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Estate Planning Basics Workshop Purpose 3/1/17 Estate Planning Basics Presented by Margaret (Margo) Felt Thoits Law 400 Main Street, Suite 250 Los Altos, California 94022 (650) 327-4200 [email protected] This presentation is for general informational purposes only and does not constitute legal advice. These materials are intended for California residents and may not reflect the most current legal developments. You should speak one-on-one to a qualified advisor for individual planning. Workshop Purpose What is estate planning? Who needs estate planning? What are the basic documents that make up a typical estate plan? How do you go about getting an estate plan in place? Questions 2 1 3/1/17 What is Estate Planning? Estate Planning is utilizing the laws of wills, trusts, property, insurance, and taxes to: ensure you and your family are cared for upon your incapacity or death maximize your estate; minimize costs and taxes carry out your wishes for property disposition carry out your wishes for your health care 3 Who Needs Estate Planning? Who Needs Estate Planning? You do! Regardless of: how old you are whether or not you are married whether or not you have children whether or not you own real estate whether or not you are “wealthy” Okay, you don’t need estate planning if: you own no real estate and have less than $150,000 in assets, you don’t care who gets your stuff or if they fight about it, and you are absolutely sure you are never going to be incapacitated (I hate to break it to you, but you are going to die someday) 4 2 3/1/17 Reasons for Estate Planning Ensure your desires are met for transferring your property; specify your wishes rather than having state law determine distribution Arrange for care of minor children and dependents (guardian and financial) Avoid probate and/or conservatorship, and the associated costs and delays Minimize taxes Protect assets Provide for ready cash to be available for immediate needs upon your death Name a person to handle your financial and medical needs in case of your incapacity Confirm wishes for funeral, burial and organ donation 5 Estate Planning Documents Will Revocable Living Trust Other inter vivos and testamentary trusts Durable Power of Attorney for Property Management Advance Health Care Directive (Living Will) Nomination of Guardian Community property agreement Documents to assist in funding trusts Beneficiary Designations (such as retirement plans and life insurance) Consider having your attorney, financial planner, accountant, and insurance agent meet as a team to get the most out of their collective expertise and to review your estate plan as a whole. 6 3 3/1/17 Understanding Probate What is Probate? Probate administration is the court-supervised process for distributing assets. The idea behind the probate proceedings is that the deceased is no longer around to manage property or see that their wishes are carried out, so the judge watches out for the interests of family and creditors in paying debts and distributing the deceased’s assets. The Probate Administration Process: . The will is filed with the local court* and authenticated, or if there is no will, the court determines who stands to inherit under state intestacy laws . Personal representative is appointed . Notices to relatives and creditors are published in local newspapers . Assets are identified and inventoried . Assets are appraised . Creditors make their claims against the estate . Family members may contest the will . Debts and taxes are paid . Court costs, attorneys’ fees, and accountants are paid . The remaining property is distributed * Probate is typically in the county of the deceased’s residence, but if real estate is owned in another state, a separate probate may be required in that state as well. 7 Understanding Probate Reasons why you want to avoid probate: Costly – estimated at about 5% of the gross estate Lengthy process – typically takes two to three years Funds are tied up during the process Complicated court procedures Usually need an attorney Public record Real estate in another state may require probate in that state as well Note that avoiding taxes is not on the list! Avoiding probate does not reduce estate taxes. Reasons why you may want to go through probate: If you have a lot of creditors with large sums of money involved, you may want to force those creditors to come forward in the forum of the probate court, particularly if they are contested claims If you think somebody will contest your distribution, the probate process provides a specified period and process for bringing the contest forward You may want a court to oversee the process of distributing your assets if you have concerns about your wishes being honored 8 4 3/1/17 Understanding Probate How do you avoid probate? Certain assets, or assets held in certain types of ownership, do not need to go through the probate court to be distributed. Therefore, utilizing these assets and ownership types removes property from your “probate estate.” In addition, California allows certain exceptions to the fully-supervised probate proceedings. Items not in your probate estate: Revocable living trusts Joint tenancy property Payable on Death / Transfer on Death holdings Life insurance IRAs, 401(k)s, profit sharing plans Lifetime gifts (outright or to a trust) California exceptions to supervised probate: Community Property Petition The surviving spouse can avoid full administration by petition Affidavit Procedure When the gross value of an estate is less than $150,000 in personal property, or less than $20,000 in real estate, summary administration is available 9 Understanding Joint Tenancy Joint Tenancy is sometimes referred to as “the poor man’s estate planning” because it avoids probate but can cause other issues: Gift upon creation (bank account exception) Co-ownership issues Creditor issues Estate tax inclusion issues Simultaneous death doesn’t avoid probate One death immediately after another may lead to property not passing as you would wish 10 5 3/1/17 Taxes in a Nutshell Tax consequences in the following areas should be considered in thorough estate planning: federal estate tax federal gift tax generation-skipping transfer tax state death or inheritance tax federal and state income tax capital gains tax property tax 11 Federal Estate Tax The federal government imposes an estate tax on the net value of all the property you own at your death. Your estate includes your ownership interest in jointly held property, property held for your benefit in a revocable trust, life insurance proceeds, annuity payments, retirement plans, property you own outside of the US, and may also include the value of certain property transferred within three years before your death. Exemptions and deductions may result in no tax actually being owed. 12 6 3/1/17 Federal Estate Tax Personal Estate Tax Exemption You can transfer up to the “applicable exclusion amount” to whomever you want, tax free. For 2017, the applicable exclusion amount is $5,490,000. This amount is adjusted each calendar year for inflation. Amounts over the applicable exclusion amount will be subject to tax unless another exemption applies (such as the marital deduction or the charitable deduction). Estate Tax is tied to the Gift Tax, with its associated Gift Tax Exemption Taxable gifts made during your lifetime will reduce (“use up”) the applicable exclusion amount from estate tax available on your death. Portability If all qualifying requirements have been met, a spouse may be able to utilize any unused applicable exclusion amount of his/her deceased spouse. Thus, it may be possible to pass up to $10,680,000 tax free. 13 Federal Estate Tax Portability – Things You Should Know You will lose portability of your first deceased spouse if you remarry and survive the second spouse (you will have only the second spouse’s remaining unused exemption amount). There is no index for inflation for the amount of exclusion from the deceased spouse – it is set at whatever the amount was at the deceased spouse’s death. There is no portability of exemption from generation-skipping transfer tax. A federal estate tax return must be filed on time to elect portability. Subject to changes in the law. If you leave your assets outright to your surviving spouse, he or she can do whatever he or she wants with them. * Compare relying on Portability to use of a Bypass Trust, discussed below. 14 7 3/1/17 Federal Estate Tax Marital Deduction Property left to your spouse, either outright or in a “QTIP Trust,” is exempt from estate tax due to the marital deduction, as long as your spouse is a US citizen. This deduction does not apply to unmarried couples. The personal estate tax exemption discussed on a prior slide can be used for a non-citizen spouse or your unmarried significant other. In addition, in the case of a non-citizen spouse, you might consider a Qualified Domestic Trust (QDOT) or the special gift tax rules to gain additional tax benefits. Charitable Deduction All property left to a tax-exempt charity is exempt from estate tax due to the charitable deduction. The charity must be a tax-exempt organization according to IRS regulations. 15 Annual Exclusion Gifts Under current federal tax law, in 2017, a person can gift $14,000 per donee per calendar year and not pay gift tax. The gift must be of a “present interest” to qualify as an annual exclusion gift – that is, there can generally be no strings attached to the donee’s access to the gifted asset. The recipient pays no income tax on the mere fact that the gift was made, though there will likely be income tax owed on earnings from holding the gifted asset.
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