WHAT EVERY FINANCIAL PLANNER SHOULD KNOW ABOUT ESTATE PLANNING KAREN S. GERSTNER [email protected] (713) 520-5205 WHAT IS ESTATE PLANING? • Estate planning is planning for the distribution of a person’s “Estate” on Death • Estate planning is planning to avoid the unnecessary dissipation of a person’s “Estate” during life if the person loses his/her mental capacity • Estate planning is NOT financial planning or retirement planning 2 GOALS OF ESTATE PLANNING • Provide financial security for spouse and children (or other beneficiaries) • Make a final gift (i.e., leave a legacy) to charity • Eliminate, reduce or defer future estate taxes • Eliminate, reduce or defer future income taxes • Provide for a particular beneficiary (e.g., a second spouse), but control the ultimate disposition of the assets remaining on that beneficiary’s death • Protect assets from the claims of creditors • Reduce post-death difficulty and expense (probate costs, time and expense of administration, etc.) 3 1 Estate Planning Definitions • Decedent = A person who has died • Testator = A person who makes a Will • Property = Any type of asset: real property, personal property, tangible personal property, intangible personal property, etc. • Trustor/Grantor/Settlor = A person who creates a trust • Donor = A person who makes a gift during life • Donee = A person who receives a gift during life 4 Estate Planning Definitions, Continued • Testamentary Trust = A trust created in a Will (testament) or upon the death of the trust creator • Inter Vivos Trust = A trust created during the trustor’s life (inter vivos means “during life”) • Per Stirpes = Equal shares to children (or 1st level), with a predeceasing child’s (or other person’s) share being divided equally between his/her children (and so on) • Contingent Trust = A contingency (such as a certain age) determines whether the trust is created or not 5 WHAT CONSTITUTES A PERSON’S “ESTATE”– MARITAL PROPERTY CONSIDERATIONS • Married Persons: A married person’s estate consists of his/her half of the community property plus his/her separate property, if any • Single Persons: A single person’s estate consists of his/her ownership interest in all property of any type (Remember definition of “property”!) 6 2 WHAT CONSTITUTES A PERSON’S “ESTATE”– TRANSFER TAX CONSIDERATIONS IRS: • Property: A deceased person’s estate consists of his/her ownership interest in various types of property • Powers: A deceased person’s estate also includes property over which the person possesses certain powers (such as a general power of appointment or a retained power or interest) • Irrelevant as far as IRS is concerned: – Which transfer method or methods are used at death – When the transfer is made (during life or at death) (Remember definition of “property”!) 7 LIST OF ESTATE ASSETS PER IRS • Home and furnishings • Other real estate (vacation home/condo, farm, vacant lot, rental real estate) • Oil, gas and other mineral interests (including royalties) • Stocks, bonds (including “tax exempt bonds”), mutual funds, other securities • Bank accounts, brokerage accounts, investment accounts, certificates of deposit, cash • Amounts due you from others, such as a note or mortgage receivable, a tax or other refund • Life insurance (if insuring your life, value is the proceeds on your death; if insuring someone else’s life, value is the cash value) • Business arrangements (partnerships, limited partnerships, limited liability companies, C and S corporations, joint ventures, sole proprietorships) • Collections (guns, coins, stamps, etc.) • Retirement benefits, including “qualified” (IRAs, 401(k) plans, profit-sharing plans) and non-qualified (NQSOs) plans, deferred compensation and annuities • Other tangible personal property (cars, jewelry, boats, airplanes, etc.) • Intellectual property (copyrights, patents, etc.) • Powers treated as “General Powers of Appointment” or “Retained Powers” (technical) 8 TEXAS MARITAL PROPERTY REGIME: COMMUNITY PROPERTY • Texas = Community Property State: Texas is a community property state—not a “title” state. Therefore, for married persons in Texas: – the title on an asset does not indicate or determine ownership – the title on an asset only tells us the manager of the asset • Community Property Presumption: Texas law presumes that all property on hand on dissolution of a marriage (by death or divorce) is community property – the person claiming certain assets as his/her separate property must rebut the legal presumption with clear and convincing evidence (the highest civil standard) • Ownership of assets for married couples is based on when and how an asset was acquired and what happened after that (not as simple as how is asset titled) 9 3 Community Property • Community property is all property acquired by either spouse during the marriage, other than (i) property acquired by gift or inheritance, (ii) property defined by statute as separate property (very limited), and (iii) property acquired with separate property: – Personal Earnings of either spouse during marriage (salary, bonus, employee and employer contributions to 401(k) plans, stock option awards, etc.) – Earnings from All Assets--all income (interest, dividends, rent payments, delay rentals) during marriage from all of the assets, whether the assets are the community property of the spouses or the separate property of just one of the spouses – Assets acquired with Earnings and other Community Property 10 Separate Property • A married person’s Separate Property consists of – Property received by gift or inheritance and kept separate during marriage* – Property owned prior to marriage and kept separate during marriage* – Property acquired while living in a non-community property (i.e., title) state and kept separate after moving to Texas* – Property specified as separate property by a specific state or federal statute (e.g., federal death benefits provided on behalf of service men and women, the pain and suffering portion of a personal injury award or settlement, and a few other items—very limited) _____________________________________________________________ *NOTE: Putting separate property in a separate account (an account titled in just that person’s name) is NOT ENOUGH to maintain that property as separate property because (i) title is not determinative of ownership in Texas and (ii) the financial institution usually places income earned by those assets (which is community property) into that same account—so the account becomes commingled 11 METHODS FOR TRANSFERRING ASSETS AT DEATH • Probate – Will – Intestacy (no will) • Non-probate – Beneficiary Designation Forms: for Beneficiary Designation Assets – “Multi-Party Arrangements”: accounts and other assets titled or registered a certain way –Trusts(meaning, assets actually held in [titled in the name of] a trust before the person dies) 12 4 IRS’ VIEW ON HOW AND WHEN ASSETS ARE TRANSFERRED • IRS doesn’t care which transfer method is used to transfer assets at death—the decedent’s interest in all assets owned at death being transferred to others upon death is part of the decedent’s estate for federal estate tax purposes • IRS doesn’t care when assets are transferred either—all assets owned by a person that are transferred to someone else (whether at death or during life) are subject to a “transfer tax” (estate or gift tax), with modest exceptions 13 PROBATE TRANSFERS • Testate: The Will transfers the Probate Assets at death via the Probate Process • Intestate Succession: If there is no Will, the Probate Assets will be transferred by the state intestacy laws—i.e., a substitute Will (also a Probate Process) • There is a big difference in the Probate Process between dying with a Will and dying without a Will--dying without a Will results in the worst transfer process of all. – If no Will, state decides who inherits your assets – If no Will, probate process is much more complex and expensive (could cost 10 x as much and take 4-8 x as long as with a Will) – If no Will, Court decides who should administer your estate – If no Will, Court decides who should become guardian of your minor children – If no Will, your children receive their share of estate at age 18 14 The Probate Process • Application to Probate Will and for Appointment of Independent Executor is filed with Probate Court, together with original Will • After ten (10) day waiting period, Probate hearing is held: – Testimony of Witness (as to jurisdictional and death facts) is given by knowledgeable person in open Court – Probate Court signs Order Admitting Will to Probate and Appointing Independent Executor – Executor swears to perform all duties required by law, and executes Oath of Independent Executor in the presence of the probate clerk – Clerk issues Letters Testamentary to Independent Executor, evidencing his/her authority to act with respect to all matters involving the Estate • Executor Provides Required Notices: – Executor publishes Notice to the General Creditors of the Estate – Executor provides notice to all secured creditors of the Estate by certified mail – Executor provides notice to all “current” beneficiaries named in the Will – Executor files proof of giving the notices with the Probate Court • Meanwhile, Executor handles the estate administration matters (discussed later) • Inventory and List of Claims is prepared by the Executor, describing and valuing all probate assets being transferred by the decedent’s Will, and filed with the Probate Court • Court signs Order Approving Inventory and List of Claims, signifying conclusion