The Family Estate PlanWhy You Should Have One,

and What Happens If You Don’t

Presented by Randy Gardner, J.D., LL.M., MBA, CPA, CFP®

March 22, 2013

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• Life Expectancy and Health Care PlanningJune 21, 2013 at 2:00 p.m., E.T.

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Today’s SpeakerRandy Gardner, J.D., LL.M., MBA, CPA, CFP®

• Director of Education Content, WealthCounsel and The Advisors Forum

• Practices in Kansas, Missouri, and California

• Professor, Tax and Financial Planning, University of Missouri-Kansas City

• Tax and wealth management advisor

What We Will Cover• The goals of effective and efficient estate

planning.• Modern Estate Planning – the evolution from

wills to trusts.• Probate and how to avoid it.• Taxes after the Fiscal Cliff.• Pitfalls of avoiding trusts. • What to expect when you work with an estate

planning attorney.

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Goals of Estate PlanningEffective transfers that accomplish your objectives.

• Give what I have to whom I want, the way I want, when I want.• Manage the risks of incapacity.• Delegate health care decisions.• Provide for the needs of the surviving spouse (if applicable).• Provide liquidity at death. • Fulfill your charitable intentions.• Promote family harmony (if married, at the second death). • Plan for children, including children with special needs.• Protect assets from creditors for generations to come.

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Goals of Estate Planning• Efficient transfers minimize transfer costs.

– Probate and transfer costs – Income tax, gift tax, estate tax, GST tax,

and state estate and inheritance taxes – Attorneys, accountants, and court fees

• Net assets distributed to your loved ones are maximized.

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The Modern Estate Plan

• Revocable Living Trust

• Pour-Over Will

• Financial Power Of Attorney

• Advance Health Care Directive

• Living Will

• HIPAA Authorization

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Why? Probate, Taxes, and Asset Protection

• Probate = court proceedings that conclude all the legal and financial matters of the deceased,

• but it also includes court proceedings during life that may be needed to name a guardian/conservator, transfer a property, or end with dignity the life of a loved one.

• Taxes = estate, gift, income, and in some states property and inheritance taxes.

• Asset protection for your children from their spouses and creditors.

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Facts About Probate• Probate is a public, not private, process.• Probate is complex.

– Usually requires the hiring of an attorney

• Probate takes time.– Often takes several months to a

year or more• Probate is expensive.

– $40,000 - $50,000 for a $1 million estate

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Estate Plans Historically• Thirty years ago, the will was the centerpiece of the

estate plan and the documents stood separately.• Will-centered plans had to be probated.• The unlimited marital deduction and the low $600,000

estate tax exclusion started the use of A/B trusts created by the will, but testamentary trusts still had to be probated.

• Attorneys created minimum cost plans at the outset with the promise of significant probate fees to come when the client died.

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Estate Plans Historically• Twenty years ago, estate planning evolved to

lifetime planning with the “revocable living trust” as the centerpiece and the avoidance of probate as the primary objective.

• Separate trusts for the spouses, A/B trusts for the surviving spouse, and staged distributions (1/3 at 30, ½ at 40, and the rest at 50) to beneficiaries were the norm.

• Landmark cases, such as Nancy Cruzan and Terri Schiavo, drew attention to the importance of living wills and incapacity planning.

• The costs of up-front planning started to increase while the number of estates that needed to be probated decreased.

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Estate Plans Historically• With the modern estate plan, joint revocable trusts

designed to avoid probate, minimize estate taxes, provide asset protection, name incapacity decision makers, and distribute property to beneficiaries over their lifetimes are the state of the art.

• Many plans promote investment continuity by naming investment advisers and including corporate fiduciaries affiliated with the investment adviser as successor trustees.

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American Taxpayer Relief Act of 2012 (ATRA)

Legislative History• Originally introduced in the House on 7/24/2012.• Passed House on 8/1/2012.• Placed on Senate calendar on 9/11/2012.• Amended in Senate and passed 12/30/212.• House agreed to Senate amendment on

1/1/2013.• Signed by President Obama on 1/2/2013.

Layering Of The Rates Ordinary Income

Single Head of Household

Married Filing Jointly

MarriedFiling

Separately

.9% Medicare Payroll Surtax

$200,000 $200,000 $250,000 $125,000

Phase Out of Deductions

250,000 275,000 300,000 150,000

39.6% Rate 400,000 425,000 450,000 225,000

Top Cumulative Marginal Rate

41.292% 41.292% 41.292% 41.292%

Layering Of The Rates Investment Income

Single Head of Household

Married Filing Jointly

MarriedFiling

Separately3.8% Medicare Payroll Surtax

$200,000 $200,000 $250,000 $125,000

Phase Out of Deductions

250,000 275,000 300,000 150,000

20% Rate 400,000 425,000 450,000 225,000

Top Cumulative Marginal Rate

24.592% 24.592% 24.592% 24.592%

Income Tax Minimization Planning

• Avoid the layering of the rates.– IRA (and Qualified Retirement Plan) planning to

reduce AGI and taxable income below threshold levels and accomplish other planning goals.• 401(k)s help but are still subject to payroll tax

– Life insurance (especially inside an ILIT) as a retirement planning solution is more attractive now that accumulations and loans/withdrawals are tax free. • Non-qualified deferred compensation plans

– Charitable trust planning provides a tax deduction and an income stream.

The Closing Wealth Transfer Windows

• Two windows we were concerned with:– The automatic tax and exemption changes

occurring on 1/1/2013; and– The “endangered strategies list” including

discounts, defective trusts, GRATs, and dynasty trusts that Congress could eliminate with a pen stroke.

• With ATRA, the first window turned into a super highway, and the second window is still wide open, meaning the strategies we were worried about implementing at the end of 2012 are still available for some.

ATRA Estate And Gift Tax Changes

• A “permanent” $5.25 million (inflation-adjusted) exemption for gift, estate, and generation-skipping transfer (GST) tax.

• A permanent 40% gift and estate tax rate.– The classic compromise between 35% and 45%.

• A permanent portable exemption between spouses, allowing the surviving spouse to make a Form 706 election to take advantage of the unused portion of the estate tax exemption of the predeceased spouse.– This provision does not allow the GST tax exemption

to be transferred to a spouse.

Planning in Light of ATRA• Estate tax applies to very few.

– Estimate for 2013 after ATRA:• 2,636,000 deaths.• 8.7K returns required; 0.33% (3 out of every

1,000).– Estimate if Sunset had occurred:

• 2,636,000 deaths.• 101.8K returns; 3.86% (39 out of every 1,000).

– Source: www.taxpolicycenter.org

Planning for the 0.33%

• Good news – existing techniques remain valid.– No limit on discounts for family entities.– No limit on dynasty trusts.– No maximum term for GRATs.

• The $5M+ gift tax and generation-skipping transfer (GST) tax exemptions make it easy to create dynasty trusts that will:– Be exempt from future estate taxes.– Provide creditor, predator and beneficiary

protection.

Planning for the 99.67%

• Avoiding estate taxes is not the motivation.• Basic estate planning is the focus.• Emphasis on non-estate tax reasons for

planning:– Family harmony.– Asset protection.– Legacy planning.– Income tax planning.

Risks of No Plan - Intestacy• What is intestacy?

– To die without a valid will or – To die with a will that does not dispose of all the

probate property.– Decedent who has a valid will is said to die

“testate.”• Intestacy and statutory share laws are state driven.

– Uniform Probate Code is the model system.– Codification of English common law principles

such as dower, curtsey, homestead rights, statutory share, and family allowance.

– Family settlement agreements.

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Risks of No Plan - Intestacy• Surviving spouse with no children may share with in-

laws.• Surviving spouse with children may get the same

share as a child or maybe none.• Children are usually treated equally, even though

the children’s needs may not be the same.• Court-appointed administrator instead of a

decedent-appointed executor.– A surety bond may be required.– Fees are likely higher.

• The court appoints a guardian for the children.

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Risks of a Will-Based Plan

• Wills only take effect at death.– They do not provide for decision makers

during the period of incapacity which frequently precedes death.

• Wills have to be probated, even if they create a testamentary trust.

• Wills provide direction and protection for a short time, not for the lives of the surviving spouse, children, and grandchildren.

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When A Will-Based Plan Might Be Appropriate• A Small Estate

– Informal, less expensive, and time-consuming probate proceedings are available in many states.

– The probate-savings cost compared to the comprehensive estate plan cost may not justify the outlay.

• Anticipated litigation– If there is family discord or disgruntled or omitted heirs,

perhaps a judge-overseen process is the best approach.

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Risks of JTWROS Planning• Many consider their plan complete if their property is

titled in a way that avoids probate: joint tenants with right of survivorship (JTWROS) with their spouse and/or children or transfer-on-death (TOD) clauses.

• Risks include:– Simultaneous death– Tenancy in common– The “next spouse”– Last person alive wins– Partition– No per stirpes– Incapacity– Gift and income tax consequences

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Risks of Beneficiary Designations• The “next spouse”• Unexpected probate• Accidental inheritance• “Stretch” IRAs

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A-B-C Trust (2013)

$3 MillionCommunity

Property

A Trust(Survivors Trust)

$1.5 Million(Revocable)

B Trust(Bypass Trust)

$1.5 Million(Irrevocable)

C Trust(QTIP Trust)

$0(Irrevocable)

Beneficiary 1 Beneficiary 2 Beneficiary 1 Beneficiary 2 Beneficiary 2Beneficiary 1

HEMS

Survivor$1.5 Million

Decedent$1.5 Million

HEMS

Disclaimer TrustSurviving Spouse

disclaims $1.5 Million in assetsto create Bypass

Trust (B Trust)

$3 Million Community

Property

Remaining$1.5 Million to

Survivor’s Trust(A Trust)

Cautions:

• Not Automatic

• Surviving spouse must disclaim in writing within 9 months of first spouse’s death

• Must not have accepted benefits of disclaimed property (e.g. interest, rental income)

Distributions To Descendants1. Outright2. In Stages

• Current distributions for health, education, maintenance, and support:

–At age 25, receive one-third of trust principal –At age 30, receive one-half of trust principal –At age 35, receive remainder of trust principal

3. Lifetime Beneficiary-Controlled Trusts• Distribution Trustee• Beneficiary as Trustee (can resign, remove, and

replace Trustees)– Protects beneficiary from himself or herself,

creditors, predators, and divorce

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Asset Protection• For the clients themselves – insurance (long-term care,

FDIC, medical)• Business protection - entities such as corporations , family

limited partnerships, and LLCs• Bypass Trusts (despite the portable exemption) - second

marriage and creditor protection• Beneficiary-Controlled Trusts - divorce, creditor, immaturity,

and predator protection for children and grandchildren• Irrevocable Trusts – Life Insurance Trusts (ILITs), Domestic

Asset Protection Trusts (DAPTs), Beneficiary Defective Inheritor’s Trusts (BDITs), and off-shore trust planning.

When Do People Plan?• First child is born.• Children reach age of majority and can serve as

decision makers.• Grandchildren are born.• Parents are aging and have more definite plans

regarding when and how they want their property to pass.

• Also when: – A parent has served as an executor.– A friend, family member, or loved one passes

away suddenly.

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Overlooked Times People Should Plan

• Generally people plan at the right times, but here are some times that are overlooked.– A child turning the age of majority should have

a durable power of attorney and health-care documents in place.

– A financial windfall, such as winning the lottery or inheriting wealth, has occurred.

– Death of a spouse or child.– A change in the relationship to a decision

maker.

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Why Don’t People Plan?• Cost• Time• “Estate planning is a luxury, not a necessity.”• “I do not want to think about it.”• “It won’t happen to me.”• “I do not have enough property.” • “I don’t like attorneys.”• “I am going to do it myself.” Leads to store bought,

Internet, Legal Zoom, etc.

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The Estate Planning Engagement

• Establish the relationship and expectations.• Gather information and identify objectives.• Process information.

– Define problem areas such as ownership, incapacity, tax, and liquidity issues.

– Establish priorities for the objectives.• Design a comprehensive plan.• Recommend a comprehensive plan.• Implement the plan, especially funding.• Monitor and update the plan as needed.

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Summary• Estate planning has come a long way in the past 30

years.

• Much more effective and efficient at meeting the client’s qualitative, personal, legal, quantitative, tax, and financial goals.

• Estate planning is a critical part of a comprehensive financial plan that also includes tax, investment, insurance, and retirement planning.

• Important to work with a team of advisers to accomplish your personal and financial objectives.

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What Happens Next…• Visit www.EstatePlanning.com.

• Locate an estate planning professional in your area.

• Stay informed! Visit often for the latest news and updates in the estate planning industry.

• Get your copy of the e-book, The Closing Wealth Transfer Window.

• Register now for the next webinar,Life Expectancy and Health Care Planning,June 21 at 2:00 p.m., E.T.