Planning Your Legacy: Estate & Legacy Planning Overview

1. Estate And Legacy Planning By: Samuel S. Stalsberg Sjoberg & Tebelius, P.A. 2145 Woodlane Drive, Suite 101 Woodbury, Minnesota 55125 Phone: 651-738-3433 sam@stlawfirm.com An Overview of the Estate Planning Process MVMA LUNCH 'N LEARN PROGRAMS November 10, 2015

2. What Is an Estate Plan? • An estate plan is a map • The map reflects the way you want your personal and financial affairs to be handled in case of incapacity or death

3. Chances are, you do Not just for the wealthy Without an estate plan, you can’t control what happens to your property if you die or become incapacitated An estate plan makes your wishes clear and helps avoid family disputes Proper estate planning can preserve assets and provide for loved ones Protects beneficiaries from others and themselves Especially needed if: Your spouse isn’t comfortable with financial matters You have minor or disabled beneficiaries Your net worth exceeds the federal transfer tax exemption amount ($5,430,000 in 2015) or, if less, your MN exemption amount ($1,400,000 in 2015) You own property in more than one state Financial privacy is a concern You own a business Second marriages Who Needs an Estate Plan?

4. Basic Estate Planning Concepts Planning for Incapacity Property Management Planning for Death Health Care Wills and Probate Tax Basics Gifting Trusts Questions

5. Planning for IncapacityHealth Care • Failing to plan means a court would have to appoint a guardian • Lack of planning increases the burden on your guardian • Your guardian’s decisions might not be what you would want • Attorney's fees, court costs and delays

6. Planning for Incapacity Health-Care Directives Durable Power of Attorney for Health Care Living Will Miscellaneous Directions Lets you designate an agent to make decisions on your behalf Puts your instructions in writing Disposition of Remains, Funeral Services, Organ Donation

7. Planning for IncapacityFinancial Management Without appropriate planning for management of your assets during incapacity, a court supervised conservatorship is probably necessary. • Time Consuming • Expensive • Public Record

8. Planning for IncapacityProperty Management Tools Joint Ownership Durable Power of Attorney (DPOA) Living Trust Joint owner has the same access to property as you do Lets you designate an agent to make decisions on your behalf Lets a successor trustee take over management of trust property

9. What Happens If You Die Without an Estate Plan? • Some property passes automatically to a joint owner or to a designated beneficiary (e.g., IRAs, retirement plans, life insurance, trusts) • All other property generally passes according to state intestacy laws

10. What Happens If You Die Without an Estate Plan? -- Intestacy • Intestacy laws vary from state to state • Pattern of distribution in Minnesota depends on marital status, and if all children are also children of the surviving spouse. • Your actual wishes are irrelevant, you are stuck with how the legislature assumes you want your property divided. • Many potential problems

11. Wills & Probate • A will is the cornerstone of an estate plan • Directs how your property will be distributed upon your death • Names personal representative and guardian for minor children • Can accomplish other estate planning goals (e.g., estate tax planning, trusts for children) • Written, signed by you, and witnessed

12. Wills & Probate -- The Probate Process • Most wills must be probated • Will is filed with probate court • Personal Representative collects assets, pays debts, files tax returns, and distributes property to beneficiaries • Typically, process lasts several months to a year

13. Costs are typically modest Court supervision Protection against creditors Can be time consuming for complex estates Title transfer delays Fees Ancillary probate Public record Wills & Probate -- Probate Pros & Cons Pros Cons

14. Can you avoid probate? Yes, an estate plan can be designed to control which assets pass through probate, or to avoid probate. Own property jointly with rights of survivorship Complete beneficiary designation forms for property such as IRAs, retirement plans, and life insurance Transfer on death deeds Make lifetime gifts Use trusts Wills & Probate -- Avoiding Probate

15. Revocable Trusts • Versatile estate planning tool • Can protect against incapacity • Avoid probate • Allow professional management of assets • Control over property • Can revoke or amend • Private

16. Trustee Manages trust property according to trust agreement Trusts -- What Is a Trust? • Legal entity that holds property • Parties to a trust: grantor, trustee, beneficiary • Living trusts vs. testamentary trusts • Revocable trusts vs. irrevocable trusts Grantor Trust Agreement Trust Property Beneficiaries Have rights to trust property under terms of trust agreement

17. Revocable Trusts

18. Tax Basics Transfer taxes include: • Federal gift tax - imposed on transfers you make during your life • Federal estate tax - imposed on transfers made upon your death • Minnesota estate tax - - imposed on transfers made upon your death • Federal generation-skipping transfer (GST) tax - imposed on transfers to individuals who are more than one generation below you (e.g., grandchildren) both during your life and upon your death

19. Transfer Tax Basics Federal

20. Lifetime Transfer You (Donor) Person Receiving Gift (Donee) Gift tax may apply Tax Basics -- Gift Tax • Federal Gift tax applies to transfers made during your life • Certain gifts are excluded • $14,000 annual exclusion • Gifts for Education • Gifts for Medical Expenses • $5,430,000 exempt from all transfers (gifts and estates) combined in 2015 • Minnesota Gift Tax [Repealed]

21. Transfer at Death Your Estate Beneficiary Estate tax may apply Tax Basics -- Federal Estate Tax • Estate tax applies to transfers made at death • Generally does not apply to transfers made to spouse or charity • $5,430,000 exempt from all transfers (gifts and estates) combined in 2015 • Any portion of exemption used for gifts will be unavailable to the estate

22. Tax Basics -- Federal Estate Tax • New feature important for married couples. • Exemption is “portable” - unused portion left by deceased spouse can be transferred to surviving spouse. • $10,860,000 can be left to beneficiaries tax free (in 2015). • Note: Portable feature does not apply to MN state estate tax

23. Tax Basics -- Federal Estate Tax • Explanation of “Portability” Feature • Assume Husband owns $7M in assets and Wife owns $3M. Wife dies first. • Wife’s $3M estate passes to Husband. • Husband now owns $10M of assets. Husband can utilize the portable unused $5.43M from Wife and use his own $5.43 M exemption on top. • 4. Result: No federal estate tax on $10.86M. • NOTE: Minnesota estate tax is still applicable.

24. Tax Basics – Minnesota Estate Tax Review of Minnesota Estate Tax • Estate Tax Exemption through 12/31/13 - $1M • Decedents Dying in 2014 - $1.2M (9%-16%)* • Decedents Dying in 2015 - $1.4M (10%-16%)* • Decedents Dying in 2016 - $1.6M (10%-16%)* • Decedents Dying in 2017 - $1.8M (10%-16%)* • Decedents Dying in 2018 - $2.0M • Over $2M but less than $2.6M – 10% of excess over $2M • Over $2.6 but less than $7.1 - $60,000 plus 13% of excess over $2.6M • *Tax on amounts exceeding the exemption.

25. Tax Basics –Tax Planning (Minnesota) • An estate plan leaving everything outright to a spouse may not be appropriate for a couple with total assets in excess of the Minnesota applicable exclusion amount. • Example: Husband and Wife each have assets of $2,000,000 and Husband dies in 2015 leaving his entire $2,000,000 estate to his wife outright. • No Minnesota or Federal estate taxes are due thanks to the unlimited marital deduction. Wife now owns $4,000,000 worth of assets. Wife dies later that same year. • No federal estate tax will be due at her subsequent death because her assets are under the federal exclusion amount. • Minnesota estate tax will be due, however, because her assets exceed the Minnesota exclusion amount.

26. Tax Basics –Tax Planning (Minnesota) Husband dies first in 2015 H'S ESTATE $2,000,000 NO TAX TO SPOUSE

27. Tax Basics –Tax Planning (Minnesota) Wife dies second, also in 2015 W'S ESTATE $4,000,000 BYPASS $0 $4,000,000 TAXABLE Federal Taxes = $0 Minnesota Taxes = $268,000

28. Tax Basics –Tax Planning (Minnesota) • To reduce MN estate tax, include tax planning in your estate plan • Bypass Trust (aka Credit Shelter Trust, Family Trust, “B” Trust) • Formula v. Disclaimer • Purpose • To use credit to pay tax at death of first-to-die • To use a trust to pass property values equal in amount to the exemption equivalent • To provide surviving spouse with use of property • To avoid tax on property at surviving spouse’s death

29. Tax Basics –Tax Planning (Minnesota) Example Revisited: Husband and Wife each have assets of $2,000,000. Husband dies in 2015, leaving $1,400,000 to a trust for the benefit of wife and children (Bypass Trust) and the remaining $400,000 passes outright to wife. Taxes at Husband’s Death: Federal Estate Tax due = $0 Minnesota Estate Tax due - $0 HUSBAND’S ESTATE $2,000,000 NO TAX NO TAX $600,000 MARITAL DEDUCTION $1,400,000 BYPASS TRUST

30. Tax Basics –Tax Planning (Minnesota) Example Revisited: Wife dies later that same year. WIFE’S ESTATE $ 2,600,000* BYPASS TRUST $1,400,000 $2,600,000 TAXABLE $1,400,000 NON- TAXABLE No Federal Estate Tax Minnesota Estate Tax = $120,000 * Bypass Trust not included in Wife’s estate.

31. Tax Basics –Tax Planning (Minnesota) Total Minnesota Estate Tax Savings $268,000 - $120,000 = $148,000

32. Lifetime Gifting • Lets you see the recipient enjoying your gift • Lets you minimize transfer taxes by taking advantage of the $14,000 annual gift tax exclusion and other tax deductions • Removes future appreciation of property from your taxable estate • No “step-up” in basis -- your basis in the property carries over instead

33. You can give $14,000 to as many individuals as you want federal gift tax free ($28,000 if you and your spouse make the gift together) If you’re contributing to a Section 529 plan, you can give $70,000 ($140,000 with spouse) gift tax free No gift tax on amounts paid directly to a school for an individual’s tuition No gift tax on amounts paid directly to a medical care provider for an individual’s medical care Unlimited exemption for gifts to qualified charities Lifetime Gifting -- Transfers Excluded from Gift Tax

34. Legacy Planning • Gifts to Charity During Lifetime • Example: Outright Gift of $25,000 Mutual Fund to the MVMF • Supports wonderful causes of MVMF • No capital gains tax • 100% income tax deductible • Lifetime Planned Gifts to Charity • Gift Annuities • Charitable Remainder/Lead Trusts

35. Legacy Planning • Gifts In Estate Plan • Use retirement plan beneficiary [most tax efficient] • Flat dollar amount by bequest • Tithing percentage by bequest • Family Foundation Planning with a Donor Advised Fund

36. MVMF Legacy Society • MVMF Board Appointed Planned Giving Task Force last fall Dr. Olson, Dr. McMenomy, and Dr. Greiner • Established the MVMF Legacy Society Includes anyone who has included MVMF in their will or estate plan • Detailed Information sent to MVMA this month • Website: mvmfcares.org/You-Can-Help • Questions: Contact Inez Bergquist at MVMF ibergquist@mvmfcares.org

37. MFMF Legacy Society • Detailed information mailed to members this month. • Website mvmfcares.org/youcanhelp • Questions? • info@mvmfcares.org

38. I would welcome the opportunity to meet individually with each of you to address any specific concerns or questions that you may have: Samuel S. Stalsberg Sjoberg & Tebelius, P.A. 2145 Woodlane Dr, Ste 101 Woodbury, MN 55125 Phone: 651-738-3433 sam@stlawfirm.com Have you implemented a plan for incapacity (health and property)? Do you have a valid will? Are transfer taxes a planning concern for you? Does your overall estate plan reflect your current wishes and circumstances? Conclusion