Estate Planning ‐ An Introduction
Presented by
Deborah A. Stokes, CPA, CSEP Brenda E. Curtis, CPA, MST, CSEP & Irene R. Walsh, EA The Tale of Two Estates –Estate 1
• Joe –70 year old Widower –VA resident • Gross estate $4.5M • Had a Will & Trust Agreement –all assets were titled to his trust –no probate • Gifted his property in DC to his children to avoid a DC estate tax return –the property was worth $750K at the time of the gift, worth $1.1M at death The Tale of Two Estates –Estate 2
• Jane, 65 year old Widow –VA resident • Gross estate $4M • No Estate Planning • All assets were subject to probate –paid over $4,000 in probate fees • No Federal Estate tax return required, but owned property in MD –owed estate tax Estate Planning Topics
• Reasons you should have an Estate Plan • Types of taxes associated with Gifts & Estates • Essential Estate Planning Documents • Basic Estate Planning Strategies Who Needs an Estate Plan
• Married couples • Single adults • Parents with minor children • Older people • Younger people • Wealthy people and those who are not wealthy Reasons for Estate Planning
• Minimize/eliminate estate taxes • Avoid probate • Ensures property passes to the people/organization you want • Control of Assets in case of incapacity • Make estate administration easier for family members Minimizing/Eliminating Estate Taxes
• Emphasis is placed on reducing the size of the estate at date of death by gifting in the most efficient manner before death • Using estate planning techniques you can transfer more wealth out of your estate using appropriate discounts • With the proper planning you can transfer more assets to your grandchildren without paying GST tax What is Probate?
• Executor/Executrix/Personal Representative (MD) – appointed by the will to administer an estate
• Administrator appointed by the court to administer an estate
• Commissioner of Accounts (VA) /Register of Wills (MD/DC) – oversees the administration of the estate
• Probate Estate different from Estate for Estate Tax purposes Probate Assets
• Bank Account/Brokerage Accounts • Stock • Business Interests • Life Insurance with the estate as beneficiary (or no beneficiary) • IRA accounts with the estate as beneficiary (or no beneficiary) • Personal Property Non‐Probate Assets
• Life Insurance with a designated beneficiary • IRA accounts with a designated beneficiary • Transfer/Pay on Death (TOD/POD) accounts • Accounts titled Joint with Right of Survivorship (JWROS) Probate –Reasons to Avoid It
• Information is made public • Costly, depending on the size of the estate • Court oversees administration Ways to Avoid Probate
• Give away all your assets before death • Title all your assets joint with right of survivorship • Set up a revocable (living) trust and title all your assets in the trust’s name Trusts
• A Revocable Living Trust is set up prior to death. Assets are transferred into the Trust, thereby avoiding probate
• Trust under the Will is set up under the Will and the Will controls the Trust. Assets are not transferred to the Trust until after death ‐ probate is not avoided Smooth Transfer of Assets
• Your estate plan will ensure your assets go to the person/people that you want them to go to • If you want some or all of your assets to go to charity, that wish can be part of your estate plan Incapacitation
• Estate Planning includes documents that help with control of your assets in the event you become incapacitated – Power of Attorney – Revocable Living Trust Making It Easier on Family Members
• A good estate plan avoids probate so your family does not have to deal with the court • A good estate plan maps out your wishes – no guessing involved. It can be as detailed as you want Death/Transfer Taxes
• Gift Tax • Estate Tax – Federal & State • Inheritance Tax • Generation Skipping Transfer Tax (GST) • Probate Tax • Estate (Fiduciary) Income Tax Gift Tax
• Tax on the transfer of assets during a person’s lifetime • Tax rate is the same as the estate tax rate • Lifetime exemption of $5,340,000 (for 2014), whatever is not used during lifetime is used at death • 2014 rate is 40% Estate Tax
• The tax on the net value of the assets held by a decedent at date of death Estate Tax Exemptions & Rates
Year Exemption Maximum Rate
2013 $ 5,250,000 40%
2014 $ 5,340,000 40%
2015 $ 5,430,000 40% Portability
For 2011 & Forward
Allows the unused exemption on the first to die to be used by the second to die Portability –706 Filed
Husband dies 2013 (Exemption $5.25M) Exemption used: $1,500,000 Unused exemption: $3,750,000 Wife dies 2014 (Exemption $5.34M) Wife’s estate: $10,000,000 Less her exemption: $5,340,000 Less husband’s unused exemption: $3,750,000 Taxable estate: $910,000 Tax $364,000 No Portability –706 Not Filed
Husband dies 2013 (Exemption $5.25M) Exemption used: $1,500,000 Unused exemption: $3,750,000 Wife dies 2014 (Exemption $5.34M) Wife’s estate: $10,000,000 Less her exemption: $5,340,000 Less husband’s unused exemption: $0 Taxable estate: $4,660,000 Tax $1,864,000 Inheritance Tax
• A tax assessed on the right to inherit property from a decedent
• Assessed at the state level (only assessed by some states)
Generation‐Skipping Transfer Tax
• The tax on the value of assets transferred to a “skip” person • Imposed on gifts in addition to normal gift and estate taxes • Skip persons are 2 generations or more below the donor (i.e., grandchild, great‐ grandchild, great‐niece or great‐nephew) GST Tax (cont.)
• A non‐related person would be considered a skip person if they are 371/2 years or more younger than the donor GST Tax Exemptions & Rates
Year Exemption Maximum Rate
2013 $ 5,250,000 40%
2014 $ 5,340,000 40%
2015 $ 5,430,000 40% Probate Tax
• Assessed by a county or city • Fees include court filing fees, inventory fees and accounting fees • Tax is paid on assets passing by Will or in the case of intestacy (no will), by state law Estate Income Tax
• The tax on the income earned from the assets of a decedent during the period beginning with his/her death and ending on the end of the tax year • Generally, filed annually as long as the estate is opened • Must file a return if the income is $600 or more or the estate has a non‐resident alien beneficiary Essential Estate Planning Documents
• Power of Attorney • Medical Directive/HIPAA Form • Will • Revocable (Living) Trust Power of Attorney
• Gives authorization to your representative to act on your behalf • May need specific authorization for specific acts such as the sale of assets or gifting of assets • Power of attorney ceases upon the death of either person Medical Directive/HIPAA Form
• Medical directive allows someone else to make decisions involving your health during your incapacitation
• Outlines what your wishes are in certain circumstances –for example, what type of measures you want taken to revive you
• HIPAA Form deals with the privacy of your medical information. Can be used to allow information to be shared with certain people Will
• Directs the transfer of assets to individuals/charities • Can direct the assets to go to a pre‐established trust (known as a “pour‐over” will) • Can be used to identify your wishes for the guardianship of your minor children
• Can be used to outline your wishes for a funeral Revocable (Living) Trust
• Used to avoid the probate process
• Assets are titled in the trust’s name, but still belong to the Grantor. Trust assets are included in the Grantor’s estate
• Can be revoked up until the Grantor’s death
• Becomes irrevocable upon the Grantor’s death
• Upon death it functions like a Will by directing the transfer of assets Basic Estate Planning Strategies Basic Estate Planning Strategies
• Plan to eliminate probate by using a Trust and/or POD or joint accounts • Annual gifting of $14,000 to each donee from each donor each year (subject to increases) • In addition, gifts over and above the $14,000 per person for educational and medical expenses are not subject to gift taxes as long as they are paid directly to the institution/medical provider • Unlimited marital deduction for transfers of property to U.S. citizen spouse (limited to $145,000 per year to non‐citizen spouse) Gifting of Unified Credit
• You may make gifts of up to $5,340,000 before death (not including the annual $14,000 exclusion)
– Advantages: Get assets out of your estate before they appreciate in value, transfer income‐producing assets to an adult child who is in a lower income‐tax bracket
– Disadvantages: loss of control of assets, no step up in basis at time of death Six Steps for Estate Planning Contact Information
Debbie Stokes, CPA, CSEP ‐ Principal [email protected] (703) 642‐2700 ext 226
Brenda Curtis, CPA, CSEP ‐ Manager [email protected] (703) 642‐2700 ext 252
Irene Walsh, EA – Manager [email protected] (703) 642‐2700 ext 266