estate and legacy planning an overview of the estate planning process mvma lunch 'n learn...
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Estate And Legacy PlanningAn Overview of the Estate Planning Process
MVMA LUNCH 'N LEARN PROGRAMSNovember 10, 2015
By: Samuel S. StalsbergSjoberg & Tebelius, P.A.
2145 Woodlane Drive, Suite 101Woodbury, Minnesota 55125
Phone: [email protected]
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
Who Needs an Estate Plan?
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
Basic Estate Planning Concepts
Planning for Planning for IncapacityIncapacity
Planning for Planning for IncapacityIncapacity
Planning Planning for Deathfor DeathPlanning Planning for Deathfor Death
Property Property ManagementManagement
Property Property ManagementManagement
Health Health CareCare
Health Health CareCare
QuestionsQuestionsQuestionsQuestions
Wills and Wills and ProbateProbate
Wills and Wills and ProbateProbate Tax BasicsTax BasicsTax BasicsTax Basics
GiftingGiftingGiftingGiftingTrustsTrustsTrustsTrusts
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
Planning for IncapacityHealth Care
Disposition of Remains, Funeral Services, Organ Donation
Lets you designate an agent to makedecisions on your
behalf
Puts your instructions
in writing
Puts your instructions
in writing
Planning for Incapacity Health-Care Directives
Miscellaneous Directions
Durable Power ofAttorney for Health Care Living WillLiving Will
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
Lets you designate an agent to makedecisions on your
behalf
Lets a successortrustee take overmanagement oftrust property
Planning for IncapacityProperty Management Tools
Living TrustDurable Power ofAttorney (DPOA)Joint Ownership
Joint owner has the same accessto property as
you do
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
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
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
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
Wills & Probate -- Probate Pros & Cons
Pros Cons 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 -- Avoiding Probate
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
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
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
TrustAgreement
BeneficiariesHave rights to trust property
under terms of trust agreement
Trust Property
TrusteeManages trust property according to
trust agreement
Revocable Trusts
Pros
1. Avoid Probate
2. Incapacity Planning and
Asset Management
3. Protects Privacy
4. Reduces Administrative
Burden on Loved Ones
Cons
1. More Complex
2. More Work Upfront
(funding the trust)
3. Higher Initial Cost
Tax BasicsTransfer 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
Transfer Tax Basics Federal
2014 2015 2016
Top rate 40% 40% 40%
Gift and estate tax exemption equivalent amount
$5,340,000 $5,430,000 $5,450,000
GST tax exemption
$5,340,000 $5,430,000 $5,450,000
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]
You(Donor)
Person Receiving
Gift (Donee)
Lifetime Transfer
Gift 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
Your Estate
Beneficiary
Transfer at Death
Estate tax may apply
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
Tax Basics -- Federal Estate Tax
Explanation of “Portability” Feature
1.Assume Husband owns $7M in assets and Wife owns $3M. Wife dies first.
2.Wife’s $3M estate passes to Husband.
3.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.
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.
Tax Basics – Tax Planning (Minnesota)
A. 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.
B. 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.
Tax Basics – Tax Planning (Minnesota)
H'S ESTATE$2,000,000
TO SPOUSE
NO TAX
Husband dies first in 2015
Tax Basics – Tax Planning (Minnesota)
W'S ESTATE$4,000,000
$4,000,000TAXABLE
Federal Taxes = $0Minnesota Taxes = $268,000
BYPASS$0
Wife dies second, also in 2015
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
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’SESTATE
$2,000,000
$1,400,000BYPASSTRUST
NO TAXNO TAX
$600,000MARITAL
DEDUCTION
Tax Basics – Tax Planning (Minnesota)
Example Revisited: Wife dies later that same year.
WIFE’S ESTATE$ 2,600,000*
$2,600,000TAXABLE
$1,400,000NON-
TAXABLE
No Federal Estate TaxMinnesota Estate Tax = $120,000
* Bypass Trust not included in Wife’s estate.
BYPASS TRUST$1,400,000
Tax Basics – Tax Planning (Minnesota)
Total Minnesota Estate Tax Savings
$268,000 - $120,000 = $148,000
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
Lifetime Gifting -- Transfers Excluded from Gift Tax
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
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
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
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 MVMFin their will or estate plan
Detailed Information sent to MVMA this monthWebsite: mvmfcares.org/You-Can-HelpQuestions: Contact Inez Bergquist at MVMF [email protected]
MFMF Legacy Society Detailed information mailed to
members this month. Website
mvmfcares.org/youcanhelp
Questions? [email protected]
ConclusionI 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 101Woodbury, MN 55125Phone: [email protected]
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?