Estate planning...  Are you ready?
An estate planning primer

Need for estate planning

  1. Management of assets during lifetime, particularly during periods of disability
  2. Welfare of minor children and other dependent persons
  3. Minimize estate taxes
  4. Orderly distribution of property located in multiple states
  5. Orderly distribution of business interests
  6. Business succession planning
  7. Liquidity needs
  8. Minimize intra-family problems
  9. Continuity of income in the event of disability or death of a spouse

The estate planning process

  1. Collect Data; a Data Sheet for Estate Planning is attached as Exhibit "A"
  2. Establish objectives
  3. Prepare estate planning documents
  4. Implementing the estate plan and funding the Trust; a Financial Planning Organizer is attached as Exhibit "B"
  5. Monitoring the estate plan on periodic basis

The estate planning team

  1.  Attorney
  2. Financial planner/consultant
  3. Accountant
  4. Insurance Agent
  5. Bank Trust Officer

Lifetime Planning

  1. Durable Powers of Attorney
  2. Bank and Brokerage Powers of Attorney
  3. Designation of Patient Advocate
  4. Living Wills, although not recognized by Michigan statute, are additional evidence of a person's beliefs regarding end of life care
  5. Disability Insurance
  6. Long Term Care Insurance
  7. Medicare
  8. Medicaid
    1. Income cap
    2. Resource cap
  9. "Special needs" Trusts
  10. Ante-Nuptial Agreement (also known as Pre-Marital Agreement)
    1. Should be considered in the case of a marriage in which one or both of the parties has been previously married and has children of the prior marriage
    2. An Ante-Nuptial Agreement can address the way in which a party's estate will pass on his or her death or address the issue of division of property in the event of a divorce

Tis better to give... Lifetime gifts (usually outright)

Gifts by definition --

  1. A sale, exchange or other transfer of property from one person (donor) to another (donee) without adequate and full consideration in money or money's worth
  2. Other types of gifts
    1. Forgiveness of indebtedness
    2. Assignment of benefits of life insurance policy
  3. When is gifting an appropriate strategy?
    1. To remove an appreciating asset from the donor's estate
    2. Generosity
    3. Reduction of taxable estate and attendant costs
    4. Maximization of marital deduction
    5. Income shifting
  4.  Tax Implications
    1. Gift tax liability
    2. Annual gift tax exclusion -- currently $12,000 per year per donee/recipient; to be adjusted for inflation in accordance with the Taxpayer Relief Act of 1997
    3. The $12,000 amount of the gift tax annual exclusion will be increased by an inflation adjustment in multiples of $1,000.
    4. Ability of spouses to "split" gifts resulting in possibility of one spouse making gifts to donee of $24,000
    5. Remove future appreciation on gifted property from donor's estate
    6. Income shifting among family members
      1.  Beware the "Kiddie Tax" (which in 2006 applies to children up to age 18) which is calculated in three stages
        1. No tax on first $850 (for 2006 tax filings) of unearned income (i.e., investment income) because of child's standard deduction
        2. The next $850 of unearned income will be taxed to child at the child's bracket
        3. Unearned income in excess of $1,700 will be taxed to child at the parent's bracket
      2.  When to use the Uniform Gifts to Minors Act (UGMA)
        1. Gift of money to child without gift being outright and without setting up Trust
        2. Income shifting
        3. Utilization of gift tax annual exclusion
        4. Reduce estate of donor and shift future appreciation to child
        5. When donor is comfortable with fact donee (child) is legally entitled to property upon reaching age of majority (18 in Michigan)
        6. Caution -- When a child is 18 years old he or she is legally entitled to entire balance in an UGMA account
      3.  2503(c) Trusts or Education Trusts
      4. Charitable giving
        1. Outright
        2. Charitable Trusts
          1. Charitable Remainder Trusts (CRTs)
          2. Charitable Lead Trusts (CLTs)
          3. Pooled income funds (PIFs)

Planning for Death and Taxes

  1. Wills
    1. A person who dies without a Will is said to have died "intestate". In such a case, a decedent's assets will pass by the laws of intestate succession of the state in which decedent resides or in which his/her property is located
    2. If you die without having prepared a Will, the State will write one for you
    3. Illustrations of how your estate would pass pursuant to a "State drawn Will" are shown on Exhibit "C"
    4.  What can a Will accomplish?
      1. Arrange for disposition of your property according to your own wishes
      2. Save estate taxes
      3. Designate a guardian and conservator for your minor children
      4. Designate appropriate fiduciaries [i.e. Personal Representative(s) and Trustee(s)]. A description of "The Responsibilities and Liabilities of Trustees and Personal Representatives" is attached as Exhibit "D"
      5. Allocate the responsibility for estate taxes; especially important in the case of blended families
      6. Testamentary Trusts for surviving spouse, children and grandchildren
        1. Can be designed to minimize or eliminate estate taxes on death of first spouse to die
        2. Disadvantage -- continual supervision of probate court until Trust is terminated
      7.  Catastrophe beneficiaries
      8.  Independent Probate vs Supervised Probate
    5.  When should a Will be reviewed?
      1. Changes in family situation
      2. Changes in business situation
      3. Changes in the law
      4. A questionnaire that we send to our clients to remind them about events which would necessitate a review of their Wills is attached as Exhibit "E"
  2.  Liquidity Needs
    1. Debts, expenses and taxes due at death may create need for immediate liquidity
    2. The size of an estate exempt from estate tax increases gradually to $3,500,000 by 2009
      1. Decedents dying in 2006, 2007 and 2008
        Exemption equivalent: 2,000,000
      2. Decedents dying in 2009
        Exemption equivalent: 3,500,000
    3. Life insurance may provide the necessary liquidity
    4. With proper planning (specifically the use of an Irrevocable Trust) the life insurance can benefit your family without creating additional tax liabilities
  3.  Forms of Property Ownership
    1. Sole Ownership
    2. Joint Tenancy with Right of Survivorship
    3. Tenancy by the Entireties
    4. Tenant-in-common
    5. Community Property
    6. Transfer on death accounts
    7. Trust Ownership
  4. Revocable Living Trusts
    1. Probate avoidance
    2. Privacy
    3. Reduce likelihood of Will contest
    4. Management expertise
    5. To protect Settlor in event of his/her disability
    6. To control governing state law
    7. "QTIP" provision
    8. Spendthrift provision
    9. "Generation-Skipping" provision
    10. Here is a more detailed discussion of Revocable Living Trusts.
  5. Designation of Patient Advocate
    1. Allows an individual to designate a Patient Advocate who is authorized to make medical treatment decisions that the individual could make on his or her own behalf, subject to limitations, if any, set forth in the Designation.
    2. The Designation can address decisions concerning the individual's care and custody.
    3. The Designation becomes effective when the individual cannot participate in his or her own medical treatment decisions.
    4. The Designation should address HIPAA regarding medical privacy rules and the access of the Patient Advocate to the individual's medical information.
    5. The Designation can address the issue of organ donations and anatomical gifts.