – Seven out of 10 American adults do not have a valid will. • Trusts. • Power of attorney. • Living will.

9. What is a will? • “A will is a legal expression or testament of a “testator’s” wishes that (1) provides for disposition of the probateestate; and (2) leaves instructions for the care of dependents and the settlement of the estate after the testator’s death.” – Tools and Techniques of Financial Planning • The will is the cornerstone of estate planning.

10. What a Will Does • Determines the beneficiaries of the probate assets; state law will determine the beneficiaries otherwise. • Gives specific assets to selected heirs. • Names an executor. • Makes gifts from the estate in trust. • Names the guardians of any minor beneficiaries. • Gives directions as to the payment of debts. • Makes charitable bequests. • Takes advantage of optimum marital-deduction tax planning. The will cannot dispose of assets that pass outside of probate, such as IRAs and Qualified Plans, proceeds of life insurance policies, joint property, assets in a trust, or nonqualified deferred compensation benefits.

11. Requirements for a Valid Will Anyone can draw up a will, but it should be done by a qualified attorney to make sure it is valid. To be valid: • A will must be written (handwritten or typed). • A will should unambiguously state that it is intended to be a will. • The will must be signed and dated at its logical end by the person for whom it is written (the testator). • A number of witnesses (generally two or three depending on state law) must sign the will after the testator’s signature attesting to the validity of the signature. Many states require that the witnesses notbe beneficiaries under the will. • The testator must have attained a threshold age (generally 18).

12. Components of a Valid Will • Introduction (a clear statement of the intent to make a will). • Direction to pay debts and expenses. • Tax apportionment and expense apportionment clauses. • Specific bequests or devises of real and personal property. • Disposition of residuary estate. • Nomination of the executor and all trustees of trusts created by the testator in the will.

13. Components of a Valid Will (cont’d) • Powers clause enumerating the powers granted to the executor. • Provisions for the disposition of property to minor beneficiaries and appointment of fiduciary. • Common disaster or simultaneous death clause (to specify which actions to take in the event of the simultaneous or near simultaneous deaths of both husband and wife). • Execution clause. • Signature, witness, and attestation clause. • Self-proving notarization.

14. Grounds for Contesting a Will A will can be contested successfully (its validity challenged and found invalid) UNLESS • The Testator has legal capacity (is competent to understand what he or she is doing). • The Testator has freedom of choice (no coercion or undue influence). • The will is properly executed.

15. Codicils • Small changes in a will can be made through a codicil, which is a short document that affirms all the other items in a will and changes one or two things. • If the changes are major, a new will should be executed. • When a new will is made, all copies of the previous will should be destroyed.

16. Revocation and Modification • A testator can revoke a will by • Making a later will which revokes a prior will. • Making a codicil expressly revoking a will. • Making a later will inconsistent with a former will, or • Physically mutilating, burning, tearing, or defacing the will with the intention of revoking it. • State law can revoke or modify a will because of • Divorce of the testator. • Marriage of the testator. • Birth or adoption of a child of the testator. • Murder of the testator.

17. Right of Election • Generally only given to the spouse. • The spouse can elect to get what the intestacy laws would have given him or her. (Obviously this will only be used if the will gave more of the estate to other parties leaving the spouse with less.) • The right of election is usually forfeited if the spouse deserted or killed the testator. Please note that estate law is state law, and can vary greatly from state to state. Always use an attorney familiar with the laws of the state in which the client lives.

18. Safeguarding the Will • Safety deposit box if the spouse can get to the box quickly after death. • Leaving it with the attorney can cause problems for the executor if he or she does not want to use that attorney for the estate. • It is possible in some states to file the will with the Surrogates Court (sometimes called Orphan’s Court).

19. Intestacy State intestacy laws provide a will for the person who did not draw his own. State law, therefore, determines • Who is entitled to receive an intestate decedent’s probate property. • How such individuals will receive their shares. • When those shares will be paid out.

21. Letter of Instructions An informal way to tell the executor personal thoughts and directions that should not be included in a will. It might include: • Location of the will and other key documents. • Funeral and burial instructions (remember that a will is often not opened until long after the funeral). • Suggestions or recommendations as to the continuation, sale, or liquidation of a business. • Personal matters the client might prefer not to be made public. • Legal and accounting services. • An explanation of why certain actions were taken in the will.

22. Picking the Executor The person chosen to be executor should have: • Competence. • The understanding and personal skills to deal with other heirs. • Knowledge of the special needs of the testator’s heirs. • Knowledge of the testator’s property. • The willingness to do a time-consuming and often thankless task. • Honesty. • Geographic proximity to the probate court, assets, and other heirs, to the greatest extent possible. • The lack of any insurmountable conflicts of interest with the estate and other beneficiaries. The best executor may not be the most successful financially, nor the most knowledgeable, although those are good traits. Honesty and diligence and a sense of responsibility are better qualifications.

23. Power of Attorney • “A power of attorney is a legal instrument that gives another person or entity the right to legally perform specified acts for a person. The power of attorney can be limited or extensive. The person granting the powers decides what powers and rights the person is going to delegate to the other person.” – Tools and Techniques of Financial Planning.

24. Types of Power of Attorney • Immediate or springing powers. • Durable power of attorney. • Scope • Broad • Limited

25. Medical & Health-related Documents • The Supreme Court decision in Cruzan vs. Director, Missouri Department of Health, held that the U.S. Constitution does not prohibit states from requiring that evidence of an incompetent patient’s wishes to have life-sustaining treatment withdrawn must be established by clear and convincing evidence. In Justice Scalia’s concurring opinion, he stated that there is no federal constitutional basis whatsoever for preventing states from prohibiting patients (or their families) to refuse unwanted life-sustaining treatment. • For a frank and learned discussion of the issues involved in Health Care Proxies, see “Questions with... Joseph Fins, M.D., on contract versus covenant: Lessons on advance directives from the Terri Schiavo case.” (2005). Journal of Financial Planning, 18(7), 10-14 at http://www.fpanet.org/journal/

26. How to Indicate Desires as to Health Care and Resuscitation Although the Cruzan decision and the Schiavo case illustrate that despite all efforts, your wishes may not be respected if you become incapacitated in a permanent vegetative state, nevertheless, every person who cares should have: • Living Will (Advance Directive for Medical Care). • Durable Power of Attorney (Health Care Proxy). State law will determine which is more effective in your state.

27. Living will • A living will is a document indicating a person’s intentions in the event the person becomes disabled and lacks the legal capacity to make medical decisions. A living will deals with the health-care measures desired in the event of disability and incapacity. The living will should carefully spell out whether or not heroic measures should be taken in the event of a terminal accident or illness or a permanent coma.

28. Durable Power of Attorney for Health Care • A durable power of attorney gives a selected agent the power to make health-care decisions for a person if the person becomes legally incompetent. The durable power for health care is more widely recognized and more flexible than a living will, since the designated agent may be able to act before a person’s permanent incapacity. Of course, while a person is still competent, the person is still free to continue to make the person’s own decisions and can revoke the power at any time the person still has the legal capacity to do so.

29. Three Stages to Administer an Estate • Safeguarding and collecting the decedent’s assets. • Paying of debts and taxes. • Distribution of any remainder to the heirs specified in the will or under state intestacy law.

30. The Personal Representative • The executor (or executrix if female) of the estate is the personal representative of the deceased and is supposed to handle the estate as the deceased would have wanted it. • The Executor or Executrix is named by the will and confirmed by the court. • If the person dies intestate, the court appoints an Administrator whose job is the same as that of an executor.

31. Why is It Important to Properly Administer and Settle the Estate? • To collect bank accounts and other assets and to enforce contracts. • To provide a chain of title on real property so it can be marketable. • Assure the person and heirs that the wishes of the decedent will be carried out and the heirs receive what they are supposed to receive.

32. Gift Giving • Sometimes it is good financial planning to divest a person’s assets by giving gifts • Remove income producing assets from the person’s taxable estate. • Lifetime gifts ensure that the property goes to the person that the giver intends. • Pleasure of seeing the gift received and a chance to see how the person receiving the gift handles it. • Privacy. Lifetime gifts are not anyone’s business but the two parties involved.

33. Reducing or Eliminating the Gift Tax • The giver is required to pay a tax on gifts. • This gift tax can be reduced by: • The annual gift tax exclusion. • Split gifts. • Gift tax marital deduction. • Unified credit.

34. What Property Should Be Given?Helping the Client Select • Income producing property if the donor is in a high tax bracket and the donee is not. • Give assets likely to appreciate in value. (Removes the property from the taxable estate). • Give away property owned in a state other than the one in which the client lives. (Avoids probate in the non-resident state). • Do not give away highly appreciated property if death is likely to occur in only a few years, because inherited property gets a step-up in basis.

35. The Federal Estate Tax • Designed to redistribute wealth – keep rich families from getting richer over generations. • Can be almost confiscatory. • Current law exempts an increasing amount from estate taxes ($1.5 million in 2005), rising to total exemption in 2010. In 2011, a sunset provision in the law reverts to $1 million being exempt from tax.

38. Gift and Estate Tax Schedules

39. The Gift and Estate Tax Law will briefly call for no taxes in 2010, then revert to the old schedule in 2011.

40. Unified Credit and Resulting Exclusion

41. Generation-Skipping Transfers • Yet another Federal Transfer tax • Taxed at top Federal rate – 47% in 2005 • “Planners should recognize that it is possible that the cost of making a generation-skipping transfer can be greater than the value of the entire gift. For example, assume a client who is already in the 48% gift tax bracket writes a check to his granddaughter for $2,000,000 in 2004. The generation-skipping transfer tax will be 48% of the $2,000,000, or $960,000. In addition, since the transfer was a gift, the client must pay a gift tax at the rate of 48% on the gift, another $960,000. To make it even worse, the client is deemed to be making a second gift, a gift of the generation-skipping transfer tax ($960,000) upon which must be paid an additional 48% gift tax (or $460,800). The total tax is therefore $2,380,000.”

42. State Death Taxes • In addition to the Federal Gift and Estate Tax, there are state death taxes. • The Federal law gives a deduction or some credit for the state taxes. (Table on next slide.) • Planning can lower state death taxes considerably. • For people of modest means, state death taxes may be worse than federal taxes.

44. Conclusion: Estate Discussions are Delicate • No one likes to think about dying. • Planners can “turn people off” to the entire planning process if estate issues are not properly handled. • The planner must: • Show compassion and care for reasons beyond possible compensation. • Become competent in estate planning and/or work with other advisers who are. • Learn the goals, circumstances, and needs of all the people involved. • Bring the client and the client’s family into the planning process as much as possible.