ESTATE STRATEGIES SECTION

·        Estate Strategies

·        Avoiding Probate

·        Charitable Gifts

·        Preserving An Estate

·        Paying Estate Taxes

·        Gifting Strategies

·        Charitable Lead Trust

·        Charitable Remainder Trust

·        Wealth Replacement Trust

Estate Planning

What Key Estate Strategies Should I Know About?

Planning is a part of nearly everything we do in life. It’s even a part of dying. How will you preserve your assets from estate taxes and probate fees? How will you ensure distribution according to your wishes? Who will make financial and medical decisions in the event of your incapacity?

By taking steps in advance, you have a greater say in how these questions are answered. And isn’t that how it should be?

Wills and Trusts

Wills and trusts are two of the most popular estate planning tools. Both allow you to spell out how you would like your property to be distributed, but they also go far beyond that.

Just about everyone needs a will. Besides enabling you to determine the distribution of your property, a will gives you the opportunity to nominate your executor and guardians for your minor children. If you fail to make such designations through your will, the decisions will probably be left to the courts. Bear in mind that property distributed through your will is subject to probate, which can be a time-consuming and costly process.

Trusts differ from wills in that they are actual legal entities. Like a will, trusts spell out how you want your property distributed. Trusts let you customize the distribution of your estate with the added advantages of property management and probate avoidance.

Wills and trusts are not mutually exclusive. While not everyone with a will needs a trust, all those with trusts should have a will as well.

Durable Power of Attorney for Finances

Incapacity poses almost as much of a threat to your financial well-being as death does. Fortunately, there are tools that can help you cope with this threat.

A durable power of attorney is a legal agreement that avoids the need for a conservatorship and enables you to designate who will make your legal and financial decisions if you become incapacitated. Unlike the standard power of attorney, durable powers remain valid if you become incapacitated.

Health Care Proxies and Living Wills

Similar to the durable power of attorney, a health care proxy is a document in which you designate someone to make your health care decisions for you if you are incapacitated. The person you designate can generally make decisions regarding medical facilities, medical treatments, surgery, and a variety of other health care issues. Much like the durable power of attorney, the health care proxy involves some important decisions. Take the utmost care when choosing who will make them.

A related document, the living will, also known as a directive to physicians or a health care directive, spells out the kinds of life-sustaining treatment you will permit in the event of your incapacity. The directive creates an agreement between you and the attending physician. The decision for or against life support is one that only you can make. That makes the living will a valuable estate planning tool. And you may use a living will in conjunction with a durable health care power of attorney. Bear in mind that laws governing the recognition and treatment of living wills may vary from state to state.

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Avoiding Probate

What Are the Pitfalls of Probate?

Have you ever wondered what will happen to your estate after you die? How long will it take for your loved ones to receive the estate you’ve left them? Will each receive what you’d like them to have?

If you’re like most people, your estate will go through a lengthy probate process.

What Is Probate?

Probate consists of the court proceedings that conclude all your legal and financial matters after your death. The probate court distributes your estate according to your wishes — if you left a valid will — and acts as a neutral forum in which to settle any disputes that may arise over your estate.

The probate process we have today is based largely on the medieval English legal system. In feudal times, only powerful families owned land. These large estates were normally passed down from father to son. This transfer was naturally a matter of great political consequence, and thus of great interest to the king. So the proceedings were made formal, complicated, and costly.

Over the years, while much of the legal system has been made easier and more accessible, the probate process has remained lengthy and complex.

There are a number of problems with the probate process that make it worth avoiding.

Time

The probate process can take a great deal of time. The settlement time frame for many estates is from nine months to two years. Complex or contested estates can take much longer.

With few exceptions, your heirs will have to wait until probate is concluded to receive the bulk of their inheritance.

Cost

Of course, all the probate court’s “help” with your affairs comes at a price. Probate can be very expensive.

Depending on the state, probate and administrative fees can consume between 6 and 10 percent of your estate.¹ That percentage is calculated before any deductions or liens are taken out.

Lack of Privacy

The proceedings of the probate courts are a matter of public record. Anyone with the time and inclination can go to the county courthouse and find out exactly how much you left to each heir and to whom you owed money. This leaves your heirs with little or no privacy.

There Are Answers

Fortunately, there are strategies you can use to avoid the probate process altogether. A trust may enable you to pass your estate on to your heirs without ever going through probate at all.

Proper estate planning could enable you to pass your estate to your loved ones privately, without undue delay or expense.

¹ American Bar Association

The information provided here is to assist you in planning for your future. Proper tax and legal advice should always be obtained.

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Charitable Gifts

How Can My Charity and I Both Benefit from My Gift?

One popular estate planning technique is planned giving. Making a donation to a qualified organization provides some very attractive benefits.

You could receive an immediate income tax deduction. With a properly structured gift, you could realign your investment portfolio without paying capital gains tax on appreciated property. Another strategy may allow you to pass your estate on to your children while avoiding both probate and estate taxes.

To Whom Can You Give?

You’re free to give your property to whomever you choose. To retain the tax advantages associated with planned giving, however, your gift must be made to a qualified organization.

The vast majority of donations are made to charitable organizations. To qualify, a charitable organization must have been organized in the United States, be operated on a strictly non-profit basis, and not be politically active.

In addition to common charitable organizations, you may give to veterans’ posts, certain fraternal orders, volunteer fire departments, and civil defense organizations.

What Can You Give?

You can contribute almost anything to a qualified organization. The deduction limits are more restrictive for gifts other than cash, but you are free to give almost any property of value.

 What Are the Gifting Strategies?

In addition to making an outright donation, there are a number of different gifting techniques you can use.

You can give life insurance. This enables you to give a large future gift at a relatively modest cost.

A charitable remainder trust allows you to retain an income interest in a future gift. With a charitable lead trust, you can give the income to the charitable organization and retain the principal for your heirs.

What Are the Benefits?

Making a planned gift can provide some significant benefits.

A charitable contribution may qualify you to receive a significant current income tax deduction.

Your deduction for an outright gift will equal the value of your gift up to certain generous limits. You can carry forward any gift amount that exceeds these limits for up to five years.

With a charitable lead trust, you can pass an appreciated asset onto your heirs with little or no estate taxes.

By using a charitable remainder trust, the Trustee can sell highly appreciated gifted investments and reinvest the proceeds to generate income without paying capital gains tax. Thus, a properly planned gift could enable you to realign your investment portfolio without incurring any current income taxes. That could allow you to diversify your holdings and even increase your cash flow.

The only thing you can’t do is take back your gift. You can’t start selling assets and then pocket the money. But you can change the charity that will eventually receive your gift.

Whatever gifting strategy you choose, planned giving can be very rewarding. It’s wonderful to see your gift at work and to receive tax benefits as well.

The information provided here is to assist you in planning for your future. Any analysis is a result of the information you have provided. Proper tax and legal advice should always be obtained.

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Preserving an Estate

How Can I Build and Preserve My Estate?

Building an estate can take years of diligent saving and investing. Once you have built up an estate, you’ll want to make sure that you preserve its value for your heirs. You can also add to or create a valuable estate by using life insurance.

Why Create an Estate?

Premature death can result in financial difficulties for your survivors. By using life insurance to protect against this outcome, you can rest assured that your heirs will be cared for financially in your absence.

If you wish, you can also ensure that other financial goals are achieved. Because the premature death of a breadwinner could make college savings or mortgage repayment impossible, steps should be taken to prepare for these possibilities. Life insurance provides a cost-effective way to guard against the threat of interrupted financial goals.

A Case Study

The following example illustrates the concept of estate creation.

Paul Pringle, a 40-year-old computer programmer, would like to begin a savings program. He and his wife, Pam, have two children, ages 10 and 8. He feels he can afford to save about $3,000 per year.

Among his options, he could choose to invest in a traditional IRA. His contributions would be fully deductible and would grow on a tax-deferred basis. This would help provide a respectable retirement nest egg. However, it would not be accessible for most other purposes without penalty before he turns 59¹/2.

For the same annual amount, he could choose to purchase a whole life policy. He could choose a fixed premium, and his cash value would be allowed to grow tax-free just like in the IRA. Unlike IRA contributions, however, whole life policy contributions are generally not tax deductible.

Paul would have penalty-free access to the cash value through policy loans or withdrawals. And in the event of Paul’s premature death, his family would receive the policy proceeds free of income tax. The proceeds would help to maintain his family’s standard of living, and it could ensure a college education for both of their children.

Financial Leverage

In the unfortunate event that Paul dies prematurely, his policy would generate a significant amount of wealth. For a potentially low premium investment, Paul can create an estate that might take 20 to 30 years to accumulate in an IRA.

Life Insurance: A Clear Advantage

The security provided by life insurance, combined with the opportunity to create an estate, makes this choice a logical one for many families. Consult an advisor to see how you can achieve financial security for your family.

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Paying Estate Taxes

How Will I Pay Estate Taxes?

Estate taxes. It’s not enough to simply know they exist, and to know strategies to minimize them. When it comes down to it, you need to plan how you and your family will eventually pay them.

The Estate Tax Dilemma

Estate taxes are generally due nine months after the date of death. And they are due in cash. In addition to estate taxes, there may be final expenses, probate costs, administrative fees, and a variety of other costs. How can you be sure the money will be there when it’s needed?

Estate Tax Options

There are four main sources of funds to pay estate taxes. First, your current savings and investments. You or your survivors can use savings and investments to cover the costs of estate taxes, probate fees, and other expenses. This is often a sound alternative. However, sometimes savings and investments may not be sufficient. And if those savings were earmarked for other financial goals, you may need to rethink how you will achieve those goals.

Another option would be to borrow the money. Unfortunately, with this option you not only have to pay the estate taxes, but you or your survivors will be forced to pay interest on the amount borrowed to pay estate taxes. Remember to consider how your family’s credit standing will be affected by a death in the family.

The third option involves liquidation. If estate taxes are larger than the cash available to pay them, you may have to sell valuable assets such as the family home, the family business, or other assets. Hopefully, they will sell for what they’re worth. In many cases, however, they don’t.

The fourth option — one that is often a prudent way to pay estate taxes — is life insurance.

What Can Life Insurance Provide?

Life insurance can provide a timely death benefit, in cash, that can be used to pay estate taxes and other costs. And it will be paid directly to the beneficiary of the policy, without being subject to the time and expense of probate.

Granted, life insurance does require premium payments. However, if appropriate to your situation, life insurance premiums can be looked at as a systematic way of funding future estate taxes. You get guaranteed liquidity and a death benefit that is generally free from federal income taxes. Indeed, the financial protection provided by life insurance can be invaluable to those who have the burden of paying estate taxes — your loved ones.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance. Keep in mind, however, that there are special tax rules that apply and you should seek professional advice before implementing this strategy.

Coping with estate taxes may be a difficult proposition for you or your survivors. When it comes to paying them, consider life insurance. It may be a strategy worth considering, and overlooking it could be costly.

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Gifting Strategies

What Gifting Strategies Are Available to Me?

There are a number of different gifting strategies available for planned giving. Each has its advantages and disadvantages.

Instead of making an outright gift, you could choose to use a charitable lead trust. With a charitable lead trust, your gift is placed in a trust. The recipient of the gift draws the income from this trust. Upon your death, your heirs will receive the principal with little or no estate tax.

If you prefer to retain an income interest in your gift, you could use a pooled income fund, a charitable remainder unitrust, or a charitable remainder annuity trust. With each of these strategies, you receive the income generated by your gift, and the recipient receives the principal upon your death.

Finally, you could purchase a life insurance policy and name the charitable organization as the owner and beneficiary of the policy. This would enable you to make a large future gift at a potentially low current cost.

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Charitable Lead Trust

How Can I Benefit from a Charitable Lead Trust? 

Charitable lead trusts are designed for people who would like to benefit a charity now rather than later. You may have heard about some charitable trust strategies before but decided against them because you wanted to make an immediate gift to charity.

With a charitable lead trust, your gift can have an immediate impact, and you’ll be entitled to other benefits as well. These trusts will enable you to take advantage of tax benefits and still make a significant gift.

If you are accustomed to making outright contributions to your favorite charity, or if you typically sell an investment and give all or a portion of the money to charity, you may be attracted to the special advantages of using a charitable trust.

Avoiding capital gains taxes on an appreciated asset is a very appealing benefit for investors. It is also a way for charitable organizations to receive a much larger donation because they are not required to pay tax on capital gains. Once the trust is established and the assets are transferred, the trustee can then sell the assets and reinvest the funds.

You also get an immediate charitable income tax deduction based on the “life expectancy” of your gift. With a charitable lead trust, you are giving the charity the income from the asset and not the asset itself. Your deduction will be based on the rate of return the charity can expect to receive, the duration of the trust, and the IRS tables used in the calculation. Your write-off will be limited to a portion of adjusted gross income but can be carried forward to future years.

With a charitable lead trust, the income from the reinvested assets will then go to the charity. The charity will receive distributions for the duration of the trust. You may specify a set number of years or the life of you or someone else. At the end of this period, the asset would revert back to you or your family, for example.

A charitable lead trust may also help reduce family squabbles over inheritance. If you were to actually gift the asset to the charity upon your death, your heirs may feel somewhat cheated. By giving income to the charity during your lifetime and having the asset revert back to your family upon your death, you may avoid much of this potential controversy.

If you are interested in increasing your gift to a charity and your tax benefits during your lifetime, a charitable lead trust may enable you to accomplish your goals.

By taking the time to plan your charitable gifts, you may be able to take advantage of some special tax benefits and make charitable giving a real win-win situation.

Keep in mind, however, that you should seek professional advice from an attorney before establishing such a complex trust.

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Charitable Remainder Trust

How Can I Benefit from a Charitable Remainder Trust? 

Sometimes it takes tough economic times and natural disasters to unite and bring out the best in people. Natural disasters such as hurricanes and earthquakes have served to bring communities together and impact the nation as a whole. Americans have given generously to rebuild communities and help local residents through these difficult situations.

Many people have also responded to tragedies worldwide or have made donations to wildlife and environmental charities. And when we give, most of us simply give from the heart and do not always consider the financial implications.

In many instances, there are ways to increase your gifts. The charity can receive a more substantial gift and you can increase your tax benefits. The charitable remainder trust is a popular estate-planning strategy that could enable you to gift an appreciated property or security and retain an interest income for you and your family.

Once your gift is put in a charitable trust, you will receive a current income tax deduction. Neither party will owe taxes on this transfer or upon the appreciation of the asset. The trust will usually sell the asset and reinvest the proceeds in an income-producing investment. You can receive this income in exchange for gifting the ownership of the asset to the charity.

You will then need to decide how you would like to receive income. You can receive either a percentage of the value of the trust or a fixed amount. With a percentage allocation, your income will vary based on the current value of the trust. Some even offer a “make-up” clause. If the trust is not able to provide the designated income for one year, the shortfall will be added to the following year’s distribution.

Trusts that provide a fixed amount each year will not be able to take advantage of future growth or higher earnings of the asset, but they do offer consistent income even in a stagnating market.

Choosing a trustee and clearly stating your intentions in the trust document and to the trustee are of vital importance. Once the trust is in place, it is an irrevocable instrument. Even if the charity does not receive any benefit for several decades, it will eventually assume ownership. In the meantime, the trustee is in charge of controlling the assets in the trust. Choose someone who knows how to handle financial matters and who will carry out your intentions.

A charitable remainder trust may allow you to make a substantial gift to charity, avoid capital gains tax, and provide regular income for you and your family.

The use of trusts involves a complex web of tax rules and regulations. You might consider enlisting the counsel of an experienced estate-planning professional before implementing such sophisticated strategies.

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Wealth Replacement Trust

How Can I Benefit from a Wealth Replacement Trust?

Charitable giving can be a rewarding experience by allowing you to both give and receive. To enjoy the benefits of charitable giving, you can utilize a variety of strategies.

The Basics of Charitable Remainder Trusts

To establish a charitable remainder trust, you transfer appreciated property to an irrevocable trust and designate the charity of your choice as the beneficiary of the trust. The property within the trust is then sold and reinvested to provide income. You retain a lifetime interest in the income generated by the trust, and when the trust expires at your death, the property within the trust is transferred to the charitable organization.

You are entitled to a current income tax deduction for the charitable gift, subject to certain limits. And because the property was sold within the charitable trust, you will not have to pay tax on any capital gains. This enables the full value of your property to be reinvested, which will increase the income generated by the trust. It also enables the charity to receive a larger gift.

If you have heirs, charitable remainder trusts have one major drawback: When the charitable trust terminates, the property within the trust is transferred to the charitable organization — rather than to family heirs. So while the charitable remainder trust offers many benefits, this strategy can effectively disinherit your heirs.

Replacing Gifted Assets

One effective solution to this situation is the wealth replacement trust.

To create a wealth replacement trust, you use a portion of the income from a charitable remainder trust to buy a life insurance policy.

You decide how much of the charitable gift to replace. You can buy enough insurance to replace only a portion of the property that will eventually pass to charity, or you may prefer to replace all of the property within the charitable remainder trust.

The wealth replacement trust is often designed so that upon the death of the second spouse, the death benefit of the life insurance policy goes to your heirs. These funds replace the property that passes to the charity from the charitable remainder trust.

And because the life insurance policy is owned by the trust, the proceeds of the policy will generally not be subject to estate taxes at either death.

An Appropriate Strategy?

If this strategy sounds interesting to you, there are a variety of considerations. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance. Before implementing this strategy, it would be prudent to have the policy approved. In addition, you should seek professional advice from an attorney before establishing such a trust. In many cases, the wealth replacement trust is an appropriate way to preserve family wealth.

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