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The Truth About Estate Planning“The Basics and Beyond”
A Recipe for Successful Estate Planning, Retirement Preservation and Post Mortem
Transfer of Assets
Sean Gjerde LL.M.Attorneys & Counselor at Law
(916)483-3040
To quote the will exactly, it
reads:
“I, Amos Thornbury,
being of sound mind and
body, have spent it all.”
Estate Planning Overview
•Proper Asset Ownership
•Control of Process• What to Do• How to Do It• How to Pay for It
Keys to an Effective Estate Plan
SAVE TAXES
EXPAND WEALTH
WEALTH
FAMILY
ME
“I want to control my property while alive and well, plan for me and my loved ones if I become mentally disabled,
and then give what I have to whom I want, when I want and the way I want--
all at the lowest possible overall cost to me and those I love.”
PLANNING PYRAMID
Estate Planning Overview
Definition of Estate Planning
I Want to Control My Property While I’m Alive and Well;
Plan for Me and My Loved Ones if I Become Disabled;
Estate Planning Overview
Definition of Estate Planning
• Give What I Have• To Whom I Want• When I Want• The Way I Want
All at the Lowest Possible Cost to Me and Those I Love
Estate Planning Strategy
• Work with a Counseling Oriented Attorney
• Establish and Maintain a Formal Updating Program
• Assure Successors Utilize Fixed Fee Services After Death
Three Types of Estate Plans
• Married Couple Under $1,000,000
• Married Couple Over $1,000,000
• Unmarried Individual
Client Personal Planning Goals
• Catastrophic Illness Protection
• Creditor Protections
• Remarriage & Bloodline Protections
• Divorce Protections
• Controlling distributions of the estate
• Transmitting values to family members
• Estate Tax & Cost Reduction
Your AssetsFederal Income Tax Federal Estate TaxState Income TaxAttorney’s FeesFuneral CostsCourt CostsOutstanding
Debt
Your Family
Key Tax Savings Provisions
• Unlimited Marital Deduction
• *$1,000,000 Exemption Equivalent for the Unified Gift & Estate Tax Credit
*(2003 & Post Jan. 1, 2011)
Federal Estate Tax Reduction
Year
2001
2002
2003
2004
2005
Amount
$ 675,000
1,000,000
1,000,000
1,500,000
1,500,000
Tax Relief Act of 2001 (EGTRRA): “Coupon” Amount
Federal Estate Tax Reduction
Year
2006
2007
2008
2009
2010
2011
Amount
$ 2,000,000
2,000,000
2,000,000
3,500,000
Estate Tax Repealed
1,000,000
Tax Relief Act of 2001 (EGTRRA): “Coupon” Amount
Estate Tax Planning With Married Couples
Example: John and Mary Sample have an estate that has an estimated $2,000,000 fair market value (this includes net worth, retirement, and life insurance). John and Mary have accumulated all their wealth during their marriage (community property). They have one son named Tom. They have no estate plan.
John dies on Jan. 1, 2003. His $1,000,000 (half the community) goes to Mary.
Mary now owns the full $2 million. No tax because of UMD, but John’s exemption expires. Mary dies on Feb. 2, 2003.
Tax Calculation: Gross Estate 2,000,000 Estate Tax 780,800 Mary’s Exemption - 345,800 Net Tax to IRS $435,000
Estate Tax Planning With Married Couples
Example: Same assumptions, except that John and Mary have created a Revocable Living Trust that contains estate tax provisions. Also, this example assumes that assets have been properly funded into the trust.
John dies Jan. 1, 2003.
Mary dies Feb. 2, 2003.
Tax Calculation:
Family Trust – Passes to Tom without any estate tax. John’s coupon was used to pass any principal and accumulated interest to Tom without any estate taxes.
Marital Trust – Any principal and accumulated interest will be estate taxable, however the survivor’s coupon can still be used. In this case:
Gross Estate 1,000,000 Estate Tax 345,800 Mary’s Exemption 345,800 Net Tax to IRS 0
RLT 2,000,000
Marital Trust
$1,000,000 100% Access
Family Trust
$1,000,000 HEMS
RLT
Marital Family
Husband
Joint Insurance 401(k) IRA
Wife
Excess 1st $1,000,000(2003)
Estate Taxes & Personal Planning Goals
“The Key is to Coordinate the Estate Plan & the Financial Plan”
Additional Tools & Concepts
Stretch Out IRA Strategies
• No Qualified DB
• Individual QDB• Trust QDB
Stretch Out IRA Example Example: John and Mary Sample have an estate that has an estimated $2,000,000 fair market value. $1,000,000 of this is in an IRA in John’s name. They have one son named Tom who is age 25. They have no estate plan.
John dies on Jan. 1, 2003. His $1,000,000 IRA goes to Mary.
Mary now owns the full $1 million IRA in her name as she did an IRA Spousal Rollover. No tax because she is the spouse. Mary dies on Feb. 2, 2003 and has not yet made proper beneficiary designations.
Income Tax Calculation: IRA forced W/D $1,000,000
(in 1 to 5 yrs.) Approx. Income Tax 450,000 NET TO HEIRS $550,000
Stretch Out IRA Example Example: John and Mary Sample have an estate that has an estimated $2,000,000 fair market value. $1,000,000 of this is in an IRA in John’s name. They have one son named Tom who is age 25.
John dies on Jan. 1, 2003. His $1,000,000 IRA goes to Mary.
Mary now owns the $1 million IRA in her name as she did an IRA Spousal Rollover.
Mary dies on Feb. 2, 2003 and has named a proper QDB Trust.
Income Tax Calculation: *IRA forced W/D 0 NET TO INVEST $1,000,000
**Future Value of $1,000,000 in 30 years
if earn 7% and adjust for 3.5% inflation. $3,000,000 Tom’s early retirement at Age 55 (6%) $180,000 yr.
**Benefit is that the $450k tax billed is deferred. This creates $1.8 Million of NEW WEALTH.
*Actual is $16,667 in Yr. 1 based on Tom’s life expectancy.
Estate Planning Strategy
• Work with a Counseling Oriented Attorney
• Establish and Maintain a Formal Updating Program
• Assure Successors Utilize Fixed Fee Services After Death
Estate Planning Overview
Three Types of Change An Estate Plan Faces
• Changes in Your Personal Situation
• Personal• Financial
Estate Planning Overview
Three Types of Change An Estate Plan Faces
•Changes in the Legal Environment
• Tax• Non-Tax (Personal Protections)
Estate Planning Overview
Three Types of Change An Estate Plan Faces
•Changes in Your Attorney’s Experience
• Static vs. Continuous Improvement?
Estate Planning Strategy
• Work with a Counseling Oriented Attorney
• Establish and Maintain a Formal Updating Program
• Assure Successors Utilize Fixed Fee Services After Death
Estate Planning Overview
Three Factors of Overall Cost
• The Cost of the Documents
• The Cost of Updating (Or Failing to Update)
• The Cost After Death• Transfer of Assets• Death Tax Return Preparation
• What to do about the taxes still due to the IRS? • What to do about the taxes still due to the IRS?
Advance Planning Opportunities
• Irrevocable Life Insurance Trusts
• Charitable Planning - Lifetime
• Charitable Planning - Testamentary
• Family Limited Partnerships
• Gifting Strategies
• Qualified Personal Residence Trusts
• Stretch Out IRA Strategies