Estate Planning Basics and Advance Directives
https://learn.extension.org/events/2149#.VZ6EW03bKM8
Barbara O’Neill, Ph.D., CFP® Rutgers Cooperative Extension
Webinar Objectives Define and discuss estate planning
Define and discuss probate
Discuss the advantages and limitations of wills
Define and discuss trusts
Define and discuss estate taxes
Discuss estate planning resources
Estate Planning is Related to Many Other Financial
Planning Decisions Source: Madura, J. Personal Finance (2004), Pearson Education
So What Exactly is Estate Planning?
• Estate planning is the process of determining the distribution of your assets upon your death
• Estate planning also covers the management of your personal affairs in the event of incapacity
In Other Words… • You give what you have
• To whom you want
• When you want
• The way that you want
• At the lowest possible cost (e.g., taxes and administrative costs) to yourself and loved ones
• And have instructions left to make medical and financial decisions if you are unable to do so
Estate Planning Phases 1. Accumulation: Build estate through earnings,
savings, investments, insurance, gifts, etc.
2. Distribution: Ensure that your estate is distributed as you wish after your death – Make sure important documents are accessible,
understandable, and legally proper
Nobody knows how long their accumulation phase will last and when their distribution phase will begin!
When Should You Plan Your Estate?
Today Mental
Incapacity Catastrophic
Illness Death
Your Planning Opportunity
Revocable Living Trust
Will Living Will
Powers of Attorney
Irrevocable Trust
Source: Goldberg Law Center, PC
Benefits of Estate Planning • Provides control over asset distribution process
• Provides peace of mind
• Reduces income taxes
• Reduces estate administration cost and delays
• Reduces/avoids estate taxes
• Reduces/avoids gift taxes
• Provides incapacity planning
The Perfect Estate Plan • Documents that are properly drafted
• Documents that are regularly updated
• Assets that are properly titled
• No conflicts between titles to assets and a will
• Communication of wishes among family
• Regularly reviewed beneficiary designations: http://njaes.rutgers.edu/money/pdfs/beneficiary-designations.pdf
What is Included in an Estate? Assets Included in definition of “Estate”
• Real property
• Life insurance policies (face value)
• Checking, savings, CDs, other liquid accounts
• Business Interests – Sole Proprietor/Corporation/ LLC/ Partnership
• Stocks, bonds, mutual funds, annuities
• Retirement and pension plans
• Personal property
Why People Avoid Getting an Estate Plan?
• Cost (real or perceived)
• Thinking that your estate is too small to support the expense of planning
• Fear of dying (“jinx factor”)
• Uncertainty about people to name in legal documents
• Uncertainty about finding legal advisors
• Other?
Estate Planning Process
Gross Estate
Your Will
Non-probate transfers
Jointly owned property Life Insurance IRAs 401(k)s, 403(b)s, TSP Annuities Assets with named beneficiaries Planned distributions
Property titled in your name
Probate Process
Adapted From: Goldberg Law Center, PC
Probate Process • Legal process by which a will is proved valid or invalid and
the estate of a decedent is administered
• Involves paying a deceased person’s debts and retitling that person’s individually owned assets to the names of heirs listed in a will
• Executor files forms in probate court, provides a copy of the will, prepares a list of assets and liabilities of deceased, pays debts and sells necessary assets
• Typically opens a bank account for this purpose
Resource: http://definitions.uslegal.com/p/probate/
Ways to Avoid Probate • Own property jointly with survivorship rights
• Beneficiary designations (insurance policies, IRA, 401(k), etc.)
• Use a revocable or irrevocable trust
• Make lifetime gifts
Note: It is often difficult to totally avoid probate: automobile and pro-rated refund payments often need to be probated
How to Distribute Assets to Heirs
• Outright – No protection
• In Trust – Creditor protection
– Estate tax protection
– Self protection (e.g., spendthrift heirs)
– Predator protection
Common Estate Planning Tools During Your Lifetime
• Power of Attorney
• Gifting
• Revocable Living Trust
• Guardianship (encompasses all personal affairs of protected person including support and health care)
• Conservatorship (limited to the management of property and financial affairs of protected person)
Common Estate Planning Tools After Your Death
• Will
• State Intestacy Laws
• Joint Tenancy
• Beneficiary Designations
• Revocable Living Trust
Preparing a Will • Specifies how your estate should be distributed upon
your death
• If can also identify a preferred guardian for surviving minor children
• Have an attorney draft your will to avoid difficulties
• A standard simple will generally cost between $300 to $500
Will Formats • Holographic Will
– Will that you write, date and sign, entirely in your handwriting
– May not be recognized in some states
• Formal Will – Usually prepared with an attorney’s assistance
– Must date, sign, and have proper witnesses
• Statutory Will – A type of formal will on a preprinted form
– Available online or from a stationery store
– May include “boilerplate” provisions not in the best interest of heirs
Key Designees in a Will Executor: Person willing and able to execute provisions of
someone’s will (can be family member, friend, lawyer, etc.) Tasks may include: • Preparing an inventory of assets
• Collecting any money due and paying off debts
• File all income and estate tax returns
• Decisions about investing or selling assets to pay debts or provide income
• Distribute the estate and make financial accounting to beneficiaries
Guardian: Person who assumes responsibility for providing personal care to the minor children of a deceased person and/or managing the estate for them
• Reasons to Review a Will: – You move to a new state with different laws – You have sold property mentioned in the will – Size and composition of your estate has changed – You have married, divorced or remarried – Potential heirs are born or have died
• Adding a Codicil – Document that explains, adds, or deletes
provisions in an existing will – Appropriate for minor revisions
Altering or Rewriting a Will
Requirements for Preparing a Will
• Attain legal age of majority: Age 18 in most states • Mentally competent • Not under undue influence of others • Must be signed and dated; video will supplement?
• 2 or 3 witnesses who are not beneficiaries (in most states)
• Preparation by an attorney highly recommended Resources: http://www.lectlaw.com/filesh/qfl06.htm
http://nationalparalegal.edu/willsTrustsEstates_Public/ExecutionValidityComponentsOfWills/StatutoryRequirementsForWill.asp
Sample Will Language
Exhibit 20.1: A Sample Will Source: Madura, J. Personal Finance (2004), Pearson Education
Sample Will Language
Exhibit 20.1: A Sample Will Source: Madura, J. Personal Finance (2004), Pearson Education
Wills Can Fall Short of Estate Planning Goals
• Won’t provide for disability or incapacity
• Won’t necessarily transfer what you have: – to whom you want
– the way you want
– when you want
• Won’t avoid the probate process Adapted From: Goldberg Law Center, PC
Advanced Estate Planning Tools
• Gifting programs
• Charitable trusts (lead trust, remainder trust)
• Other irrevocable trusts
• Special needs trusts
• Life insurance trusts
• Trusts for minor children Adapted From: Goldberg Law Center, PC
Will vs. Revocable Living Trust
Probate
My Property
Heirs
Property in My Living
Trust
(No Probate)
Heirs
Adapted From: Daniela Lungu, Attorney at Law
Trusts Legal document that transfers assets to manage for designated beneficiaries; fee usually based on AUM
• Grantor (Trustor): Person who creates a trust
• Trustee: Person (e.g., family member, friend, lawyer) or financial institution (e.g., commercial bank) named in a trust to manage trust assets for beneficiaries
• Beneficiary: Person(s) who receive the benefits of a trust (e.g., income and assets)
Types of Trusts Living Trust (a.k.a., “Inter vivos trust”)
A trust to which someone assigns the management of their assets to a trustee while they are living
• Revocable Living Trust: A living trust that can be dissolved
• Irrevocable Living Trust: A living trust that cannot be changed, although it can provide income to the grantor
Testamentary Trust • Established by your will; takes effect after death
http://www.americanbar.org/content/dam/aba/migrated/publiced/practical/books/wills/chapter_5.authcheckdam.pdf
Pros and Cons of Trusts • Benefits of Trusts:
– Avoids probate: transfers assets quickly and provides privacy
– Frees grantor from managing assets
– Provides income for survivors
• Revocable Trust – Grantor retains the right to end the trust or change its terms during
lifetime
– Does not provide shelter assets from federal or state estate taxes
• Irrevocable Trust – Grantor cannot change the terms once instituted
– Used to reduce estate taxes
What if You Do Nothing? • At Incapacity (e.g., brain dead on life support)
– Guardianship/Conservatorship – Court controls assets
• At Death – Court proceeding to determine who will be guardian for minor children – Assets distributed according to state law – intestacy
Failure to Do Advanced Planning for Larger Estates: – Family money goes to taxes and legal expenses instead of to heirs – Kids blow inheritance – Control issues and fighting among family members left behind
Adapted From: Daniela Lungu, Attorney at Law
Intestacy: What Happens? • You die without a will • The state distributes your assets according to a pre-
determined formula (“My State Will”) – Typically splits property between surviving spouse, children – http://www.mystatewill.com/statutes/statute_links.htm
• May mean the state will decide on a guardian for your children – Very complicated if a “blended” family
• Generally takes longer to settle an estate and costs more (e.g., bonding an appointed administrator)
http://www.nolo.com/legal-encyclopedia/how-estate-settled-if-theres-32442.html
Celebrity Estate Planning Horror Stories
• Jerry Garcia of the Grateful Dead band • Elvis • Anna Nicole Smith • Chief Justice Warren Burger • Casey Kasem • Tom Clancy http://wfplaw.com/law-news/estate-planning/celebrity-estate-planning-horror-stories.html
http://www.clearcounsel.com/estate-planning-horror-stories/
http://trialandheirs.com/blog/celebrities/top-10-celebrity-stories-spark-holiday-estate-planning-conversations
Taxes And Estate Planning • Estate Taxes (Federal and Some States)
– Tax on value of property at death – Based on fair market value of estate assets (minus estate liabilities) – $5,430,000 federal estate tax exclusion in 2015 – Maximum federal estate tax rate: 40% (taxable estates > $1 million)
• Estate and Trust Income Taxes – Estates and certain trusts must file tax returns
• Inheritance Taxes – Tax on property left by a person in their will – Imposed by states: http://www.forbes.com/sites/ashleaebeling/2014/09/11/where-not-to-die-in-2015/
– Tax rate generally based on heirs’ relationship to the deceased
• Gift Taxes – Tax on gifts given by one person to another in a single year – Imposed by Federal government and two states (MN and CT) – $14,000 annual federal gift tax exclusion in 2015; inflation indexed
More About Estate Taxes • It is important for affluent households to calculate the
value of their estate periodically to plan appropriately if net worth exceeds the estate tax exclusion – Federal estate tax affects only about 0.12% of estates
• May want to consider state estate taxes in retirement housing decisions
• Portability of federal estate tax exemption between married couples is permanent (for now)
http://wills.about.com/od/2015-Estate-Tax-Rules/fl/Overview-of-2015-Estate-Tax-Gift-Tax-amp-Generation-Skipping-Transfer-Tax-Laws.htm
http://blogs.wsj.com/totalreturn/2014/10/30/estate-tax-exemption-for-2015-announced-by-irs/
Timing is Everything! Scenario #1
$20,000 Original Basis $180,000 Current Value $160,000 Appreciation If you gift house DURING your lifetime, the recipient is obligated to pay capital gains tax on the full appreciated value
Scenario #2
Source: David Ennis, Esq.
$20,000 Original Basis $180,000 Current Value $160,000 Appreciation If you gift house through a will or trust, the recipient is ONLY obligated to pay capital gains tax on any appreciated value that occurs AFTER your death (theoretically $0)
Advance Directives Broad Definition Instructions about a person’s wishes, goals, and values regarding what will be done in case he or she become incapable of making decisions
Three Common Documents: • Living Will: Specifies desired medical treatment
• Health Care Proxy (Durable Power of Attorney for Health Care): Designates person to make health care decisions
• Durable Power of Attorney: Designates person to make financial transactions (e.g., pay bills, make deposits, sign checks)
More About Advance Directives
• Power of Attorney authorizes someone to legally act on someone’s until the creator revokes it or dies
• Estate planning and advance directive documents need to be kept in safe, convenient places (copy with your attorney) – Original: Safe deposit box (with photocopies at home), desk drawer or
file cabinet at home (fire resistant), wrapped in plastic in freezer?
– Back-Up Copies: Cloud storage, scanned files on flash drive, family
• Key individuals need to know where documents are kept! http://www.silvesterlaw.com/index.php?option=com_content&view=article&id=59:where-should-i-keep-my-estate-planning-documents&catid=14:trust-housekeeping&Itemid=14
http://wills.about.com/od/preparingtodraftaplan/a/storedocuments.htm
Living Wills • Allows you to specify whether or not to be kept on
artificial life support • “Do Not Resuscitate” (DNR) orders; feeding tubes
• Guide choices for doctors and caregivers when someone is seriously injured or near end of life
• Avoids unnecessary suffering by patient • Relieves caregivers of decision-making burdens • Reduces disagreement among family members • Not just for older adults! http://www.mayoclinic.org/healthy-lifestyle/consumer-health/in-depth/living-wills/art-20046303
Letter of Last Instruction • Not legally binding
• Provides heirs with valuable information
• Could include:
– Funeral/memorial service preferences
– Names of people to be notified of your death
– Location of bank accounts, safe deposit box, etc.
– Disposition of personal effects (untitled property)
Resource: Who Gets Grandma’s Yellow Pie Plate? http://www.extension.umn.edu/family/personal-finance/who-gets-grandmas-yellow-pie-plate/
Digital Assets • Personal information that is stored electronically on
either a computer or online “cloud” server account • Often provide access to financial assets • Generally require a username and/or password or
PIN to access and can be difficult or impossible to retrieve if someone is incapacitated or passes away
Resources: http://www.extension.org/pages/72624/dou-you-know-your-digital-assets#.VZ_4Wk3bKM8 (eXtension article)
http://njaes.rutgers.edu/money/pdfs/Digital-Assets-Worksheet.pdf (Digital Assets Inventory worksheet)
Estate Planning Resources • Prepare Your Estate Plan (eXtension): http://www.extension.org/pages/15749/prepare-your-estate-plan#.VZ_7k03bKM9
http://www.extension.org/pages/15800/prepare-your-estate-plan:-print-this-lesson#.VZ_8iE3bKM8 • Money Talk: A Financial Guide for Women, Session
V, Planning for Future Life Events (Rutgers Cooperative Extension): http://njaes.rutgers.edu/money/pdfs/session-v.pdf
Estate Planning Resources • Getting Ready for Estate Planning (Purdue
University): https://ag.purdue.edu/programs/areyouprepared/readyestate/Pages/default.aspx
• Estate Planning (North Carolina State University Extension): http://forestry.ces.ncsu.edu/estate-planning/
• Annual Limits Relating to Financial Planning (College for Financial Planning): http://www.cffpinfo.com/annual-limits/
Key Take-Aways • Estate planning is not just for the wealthy
– Even simple estates need plans; no magic number
• Incapacity can strike at any time
– Failing to plan means court will appoint a guardian
• Health Care PoA and Durable PoA designate an agent to act on your behalf
• Wills must be property signed and witnessed
• Intestacy cases distribute assets according to state law
• Executor is personally responsible to pay debts and distribute property
Key Take-Away Applications • Prepare or review your estate plan; look for gaps
• Have documents in place to address potential incapacity
• Review your PoA designees and discuss your wishes with them (never “surprise” people with key roles after you die!)
• Review your will periodically and revise when needed
• Don’t die intestate!
• Prepare a letter of last instructions and digital assets inventory
• Think carefully about choosing to be an executor or performing executor duties