Introduction to Estate Planning - Setting a Foundation Designed for Peace of Mind

1. Estate Planning Basics
A Foundation for Success

2. What Is an Estate Plan?
 An estate plan is a map
 This map reflects the
way you want your
personal and financial
affairs to be handled in
case of incapacity or
death

3. Who Needs an Estate Plan?
Chances are, you do Especially needed if:
 Not just for the wealthy  Your spouse isn’t comfortable
with financial matters
 Without an estate plan, you
can’t control what happens  You have minor children
to your property if you die or  Your net worth exceeds the
become incapacitated federal transfer tax exemption
amount ($5 million in 2011), or,
 An estate plan makes your if less, your state’s exemption
wishes clear, and helps amount
avoid family disputes  You own property in more than
 Proper estate planning can one state
preserve assets and provide  Financial privacy is a concern
for loved ones  You own a business

4. Basic Estate Planning Concepts
Planning for
Incapacity Property
Management
Planning
Health
for Death
Care Wills and Lifetime
Probate Gifting
Trusts
Tax
Basics
Life
Insurance

5. Planning for Incapacity
 Incapacity can strike
anyone at any time
 Failing to plan means a
court would have to
appoint a guardian
 Lack of planning
increases the burden on
your guardian
 Your guardian’s
decisions might not be
what you would want

6. Planning for Incapacity – Health-Care
Directives
Durable Power of
Do Not Resuscitate
Living Will Attorney for Health Care
(DNR) Order
(Health-Care Proxy)
Directs that
Lets you designate
Puts your resuscitative
an agent to make
instructions measures be
decisions on your
in writing withheld or
behalf
withdrawn
Not all types of health-care directives are effective in all states,
so be sure to execute the one(s) that will be effective for you.

7. Planning for Incapacity – Property
Management Tools
Durable Power of
Joint Ownership Living Trust
Attorney (DPOA)
Joint owner has Lets you designate Lets a successor
the same access an agent to make trustee take over
to property as decisions on your management of
you do behalf trust property

8. What Happens If You Die Without an
Estate Plan?
 Some property passes
automatically to a joint
owner or to a
designated beneficiary
(e.g., IRAs, retirement
plans, life insurance,
trusts)
 All other property
generally passes
according to state
intestacy laws

9. What Happens If You Die Without an
Estate Plan—Intestacy
 Intestacy laws vary from
A typical intestate distribution
state to state pattern looks like this:
 Typical pattern of
distribution divides
Husband / Father
property between
surviving spouse and
children
 Your actual wishes are
irrelevant ½ ¼ ¼
 Many potential Wife Child Child
problems

10. Wills & Probate
 A will is the cornerstone of
an estate plan
 Directs how your property
will be distributed
 Names executor and
guardian for minor children
 Can accomplish other estate
planning goals
(e.g., minimizing taxes)
 Written, signed by you, and
witnessed

11. Wills & Probate – The Probate
Process
 Most wills must be
probated
 Will is filed with probate
court
 Executor collects
assets, pays debts, files
tax returns, and
distributes property to
heirs
 Typically, process lasts
several months to a
year

12. Wills & Probate – Probate Pros &
Cons
Pros Cons
 Time and costs are  Can be time consuming
typically modest for complex estates
 Court supervision  Title transfer delays
 Protection against  Fees
creditors  Ancillary probate
 Public record

13. Wills & Probate – Avoiding Probate
 Own property jointly
Can you avoid
with rights of
probate? survivorship
 Complete beneficiary
Yes, an estate plan can be designation forms for
designed to control which property such as IRAs,
assets pass through retirement plans, and
probate, or to avoid life insurance
probate.  Use trusts
 Make lifetime gifts

14. Tax Basics
Transfer taxes include:
 Federal gift tax - imposed on
transfers you make during
your life
 Federal estate tax - imposed
on transfers made upon your
death
 Federal generation-skipping
transfer (GST) tax - imposed
on transfers to individuals
who are more than one
generation below you (e.g.,
grandchildren) both during
your life and upon your
death
Transfer taxes imposed on the state level tend to affect smaller estates

15. Tax Basics – Federal Gift Tax
Lifetime Transfer  Gift tax applies to transfers
made during your life
 Certain gifts are excluded
You (e.g., $13,000 annual gift tax
(Donor) exclusion)
 $5 million exempt from all
transfers (gifts and estates)
combined in 2011 (The $5
Person million exemption is the
Receiving largest in the history of the
Gift (Donee) federal gift and estate tax,
but it is set to drop to $1
Gift tax may apply million in 2013.)

16. Tax Basics – Federal Estate Tax
 Estate tax applies to
Transfer at Death transfers made at death
 Generally does not apply to
transfers made to spouse or
Your Estate charity
 $5 million exempt from all
transfers (gifts and estates)
combined in 2011
 Any portion of exemption
used for gifts will be
Beneficiary unavailable to the estate
 $5 million indexed for
inflation in 2012; scheduled
Estate tax may apply to drop to $1 million in 2013

17. Tax Basics – Federal Estate Tax
 New feature important
for married couples
 Exemption is “portable”
- unused portion left by
deceased spouse can
be transferred to
surviving spouse
 $10 million can be left
to beneficiaries tax free
(in 2011)
 Portability scheduled to
expire in 2013

18. Tax Basics – Federal GST Tax
Transfer During Life  The generation-skipping
or at Death transfer (GST) tax may apply
to transfers made to
someone more than one
You / Your Estate
generation below you
 $5 million GST tax
Child
exemption in 2011
(Donee / Beneficiary)  $5 million adjusted for
inflation in 2012
 Scheduled to drop to $1
Grandchild
(Skip Donee / Beneficiary)
million in 2013
 NOT portable
GSTT may apply

19. Tax Basics – An Uncertain Future
2009 2010 2011 2012 2013
Top rate 45% 35% 35% 35% 55% (?)
Gift and $3.5 $1 million for $5 million $5 million, $1 million (?)
estate tax million gift tax indexed for
exemption purposes inflation
$5 million for
estate tax
purposes
(estates can
elect out of the
estate tax)
GST tax $3.5 $5 million (but $5 million $5 million, $1 million (?)
exemption million taxed at a 0% indexed for
rate) inflation

20. Lifetime Gifting
 Lets you see the recipient
enjoying your gift
 Lets you minimize transfer
taxes by taking advantage of
the $13,000 annual gift tax
exclusion and other tax
deductions
 Removes future appreciation
of property from your taxable
estate
 But, no “step-up” in basis –
your basis in the property
carries over instead

21. Lifetime Gifting – Transfers Excluded
from Gift Tax
 If you’re contributing to a
Section 529 plan, you can
give $65,000 ($130,000 with
spouse) gift tax free
 No gift tax on amounts paid
directly to a school for an
individual’s tuition
 No gift tax on amounts paid
 You can give $13,000 to as
directly to a medical care
many individuals as you
provider for an individual’s
want federal gift tax free
medical care
($26,000 if you and your
spouse make the gift
together)

22. Trusts
 Versatile estate planning tool
 Can protect against
incapacity, avoid probate,
minimize taxes
 Allows professional
management of assets
 Provide safeguards for minor
children, elderly parents,
other beneficiaries
 Can protect assets from
future creditors
 Control over property

23. Trusts – What Is a Trust?
 Legal entity that holds
Grantor
property
 Parties to a trust:
grantor, trustee, Trust
Trust Property
beneficiary Agreement
 Living trusts vs.
testamentary trusts Trustee
Manages trust property according
 Revocable trusts vs. to trust agreement
irrevocable trusts
Beneficiaries
Have rights to trust property
under terms of trust agreement

24. Life Insurance
 Can provide instant
estate
 Can provide needed
estate liquidity
 Life insurance proceeds
are included in your
estate for federal estate
tax purposes unless
your estate plan
addresses this issue
 Key issue is ownership
of policy

25. Life Insurance – Irrevocable Life
Insurance Trust (ILIT)
During Your Life
Insured Irrevocable Trust Insurance
Company
1. You (the insured) 2. Trustee purchases
create an irrevocable life insurance
trust and name a policy on your life – Beneficiaries
trustee and policy owned by
beneficiaries trust
4. Beneficiaries
3. You make regular cash
technically can
gifts to trust
5. Trustee uses cash withdraw cash
gifts to pay premiums gifts during
limited window
of time

26. Life Insurance – Irrevocable Life
Insurance Trust (ILIT)
At Death
Insurance Irrevocable Trust Beneficiaries
Company
1. ILIT receives proceeds of life insurance policy
2. Proceeds not subject to estate tax
3. Proceeds distributed according to terms of trust
4. Beneficiaries receive full proceeds, free of estate tax

27. Conclusion
 Have you implemented I would welcome the
a plan for incapacity opportunity to meet
(health and property)? individually with each of
 Do you have a valid you to address any
will? specific concerns or
 Are transfer taxes a
questions that you may
planning concern for have.
you?
 Does your overall
estate plan reflect your
current wishes and
circumstances?

28. Disclaimer
 Securities Offered Through Pacific West
Securities, Inc., Member FINRA, SIPC
 Advisory Services through Pacific West
Financial Consultants, Inc, a Registered
Investment Advisor
 THANK YOU!