Estate Planning a Workshop
Making an Effective Estate Plan:
Estate planning is the arrangements of one's financial affairs through asset ownership and legal documents to provide for one's goals related to the management and disposition of one's estate.
The Role of Asset Ownership:
Estate planning is implemented with legal documents, including change-of-ownership or change-of-beneficiary documents.
Asset ownership and beneficiary designations are an essential element of effective estate planning.
An effective estate plan requires that ownership and beneficiary-designation documents are consistent with the plan. Far too often, a person’s ownership and beneficiary-designation documents are inconsistent with his or her will or trust and with his or her true objectives. For example, you cannot own a home in joint tenancy with one person and leave that same home to someone else in your will. Similarly, you cannot designate one person as a beneficiary under a life insurance policy and expect that person to share with siblings or to use the insurance proceeds to pay off debts or pay funeral expenses.
[PLEASE REFER TO THE ASSET OWNERSHIP HANDOUT FOR DETAIL]
ESTATE PLANNING DOCUMENTS:
Last Will and Testament:
Every adult (over 18 years of age) should have this legal document which describes what will be done with assets titled in his or her name after death.
For assets of a decedent that have no beneficiary designation and there is not a valid will, New York intestacy statute will provide for distribution.
Power Of Attorney:
“Nondurable”- used for a specific transaction
“Durable” - enables the agent to act for principal even after incompetence
- effective until revoked or until principal’s death
“Springing” - becomes effective at a future time
-January, 1997: Statutory Short-Form Powers of Attorney (drafter can expand certain powers, e.g., gifting)
Health Care Proxy:
New York law allows you to appoint someone you trust to make health care decisions for you if you lose the ability to make decisions for yourself. You may give the person you select as your health care agent as little or as much authority as you want (they may make all health care decisions or only certain ones). You may also give your agent instructions that he or she has to follow.
Living Will:
A Living Will is a document that provides specific instructions about health care decisions.
Living Wills are not codified in New York law. However, they are recognized as an expression of a person’s intent with regard to medical treatment.
Transfer Taxes:
Under current federal law (as modified by the 2001 tax act)2, there are three taxes that can be imposed on the transfer of assets: the gift tax, the estate tax, and the generation skipping transfer tax (“GSTT”).
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(a) A taxable gift is any transfer of property for less than its fair market value
excluding transfers of $12,000 of property in each calendar year to any one recipient. (This amount is adjusted each year a $1,000 increase is warranted by an increase in the cost of living.) No gift tax is due until cumulative gifts made any time during one’s lifetime exceed the $1,000,000 “applicable exclusion” for gift-tax purposes.
(b) The applicable exclusion for the estate tax is $1.5 million from 2004 and 2005, $2 million from 2006 through 2008, $3.5 million during 2009, and unlimited in 2010. The applicable exclusion for the gift tax is frozen at $1 million. In 2005, the lowest tax bracket is 45%. The top bracket is 46% in 2005 and 45% from 2006 to 2009. Unless the “sunset provision” is repealed, the law reverts to pre-2001 law in 2011, which leaves us with a $1 million applicable exclusion for both gift- and estate-tax purposes and the tax rates will range from 41% to 55%.
(c) The GSTT applies to transfers to grandchildren and others in lower generations to the extent the cumulative transfers, either during life or at death, exceed the GST exemption, which is $2 million during 2006 through 2008, $3.5 million during 2009, unlimited in 2010, and $1 million (adjusted for inflation). The GST tax is imposed at the highest rate imposed for federal estate tax purposes, which is mentioned in paragraph A.4 (b).
WORKING WITH TRUSTS:
Transfer Tax Savings for Couples under A Revocable Trust:
For couples who have a net worth that exceeds the “applicable exclusion”, it is common to design a revocable trust (or will) to set aside assets belonging to the first spouse to die in an irrevocable “exemption trust” or “credit-shelter trust”. The surviving spouse can be the trustee, the primary beneficiary, and can even have the right to designate the trust’s beneficiaries after his or her death. If designed and funded properly, the credit-shelter trust will be exempt from the estate tax upon the survivor’s death.
Distribution at Death; Management during Life:
With assets owned in a manner consistent with your will or a living trust, those documents can provide for the distribution of your estate at death.
In most states, however, a will requires probate proceedings to be effective, and a will alone does virtually nothing to provide for the management of one's estate during life. A revocable living trust can provide for the management and disposition of your estate both during life and after death. One or more irrevocable trusts can protect assets from creditors, reduce transfer taxes, and provide a financial safety net for the designated beneficiaries.
Beyond the Revocable Trust:
Most estate-tax savings techniques require you to give up at least some control over your own assets and to limit or eliminate the benefits you receive from them.
The first estate-reduction technique is to spend and use up your estate for your own benefit. After that, most estate-reduction tools involve some sort of gift giving.
Irrevocable Trusts:
There are several types of irrevocable trusts that can be used to make
gifts to other persons with the assets under the control and management of a trustee. To be effective for estate-reduction purposes, the trust must be irrevocable, and the grantor of the trust cannot be a trustee or a beneficiary of the trust without creating problems. Some commonly used irrevocable trusts include
(a) the irrevocable life insurance trust (“ILIT”) that is the owner and beneficiary of life insurance; (b) a children’s or grandchildren’s trust that holds assets until one or more intended beneficiaries reach a specific age or accomplish a specific objective; (c) a bypass & spendthrift trust, which can save taxes and protect
against the claims of a beneficiary’s creditors and which can be designed as a generation-skipping trust that benefits multiple generations and (d) a supplemental needs trust, which is designed so that discretionary distributions are made only to “supplement” governmental assistance benefits already being received by a beneficiary.
Estate Plans need Custom Planning:
Estate planning has competing goals. For example, saving transfer taxes on your assets or protecting them from future creditors (nursing homes) will often reduce your lifetime control and benefit over those assets. The basic estate plan begins with a will or revocable trust. Other estate planning tools go beyond the basics. Some of these tools can be combined to become even more effective. The best estate plan for you is one that balances your objectives according to your own priorities.
What to do next:
We suggest that you prepare a current estate inventory, make a prioritized list of your estate planning goals and objectives, have existing documents and plans reviewed in light of your current goals and objectives, and consult with experienced advisors that will help you explore your options and implement the plan you ultimately decide upon. Once your plan is in place, you cannot simply forget it: It will be up to you to keep it up-to-date.
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